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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition period from to
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Commission File Number 000-08193
SENSYTECH, INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 38-1873250
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8419 Terminal Road, Newington, Virginia 22122-1430
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(Address of principal executive offices)
Issuer's telephone number (703)550-7000
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-----
As of February 7, 2003, there were 6,430,578 shares of the Registrant's
Common Stock, par value $.01 per share, outstanding.
SENSYTECH, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 2002 and
September 30, 2002.................................................................3-4
Condensed Consolidated Statements of Income for the
Three Months Ended December 31, 2002 and December 31, 2001 ..........................5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 2002 and December 31, 2001 ..........................6
Notes to Condensed Consolidated Financial Statements.................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................................10-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........................14
Item 4. Controls and Procedures.............................................................14
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................................15
Item 6. Exhibits and Reports of Form 8-K....................................................15
Signatures..................................................................................16
Certifications...........................................................................17-18
2
SENSYTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 2002 September 30, 2002
----------------- ------------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $11,063,000 $ 700,000
Accounts receivable, net of allowance for
doubtful accounts of $200,000 10,212,000 8,880,000
Unbilled contract costs, net 9,312,000 8,820,000
Inventories 3,076,000 3,168,000
Deferred income taxes 591,000 411,000
Other current assets 246,000 272,000
----------- -----------
TOTAL CURRENT ASSETS 34,500,000 22,251,000
PROPERTY AND EQUIPMENT 2,729,000 2,608,000
OTHER ASSETS
Deferred income taxes 260,000 260,000
Intangibles, net 325,000 400,000
Other assets 81,000 333,000
----------- -----------
TOTAL ASSETS $37,895,000 $25,852,000
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SENSYTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 2002 September 30, 2002
----------------- ------------------
(unaudited)
CURRENT LIABILITIES
Line of credit $ -- $ 2,900,000
Accounts payable 1,762,000 2,916,000
Accrued salaries, benefits, and related expenses 1,352,000 2,093,000
Other accrued expenses 1,080,000 438,000
Billings in excess of costs 1,186,000 2,342,000
Income taxes payable 506,000 497,000
------------ ------------
TOTAL CURRENT LIABILITIES 5,886,000 11,186,000
------------ ------------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; 25,000,000 shares
authorized; 6,551,723 and 4,239,223 shares issued
at December 31, 2002 and Septemer 30, 2002 66,000 42,000
Additional paid-in capital 24,496,000 7,972,000
Treasury stock, at cost, 126,245 shares at
December 31, 2002 and 125,245 shares at
September 30, 2002 (534,000) (525,000)
Retained earnings 7,981,000 7,177,000
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 32,009,000 14,666,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 37,895,000 $ 25,852,000
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SENSYTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
For the Three Months Ended
December 31,
--------------------------------
2002 2001
------------ ------------
REVENUES
Contract revenues $ 11,723,000 $ 4,409,000
------------ ------------
COSTS AND EXPENSES
Cost of revenues 9,251,000 2,993,000
General and administrative expenses 1,063,000 772,000
------------ ------------
Total costs and expenses 10,314,000 3,765,000
------------ ------------
INCOME FROM OPERATIONS 1,409,000 644,000
OTHER INCOME (EXPENSES)
Interest income 5,000 20,000
Interest expense (55,000) (2,000)
Other income 4,000 37,000
Other expenses -- (11,000)
------------ ------------
INCOME BEFORE INCOME TAXES 1,363,000 688,000
INCOME TAX PROVISION (559,000) (275,000)
------------ ------------
NET INCOME $ 804,000 $ 413,000
============ ============
PER SHARE AMOUNT
Basic earnings per share $ 0.16 $ 0.10
Diluted earnings per share $ 0.16 $ 0.10
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SENSYTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
December 31,
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001
------------ ------------
Net income $ 804,000 $ 413,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 260,000 123,000
Deferred taxes (180,000) 28,000
Cash provided (used) by assets and liabilities
Accounts receivable (1,332,000) (739,000)
Unbilled contract costs (492,000) (650,000)
Inventories 92,000 (1,150,000)
Other assets 278,000 37,000
Income taxes payable 26,000 247,000
Accounts payable (1,297,000) 129,000
Other accrued expenses (99,000) (49,000)
Billing in excess of costs (1,156,000) 2,100,000
------------ ------------
Net cash (used in) provided by operating activities (3,096,000) 489,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net acquisition of property and equipment (306,000) (47,000)
Acquisition of FEL Corporation assets -- (400,000)
------------ ------------
Net cash used in investing activities (306,000) (447,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock issuance costs (1,774,000) --
