-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FFQdW5j+xj60yp/FBx+kFZEx5fDbuZBH5dNNdIJ1D/LgwgttGakqF6zNvdjbeaSE rfaZWUfiXYWG5gGphTmJ6A== 0000950133-04-004417.txt : 20041123 0000950133-04-004417.hdr.sgml : 20041123 20041123135742 ACCESSION NUMBER: 0000950133-04-004417 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040929 ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041123 DATE AS OF CHANGE: 20041123 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARGON ST, Inc. CENTRAL INDEX KEY: 0000026537 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 381873250 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08193 FILM NUMBER: 041163269 BUSINESS ADDRESS: STREET 1: 8419 TERMINAL ROAD STREET 2: P O BOX 1869 CITY: NEWINGTON STATE: VA ZIP: 22122-1430 BUSINESS PHONE: (703)550-7000 MAIL ADDRESS: STREET 1: 8419 TERMINAL ROAD CITY: NEWINGTON STATE: VA ZIP: 22122-1430 FORMER COMPANY: FORMER CONFORMED NAME: SENSYTECH INC DATE OF NAME CHANGE: 20000118 FORMER COMPANY: FORMER CONFORMED NAME: SENSYS TECHNOLOGIES INC DATE OF NAME CHANGE: 19980615 FORMER COMPANY: FORMER CONFORMED NAME: DAEDALUS ENTERPRISES INC DATE OF NAME CHANGE: 19920703 8-K/A 1 w68860e8vkza.txt FORM 8-K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A (Amendment No. 1) CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event report): September 29, 2004 ARGON ST, INC. --------------------------------- (Exact Name of Registrant as specified in its charter) DELAWARE ----------------------------- (State or other jurisdiction of incorporation) 000-08193 38-1873250 --------- ---------- (Commission File No.) (I.R.S. Employer Identification No.) 12701 Fair Lakes Circle, Suite 800, Fairfax, -------------------------------------------- Virginia 22033 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (703)322-0881 Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): [ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) [ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) [ ] Pre-commencement communications pursuant to Rule 14-d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) [ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) ARGON ST, INC. AND SUBSIDIARIES EXPLANATORY NOTE: The purpose of this Amendment No. 1 to Current Report on Form 8-K is to provide the disclosure under Item 9.01. ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial statements of businesses acquired. Balance sheets of Argon Engineering Associates, Inc. as of June 27, 2004 and September 30, 2003 and 2002, related statements of earnings and cash flows for the fiscal years ended September 30, 2003, 2002 and 2001 and the nine months ended June 27, 2004 and June 29, 2003, and related statements of stockholders' equity for the fiscal years ended September 30, 2003, 2002 and 2001 and the nine months ended June 27, 2004. A Report of Independent Registered Public Accounting Firm to the Board of Directors of Argon Engineering Associates, dated July 1, 2004 (except for the note 15 to Argon Engineering's financial statements, as to which the date is August 31, 2004). (b) Pro forma financial information. An unaudited pro forma condensed combined consolidated balance sheet at June 30, 2004 and unaudited pro forma condensed combined consolidated statements of earnings for the fiscal year ended September 30, 2003 and the nine months ended June 30, 2004. (c) Exhibits
Exhibit Number Description -------------- ----------- 99.1 Audited Financial Statements of Argon Engineering Associates, Inc. 99.2 Unaudited Pro Forma Condensed Combined Consolidated Financial Statements
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report be signed on its behalf by the undersigned, thereunto duly authorized. ARGON ST, INC. November 23, 2004 By: /s/ Donald F. Fultz ----------------------------- Donald F. Fultz Chief Financial Officer EXHIBIT INDEX
Exhibit Number Description - -------------- ----------- 99.1 Audited Financial Statements of Argon Engineering Associates, Inc. 99.2 Unaudited Pro Forma Condensed Combined Consolidated Financial Statements
EX-99.1 2 w68860exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 ARGON ENGINEERING ASSOCIATES, INC. INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm................ 1 Balance Sheets......................................................... 2 Statement of Earnings.................................................. 3 Statement of Stockholders' Equity...................................... 4 Statement of Cash Flows................................................ 5 Notes to Financial Statements.......................................... 6 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Argon Engineering Associates, Inc. We have audited the accompanying balance sheets of Argon Engineering Associates, Inc. (the Company), as of September 30, 2003 and 2002, and the related statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended September 30, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ GRANT THORNTON LLP Vienna, Virginia July 1, 2004 (except for note 15, as to which the date is August 31, 2004) 1 ARGON ENGINEERING ASSOCIATES, INC. BALANCE SHEETS