Proceeds from line of credit 2,055,000 --
Repayments of line of credit (4,955,000) --
Proceeds from stock issuance 18,400,000 --
Proceeds of stock option exercises 48,000 46,000
Purchase of treasury stock (9,000) --
------------ ------------
Net cash provided financing activities 13,765,000 46,000
------------ ------------
Net increase in cash and cash equivalents 10,363,000 88,000
Cash and cash equivalents, beginning of period 700,000 4,362,000
------------ ------------
Cash and cash equivalents, end of period $ 11,063,000 $ 4,450,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 55,000 $ 3,000
============ ============
Cash paid for income taxes $ 712,000 $ --
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Tax benefit on stock option exercises included in income taxes payable $ 17,000 $ --
============ ============
Stock issuance costs included in accounts payable $ 143,000 $ --
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
SENSYTECH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
items) considered necessary for fair presentation have been included. Operating
results for the three-month period ended December 31, 2002, are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2003. Inter-company accounts and transactions have been eliminated
in consolidation. For further information, refer to the consolidated financial
statements and footnotes thereto included in Sensytech, Inc.'s Annual Report on
Form 10-K for the fiscal year ended September 30, 2002. Certain
reclassifications have been made to the prior year financial statements to
conform to the 2003 presentation.
2. INVENTORIES
Inventories consist of the following:
December 31, 2002 September 30, 2002
Raw materials $ 953,000 $ 989,000
Component parts, work in process 2,028,000 2,004,000
Finished component parts 95,000 175,000
---------- ----------
$3,076,000 $3,168,000
========== ==========
3. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number
of common shares outstanding during each period. Diluted earning per is computed
using the weighted average number of common and common equivalent shares
outstanding during each period. The following summary is presented for the three
months periods ended December 31:
DECEMBER 31,
----------------------------
2002 2001
---------- ----------
Net income $ 804,000 $ 413,000
========== ==========
Weighted average shares outstanding - basic 5,049,000 3,966,980
Effect of dilutive securities:
Net shares issuable upon exercise of stock options 130,000 89,828
---------- ----------
Weighted average shares outstanding - diluted 5,179,000 4,056,808
Basic earnings per share $ .16 $ .10
Diluted earnings per share $ .16 $ .10
7
4. ACQUISITION
On February 1, 2002, our wholly-owned subsidiary, ST Production Systems,
Inc. (STPSI), acquired the operating assets and assignment of certain defense
contracts of FEL Corporation (FEL), for an aggregate purchase price of
approximately $2,050,000. The acquisition has been recorded under the purchase
method of accounting and, accordingly, the results of operations of STPSI since
February 1, 2002 have been included in the consolidated financial statements. In
connection with the acquisition, $600,000 of intangible assets were identified,
related to acquired contracts, and were determined to have estimated lives of
eighteen to thirty-six months. The Company has recognized no goodwill in
connection with the acquisition. Amortization expense was $75,000 for the three
months ended December 31, 2002.
The following condensed proforma results of operations reflect the
proforma combination of the Company and the acquired FEL assets as if the
combination occurred at the beginning of the three months ended December 31,
2001, compared with the actual results of operations for Sensytech for the three
months ended December 31, 2001 as follows:
THREE MONTHS ENDED
DECEMBER 31, 2001
HISTORICAL PROFORMA
--------- ----------
Revenues $4,409,000 $7,427,000
Income from operations 644,000 483,000
Net income 413,000 292,000
Basic earnings per share .10 .07
Diluted earnings per share .10 .07
Proforma adjustments include the amortization of intangible assets over an
eighteen to thirty-six month period, the reduction of interest income for cash
used for the acquisition and depreciation for acquired equipment using a three
year life.
5. SEGMENT INFORMATION
We operate in the passive surveillance and countermeasures market for
domestic and international clients. Our systems are globally applicable to the
defense markets and their allied information agencies for land, air, and
sea-based applications. We believe that our passive surveillance and
countermeasures products and services are among the best in the world. Our goal
is to provide customers with total system surveillance solutions across the
electromagnetic spectrum, using products manufactured by us and by others. We
are customer-focused by providing tailored solution-based systems as follows:
- Defense Systems (DS) Group designs, develops, manufactures, and supports
products which intercept, analyze, classify, identify, locate and track
microwave signals from radars and weapons, which may originate from
potentially hostile sources. It provides communication data links and
remote targeting systems and provides equipment and systems that are
used to carry out defensive measures against hostile signals or their
sources to protect high value assets. The group's systems are used on
military platforms, such as ships, submarines, patrol aircraft, as well
as at ground installations. Included in this group are the programs
acquired through our February 2002 acquisition of the operating assets
of FEL Corporation, which we operate through our ST Productions Systems,
Inc. subsidiary.
- Communication (Comms) Group designs, develops, manufactures, and
supports products which intercept signals and analyze communications in
a variety of transmission media, and then identify and locate the
sources of these signals and communication. These systems are generally
used by operators on board aircraft, ships and ground installations to
intercept various kinds of transmissions over established communications
networks.
- Imaging Group designs, develops, manufactures and supports products that
are installed on special purpose aircraft and land vehicles and use
multispectral, infrared, and light imaging systems to perform remote
surveys. Applications of this technology include environmental
pollution, facility inspection, utility monitoring, surface mineral
exploration and other special purpose inspections where on-site
inspections are not possible or desirable.
8
All three business segments offer applicable system engineering services
which provide concept studies, system definition and services to aid in
specification of customer requirements. These activities are performed for
either present or prospective customers and are principally undertaken to assist
the customer in the procurement of major integrated passive surveillance systems
and where applicable, active electronic countermeasures.
Manufacturing of the Communications Group is in Newington, Virginia. The
Defense Systems Group manufactures in both its Newington, Virginia and
Farmingdale, New Jersey facilities. The Imaging Group products are manufactured
in the Ann Arbor, Michigan, facility.
The Company does not have a significant amount of inter-segment revenue
and evaluates segment performance based upon revenue and income from operations
by group. The combined segments income from operations equals the income from
operations as reported in the Consolidated Income Statements of the Company. The
Company does not allocate interest, other income and expenses or income taxes to
the three segments and does not produce separate balance sheet information for
each segment.
The revenue and income from operations by segment for the three months
ended December 31, 2002 and 2001 are as follows:
DECEMBER 31,
2002 2001
----------- -----------
Revenue:
DS $ 6,449,000 $ 1,617,000
Comms 3,754,000 1,779,000
Imaging 1,520,000 1,013,000
----------- -----------
Total $11,723,000 $ 4,409,000
=========== ===========
Income From Operations:
DS $ 417,000 $ 46,000
Comms 781,000 421,000
Imaging 211,000 177,000
----------- -----------
Total $ 1,409,000 $ 644,000
=========== ===========
6. RECENTLY ISSUED ACCOUNTING STANDARD
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123 ("SFAS No. 148"). SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002, and will be
disclosed in our 2003 second quarter Form 10-Q.
7. SUBSEQUENT EVENT
The Company executed a letter of intent to purchase all of the
outstanding shares of common stock of Codem Systems, Inc. The transaction, in
the form of cash and stock, is expected to close by March 31, 2003. The
operations of Codem Systems, Inc. will be reported in the Communications Group.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides information which management believes
is relevant to an assessment and an understanding of the Company's operations
and financial condition. This discussion should be read in conjunction with the
condensed consolidated financial statements and accompanying notes.
FORWARD-LOOKING STATEMENTS
Statements in this filing which are not historical facts are
forward-looking statements under the provision of the Private Securities
Litigation Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. These statements are based upon numerous assumptions about future
conditions that could prove not to be accurate. Actual events, transactions or
results may materially differ from the anticipated events, transactions or
results described in such statements. The Company's ability to consummate such
transactions and achieve such events or results is subject to certain risks and
uncertainties. In addition to those specifically mentioned above, such risks and
uncertainties include, but are not limited to, the existence of demand for, and
acceptance of the Company's products and services, regulatory approvals, export
approvals, economic conditions both domestically and internationally, the impact
of competition and pricing, results of financing efforts and other factors
affecting the Company's business that are beyond the Company's control. All of
our forward-looking statements should be considered in light of these factors.
You should not put undue reliance on any forward-looking statements. The Company
undertakes no obligation to update these forward-looking statements to reflect
new information, future events or otherwise, except as provided by law.
OVERVIEW
We are a designer, developer and manufacturer of electronics,
communications and technology products for the defense and intelligence markets.
Specifically, we specialize in integrated passive surveillance, communications
and data links, electronic countermeasures and threat simulators, and airborne
imaging and scanning systems. Our products are developed for use primarily by
U.S. federal government customers and U.S. approved foreign governments,
including U.S. defense and intelligence agencies, foreign governments agencies,
and civilian agencies.
To estimate revenues for performance under U.S. federal government
fixed-price and cost-reimbursement contracts, including customer-funded research
and development, we use the percentage of completion method of accounting under
which estimated revenues are determined on the basis of completion to date
(i.e., the total contract amount multiplied by percent of performance to date
less revenue value recognized in previous periods). We record revenues under
cost-reimbursement contracts as costs are incurred and we include estimated
earned fees in the proportion that costs incurred to date bear to total
estimated costs. We increase or decrease fees under certain U.S. federal
government contracts in accordance with cost or performance incentive provisions
which measure actual performance against established targets or other criteria.
We include such incentive fee awards or penalties, which historically are not
material, in revenues at the time the amounts can be determined reasonably. We
recognize anticipated losses at the time they become known. Our future operating
results may be affected if actual contract costs incurred differ from our
current estimates of total contract costs.
Our revenues are primarily derived from fixed-price contracts, under
which we perform specific tasks for a fixed price. Under fixed-price contracts
we assume the risk of cost overruns and receive the benefit of cost savings. All
of our U.S. federal government contracts, whether we are the prime contractor or
a subcontractor, are subject to audit and cost controls. As a result, the U.S.
federal government contracting authorities typically have the right to object to
our costs as not allowable or as unreasonable, which can result in our bearing
all or a portion of these costs ourselves rather than recovering them from the
U.S. federal government.
10
We expense operating costs such as cost of revenues, general and
administrative, independent research and development expenses, and bid and
proposal costs in the period incurred. The major components of these costs are
compensation, materials, and overhead. Intangible assets are amortized over
their useful lives.
Our results of operations, particularly our revenues, gross profit and
cash flow, may vary significantly from period to period depending on a number of
factors, including the progress of contract performance, revenues earned on
contracts, the timing of customer orders and billing of other direct costs, the
commencement and completion of contracts during any particular quarter, the
timing of government contract awards, the term of each contract that we have
been awarded, foreign budget reallocations, currency fluctuations, and general
political and economic conditions. Because a significant portion of our
expenses, such as personnel and facilities costs, are fixed in the short term,
successful contract performance and variation in the volume of activity, as well
as in the number of contracts commenced or completed during any period may cause
significant variations in operating results. As a result of the factors above,
period-to-period comparisons of our revenues and operating results may not be
meaningful.
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2001
REVENUES:
Revenues increased $7,314,000, or 165.9% to $11,723,000 for the three
months ended December 31, 2002 from $4,409,000 for the three months ended
December 31, 2001. The increase was due primarily to new contract awards in the
Communications Group and the Imaging Group of approximately $2,482,000, in
addition to revenues attributable to ST Production Systems, Inc., the subsidiary
that holds the assets we acquired from FEL Corporation and which we include as
part of our Defense Systems Group, of approximately $4,179,000. The remaining
increase is attributed to other Defense Systems revenue. During the three months
ended December 31, 2002, the four largest non-classified revenue producing
contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System, the AN/SLQ-4A
Radio Terminal Set, the Hyperspectral Imaging System, and the AN/BLQ-10 (v)1 and
(v)2, which contributed 41.0% of revenues.
The total amount of negotiated backlog, including both unfilled firm
orders for the Company's products for which funding had been authorized and
appropriated by the customer and firm orders for which funding had not been
appropriated as of December 31, 2002 and 2001, was $34,980,000 and $8,020,000,
respectively.
COST OF REVENUES:
Cost of revenues increased $6,258,000, or 209.1%, to $9,251,000 for the
three months ended December 31, 2002 from $2,993,000 for the three months ended
December 31, 2001. The increase was attributed to costs associated with the
revenues generated by ST Production Systems, Inc., which, due to competitive
factors, has a higher associated cost structure than the revenues generated in
our Communications and Imaging Groups. Cost of revenues as a percentage of
revenues increased to 78.9% for the three months ended December 31, 2002 from
67.9% for the three months ended December 31, 2001.
GENERAL AND ADMINISTRATIVE EXPENSES:
General and administrative expenses increased $291,000, or 37.7%, to
$1,063,000 for the three months ended December 31, 2002 from $772,000 for the
three months ended December 31, 2001. The increase was due principally to added
salaries, benefits and other related expenses of new employees hired of
approximately $284,000; and to increases in salaries and benefits to our
existing employees of approximately $150,000.
For the three months ended December 31, 2002, internal research and
development was $155,000 compared to
11
$340,000 for the three months ended December 31, 2001 and represented 14.6% and
44.0% of general and administrative expense, respectively.
INTEREST INCOME AND INTEREST EXPENSE:
Interest income decreased $15,000 or 75% to $5,000 for the three months
ended December 31, 2002 from $20,000 for the three months ended December 31,
2001. The decrease was primarily the result of lower rates on investments.
Interest expense increased $53,000 or over 100% to $55,000 from $2,000. The
increase was primarily due to interest expense incurred due to borrowings on the
line of credit.
OTHER INCOME AND OTHER EXPENSES:
Other income decreased $33,000 to $4,000 for the three months ended
December 31, 2002 from $37,000 for the three months ended December 31, 2001. The
decrease was due to a reduction in sublease income.
INCOME TAX EXPENSE:
Income tax expense consists of federal and state income taxes. Income
tax expense increased $284,000 or 103.3% to $559,000 for the three months ended
December 31, 2002, from $275,000 for the three months ended December 31, 2001.
The increase was primarily due to increased and improved profitability for the
three month period ended December 31, 2002. Our effective tax rate was 41% for
the three months ended December 31, 2002 and varies from the federal statutory
rate primarily due to state taxes and other nondeductible expenses.
NET INCOME:
Net income increased $391,000 or 94.7% to $804,000 for the three months
ended December 31, 2002, from $413,000 for the three months ended December 31,
2001. The increase was the result of an increase in revenues that was partially
offset by an increase in costs and expenses. Net income as a percentage of
revenue was 6.9% for the three months ended December 31, 2002 compared to 9.4%
for the three months ended December 31, 2001. The decrease is due to lower
margins in our subsidiary ST Productions Systems Inc.
LIQUIDITY AND CAPITAL RESOURCES
Historically our primary source of liquidity is cash provided by
operations and our line of credit. Our liquidity requirements depend on a number
of factors, including the timing of production under our federal government and
foreign sales contracts. On November 22, 2002, the Company sold 2 million shares
of common stock for net proceeds, after costs and underwriters commissions, of
$14,520,000. On December 12, 2002 the underwriters exercised their overallotment
option which provided net proceeds to the Company of $2,230,000 from the sale of
an additional 300,000 shares. We had cash and cash equivalents of $11,063,000 at
December 31, 2002, as compared to $4,450,000 at December 31, 2001. The increase
was primarily due to the net proceeds of $16,483,000 received from the sale of
2.3 million shares of common stock. The increase was partially offset by cash
used in operations and the repayment of the line of credit.
Cash used in operating activities was approximately $3,096,000 for the
three months ended December 31, 2002, compared to cash provided by operating
activities of approximately $489,000 for the three months ended December 31,
2001, a decrease of approximately $3,585,000. The primary reasons for this
decrease were (1) an increase in certain fixed price contracts, which provide
for billing only at the completion and delivery of those products, and
government processing delays at our subsidiary ST Production Systems, Inc.,
which, together, resulted in an increase in unbilled
12
receivables of approximately $492,000 and billed accounts receivable of
$1,332,000 for the three month period ended December 31, 2002, and (2) a
decrease in accounts payable due to timing of payments to vendors and billings
in excess of cost as a result of revenue earned against advanced payments.
Cash used in investing activities was approximately $306,000 during the
three months ended December 31, 2002, compared to approximately $447,000 for the
three months ended December 31, 2001, a decrease of approximately $141,000. The
primary reasons for the decrease were the acquisition of property and equipment
used in the California operations of FEL Corporation and lower expenditures for
other property and equipment during the three months ended December 31, 2001
compared to only capital expenditures for property and equipment in 2002.
Cash provided by financing activities was approximately $13,765,000
during the three months ended December 31, 2002, compared to cash used in
financing activities of approximately $46,000 for the three months ended
December 31, 2001, an increase of $13,719,000. The increase was primarily due to
the net proceeds of $16,483,000 received from the sale of 2.3 million shares of
common stock. The increase was partially offset by cash used for the repayment
of the line of credit.
The Company has a $10,000,000 line of credit with Bank of America. The
line of credit is available to finance the performance of government contracts,
to support the issuance of stand-by letters of credit, and for short-term
working capital purposes. The line of credit bears interest at either Bank of
America's base interest rate or the London Interbank Offering Rate (LIBOR) plus
225 basis points and matures on February 28, 2003. The Company is in
negotiations with Bank of America to renew the line of credit. Under the line of
credit, we may borrow the lesser of a defined percentage of accounts receivable
under ninety days or $10,000,000. As of December 31, 2002, there were no
borrowings under our line of credit. We have given the lender a security
interest in substantially all of our assets to secure the debt under our credit
facility. If the lender declares amounts outstanding under the credit facility
to be due, the lender could proceed against those assets.
We believe our existing funds, cash we generate by operations, and
amounts available for borrowings under our line of credit will be sufficient to
meet our current working capital needs and the potential acquisition of Codem
Systems, Inc.
MARKET RISKS
In addition to the risks inherent in our operations, we are exposed to
financial, market, political and economic risks. The following discussion
provides additional detail regarding our exposure to credit, interest rates and
foreign exchange rates.
CASH AND CASH EQUIVALENTS:
All unrestricted, highly liquid investments purchased with a remaining
maturity of three months or less are considered to be cash equivalents. We
maintain cash and cash equivalents with various financial institutions in excess
of the amount insured by the Federal Deposit Insurance Corporation. We believe
credit risk related to these cash and cash equivalents is minimal.
INTEREST RATES:
Our line of credit financing provides available borrowing to the Company
at variable interest rates. There are no outstanding borrowings at December 31,
2002. According, the Company does not believe that any movement in interest
rates would have a material impact on future earnings or cash flows. If the
Company were to significantly increase borrowing under the current line of
credit agreement, future interest rate changes could potentially have a material
impact.
FOREIGN CURRENCY:
13
The Company has contracts to provide services to U.S. approved foreign
countries. Our foreign sales contracts require payment in U.S. dollars, so we
are not affected by foreign currency fluctuations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes in our critical accounting policies
and estimates during the three months ended December 31, 2002, except as noted
below. A complete description of the Company's critical accounting policies and
estimates is included in Part II, Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," in our Annual Report on Form
10K for the year ended September 30, 2002.
INVENTORIES:
We are required to state our inventories at the lower of cost or market.
In assessing the ultimate realization of inventories, we are required to make
judgments as to future demand requirements and compare these with the current or
committed inventory levels. Inventory is generally purchased to fulfill a
specific contract commitment. At December 31, 2002, we had $1,566,000 in
inventory related to a program for the Egyptian Navy. Although we have no reason
to believe this contract is in jeopardy, given the delays experienced, we
cannot, with any certainty, plan on a contract notice to proceed until sometime
after March 31, 2003.
RESEARCH AND DEVELOPMENT:
We include internally funded research and development costs in general
and administrative expenses in our consolidated income statements. Our applied
research and development during the three months ended December 31, 2002 focused
on advanced scanning capabilities, an upgrade to a digital receiver and upgraded
pulse analyzer; all of which are expected to assist in anticipated future
contracts. We expensed $155,000 and $340,000 of internally funded research and
development costs during the three months ended December 31, 2002 and 2001,
respectively.
RECENTLY ISSUED ACCOUNTING STANDARD
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment of FASB Statement No. 123 ("SFAS No. 148"). SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002, and will be
disclosed in our 2003 second quarter Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information called for by this item is provided under Item 2 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 4. CONTROLS AND PROCEDURES
(a) The Company's Chief Executive Officer and Chief Financial Officer
have concluded that the Company's disclosure controls and procedures
are effective based on their evaluations of these controls, which
was done within the last 90 days.
14
(b) During the last quarter, there were no significant changes in the
Company's internal controls or in other factors that could
significantly affect these controls subsequent to the evaluation of
these controls.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) Exhibits None.
(b) Reports on Form 8-K
The Company did not file any Reports on Form 8-K during the three
months ended December 31, 2002.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENSYTECH, INC.
February 13, 2003 By: /s/ S. Kent Rockwell
---------------------------------
S. Kent Rockwell
Chairman and Chief Executive Officer
February 13, 2003 By: /s/ Donald F. Fultz
---------------------------------
Donald F. Fultz
Vice President and Chief Financial Officer
16
FORM OF CERTIFICATION
I, S. Kent Rockwell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sensytech, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
/s/ S. Kent Rockwell
- ------------------------------------
S. Kent Rockwell
Chief Executive Officer
17
FORM OF CERTIFICATION
I, Donald F. Fultz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sensytech, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations, and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed based on our
most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
/s/ Donald F. Fultz
- ------------------------------------
Donald F. Fultz
Chief Financial Officer