As of September 30, ------------------------------------- As of June 27, ASSETS 2003 2002 2004 ----------------- ----------------- ---------------- Current Assets (unaudited) Cash and cash equivalents $ 4,099,503 $ 5,231,084 $ 5,627,865 Accounts receivable, net 15,851,362 10,843,810 38,624,018 Income taxes receivable 704,477 - - Deferred income tax asset - 1,060,466 - Prepaids and other 512,027 691,584 1,331,445 ----------------- ----------------- ---------------- Total current assets 21,167,369 17,826,944 45,583,328 Property, equipment and software, net 2,459,624 2,180,561 3,412,662 Other assets 109,208 82,341 226,760 ----------------- ----------------- ---------------- Total Assets $ 23,736,201 $ 20,089,846 $ 49,222,750 ================= ================= ================ LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Accounts payable and accrued expenses $ 3,644,809 $ 2,302,343 $ 12,943,585 Accrued salaries and related expenses 4,856,434 3,982,662 5,465,409 Deferred revenue 3,738,488 4,941,243 10,840,670 Notes payable - current portion 34,375 137,500 225,637 Income taxes payable - 642,677 987,408 Deferred rent 34,651 104,831 995,084 Deferred income tax liability, current 243,448 - 243,448 ----------------- ----------------- ---------------- Total current liabilities 12,552,205 12,111,256 31,701,241 Deferred income tax liability, long term 174,187 - 174,187 Notes payable, net of current portion - 34,375 112,817 Commitments and contingencies (Notes 1, 3, 5, 7, 9, 11) - - - Stockholders' equity Common stock, class A shares: $.01 Par Value, 1,000,000 shares authorized, 532,800, 531,900 and 529,200 shares issued and outstanding respectively 5,328 5,319 5,292 Common stock, Class B non-voting shares: $.01 par value, 14,000,000 shares authorized, 5,620,181, 5,300,385 and 5,594,645 shares issued and outstanding respectively 56,202 53,004 55,946 Additional paid in capital 147,822 85,631 211,617 Retained earnings 10,800,457 7,800,261 16,961,650 ----------------- ----------------- ---------------- Total stockholders' equity 11,009,809 7,944,215 17,234,505 ----------------- ----------------- ---------------- $ 23,736,201 $ 20,089,846 $ 49,222,750 ================= ================= ================
The accompanying notes are an integral part of these consolidated financial statements. 2 ARGON ENGINEERING ASSOCIATES, INC. STATEMENT OF EARNINGS
Years Ended September 30 Nine Months Ended --------------------------------------------------- -------------------------------- 2003 2002 2001 June 27, 2004 June 29, 2003 --------------- -------------- -------------- -------------- -------------- (unaudited) CONTRACT REVENUE $ 79,349,052 $ 61,758,650 $ 41,395,967 $ 89,025,689 $ 52,250,466 DIRECT AND ALLOCABLE CONTRACT COSTS Cost of revenues 65,271,039 51,033,683 35,169,737 73,527,614 42,999,520 General and Administrative Expenses 5,844,251 5,181,339 3,100,506 4,749,004 4,282,279 --------------- -------------- -------------- -------------- -------------- 71,115,290 56,215,022 38,270,243 78,276,618 47,281,799 --------------- -------------- -------------- -------------- -------------- INCOME FROM OPERATIONS 8,233,762 5,543,628 3,125,724 10,749,071 4,968,667 Other income (expense) Interest income 35,098 77,653 88,081 89,859 28,703 Interest expense (4,294) (15,621) (45,426) (10,099) (8,730) --------------- -------------- -------------- -------------- -------------- 30,804 62,032 42,655 79,760 19,973 --------------- -------------- -------------- -------------- -------------- INCOME BEFORE PROVISION FOR INCOME TAXES 8,264,566 5,605,660 3,168,379 10,828,831 4,988,640 PROVISION FOR INCOME TAXES 2,695,847 2,021,072 1,139,115 3,996,000 1,801,000 --------------- -------------- -------------- -------------- -------------- NET INCOME $ 5,568,719 $ 3,584,588 $ 2,029,264 $ 6,832,831 $ 3,187,640 =============== ============== ============== ============== ============== EARNINGS PER SHARE Basic $ 0.95 $ 0.64 $ 0.41 $ 1.12 0.55 =============== ============== ============== ============== ============== Diluted $ 0.88 $ 0.57 $ 0.32 $ 1.03 0.48 =============== ============== ============== ============== ============== WEIGHTED-AVERAGE SHARES OUTSTANDING Basic 5,884,894 5,582,811 4,921,089 6,117,754 5,843,198 =============== ============== ============== ============== ============== Diluted 6,310,154 6,278,775 6,290,303 6,653,870 6,605,239 =============== ============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 3 ARGON ENGINEERING ASSOCIATES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Class A Class B -------------------------- --------------------------- Additional Total Number of Number of Paid in Retained Stockholders' Shares Par Value Shares Par Value Capital Earnings Equity ------------- ------------ ------------ ------------- ------------ ------------- ------------- Balance, September 30, 2000 486,000 $ 4,860 4,327,866 $ 43,279 $ - $ 2,187,951 $ 2,236,090 Shares issued upon exercise of stock options 45,000 450 621,468 6,215 51,502 - 58,167 Retirement of shares - - (960) (10) (323) - (333) Net income - - - - - 2,029,264 2,029,264 ------------- ------------ ------------ ------------- ------------ ------------- ------------- Balance, September 30, 2001 531,000 $ 5,310 4,948,374 49,484 51,179 4,217,215 4,323,188 Shares issued upon exercise of stock options 900 9 352,971 3,530 34,633 38,172 Retirement of shares - - (960) (10) (181) (1,542) (1,733) Net income - - - - - 3,584,588 3,584,588 ------------- ------------ ------------ ------------- ------------ ------------- ------------- Balance, September 30, 2002 531,900 5,319 5,300,385 53,004 85,631 7,800,261 7,944,215 Shares issued upon exercise of stock options 900 9 332,496 3,325 73,773 - 77,107 Retirement of shares - - (12,700) (127) (11,582) (106,778) (118,487) Dividend declared - - - - - (2,461,745) (2,461,745) Net income - - - - - 5,568,719 5,568,719 ------------- ------------ ------------ ------------- ------------ ------------- ------------- Balance, September 30, 2003 532,800 5,328 5,620,181 56,202 147,822 10,800,457 11,009,809 Shares issued upon exercise of stock options - - 30,904 308 74,211 - 74,519 Retirement of shares (3,600) (36) (56,440) (564) (10,416) (671,638) (682,654) Net income - - - - - 6,832,831 6,832,831 ------------- ------------ ------------ ------------- ------------ ------------- ------------- - Balance, June 27, 2004 (UNAUDITED) 529,200 $ 5,292 5,594,645 $ 55,946 $ 211,617 $ 16,961,650 $17,234,505 ============= ============ ============ ============= ============ ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 4 ARGON ENGINEERING ASSOCIATES, INC. STATEMENTS OF CASH FLOWS
Years Ended September 30, Nine Months Ended ---------------------------------------------- ----------------------------- 2003 2002 2001 June 27, 2004 June 29, 2003 -------------- -------------- ------------- -------------- ------------- CASHFLOWS FROM OPERATING ACTIVITIES (Unaudited) Net income $ 5,568,719 $ 3,584,588 2,029,264 6,832,831 3,187,640 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,065,182 828,483 401,892 922,514 748,335 Deferred income taxes 1,478,101 (503,735) (646,665) - - Change in: Billed accounts receivable (795,150) (985,692) (4,340,386) (19,483,891) (1,084,937) Unbilled accounts receivable (4,212,402) (869,755) (1,502,738) (3,885,765) (1,841,668) Accounts receivable reserve - - - 597,000 - Income taxes receivable (704,477) - 90,078 704,477 (121,223) Prepaids and other 179,557 (591,722) 117,201 (819,418) (353,166) Accounts payable and accrued expenses 1,342,466 (2,185,292) 2,726,031 9,298,776 (775,560) Accrued salaries and related expenses 873,772 1,756,494 1,256,765 608,975 503,577 Deferred revenue (1,202,755) 1,973,961 2,945,464 7,102,182 376,488 Income taxes payable (642,677) (206,709) 849,386 987,408 (642,677) Deferred rent (70,180) 104,831 - 960,433 (52,713) -------------- -------------- ------------- -------------- ------------- Net cash provided by (used in) operating activities 2,880,156 2,905,452 3,926,292 3,825,522 (55,904) CASHFLOWS FROM INVESTING ACTIVITIES Acquisitions of property, equipment and software (1,344,245) (1,779,410) (1,083,765) (1,875,552) (933,383) Deposits (26,867) (8,517) 62,116 (117,552) (140,525) -------------- -------------- ------------- -------------- ------------- Net cash provided by (used in) investing activities (1,371,112) (1,787,927) (1,021,649) (1,993,104) (1,073,908) CASHFLOWS FROM FINANCING ACTIVITIES Payment on note payable (137,500) (137,500) (137,500) (147,195) - Payment on note payable, stockholder - - (110,740) - (103,125) Retirement of common stock (118,487) (1,733) (333) (231,380) (4,957) Refund of exercised stock options - - (4,890) - - Proceeeds from exercise of stock options 77,107 38,172 58,167 74,519 172 Dividends paid (2,461,745) - - - - -------------- -------------- ------------- -------------- ------------- Net cash provided by (used in) financing activities (2,640,625) (101,061) (195,296) (304,056) (107,910) -------------- -------------- ------------- -------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,131,581) 1,016,464 2,709,347 1,528,362 (1,237,722) CASH AND CASH EQUIVALENTS, Beginning of year 5,231,084 4,214,620 1,505,273 4,099,503 5,231,084 -------------- -------------- ------------- -------------- ------------- CASH AND CASH EQUIVALENTS, End of year $ 4,099,503 $ 5,231,084 $ 4,214,620 $ 5,627,865 $ 3,993,362 ============== ============== ============= ============== ============= SUPPLEMENTAL DISCLOSURE Income taxes paid $(1,813,221) $ (2,731,516) (846,316) (2,275,000) (1,813,221) ============== ============== ============= ============== ============= Interest expense paid $ (7,227) $ (15,477) (45,426) (10,099) (8,730) ============== ============== ============= ============== ============= Note payable issued in connection with retirement of common stock $ - $ - - 451,274 - ============== ============== ============= ============== =============
The accompanying notes are an integral part of these consolidated financial statements. 5 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Argon Engineering Associates, Inc. (Argon) designs and provides communications signal identification and processing systems. Argon's products and services encompass sensor development, data collection and decision support. These products and services are designed for ground based, sub-surface, surface, land-mobile, and airborne applications. Argon's primary customers are positioned in the defense, intelligence and homeland security markets both for the United States government and for certain foreign defense markets. Argon was incorporated in 1997. The company is headquartered in Fairfax, Virginia. INTERIM RESULTS The accompanying balance sheet as of June 27, 2004 and the statements of earnings and cash flows for the nine months ended June 27, 2004 and June 29, 2003 and the statement of stockholders' equity for the nine months ended June 27, 2004 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the results of the interim periods. The information disclosed in the notes to the financial statements for these periods is unaudited. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. Argon maintains a September 30 fiscal year-end for annual financial reporting purposes. Argon presents its interim periods ending on the last Sunday of the month for each quarter consistent with labor and billing cycles. As a result, the fourth quarter of each year may contain more days than earlier quarters of the year. Management does not believe that this practice has a material effect on quarterly results. Argon records contract revenue and cost for interim reporting purposes based on annual provisional approved indirect rates. At year-end, the revenues and costs are adjusted for actual indirect rates. During the interim reporting periods, variances may accumulate between the actual indirect rates and the annual provisional approved rates. All timing-related indirect spending variances are included in unbilled receivables during these interim reporting periods. This accounting policy is based on management's belief that such a variance will be absorbed by expected contract activities during the remainder of the year. REVENUE AND COST RECOGNITION Contract revenue is accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position 81-1, Accounting for Performance of Construction-Type and Production-Type Contracts . These contracts are transacted using written contractual arrangements, most of which require Argon to design, develop, manufacture and/or modify complex products, and perform related services according to specifications provided by the customer. Argon accounts for cost reimbursement contracts by charging contract costs to operations as incurred and recognizing contract revenues and profits by applying contractually agreed to fee rate to actual costs on an individual contract basis. Argon accounts for fixed-price contracts by using the percentage-of-completion method of accounting. Under this method, contract costs are charged to operations as incurred. A portion of the 6 contract revenue, based on estimated profits and the degree of completion of the contract as measured by a comparison of the actual and estimated costs, is recognized as revenue each period. Unexpected increases in the cost to develop or manufacture a product under a fixed-price contract, whether due to inaccurate estimates in the bidding process, unanticipated increases in material costs, inefficiencies, or other factors are borne by Argon, and could have a material adverse effect on Argon's results of operations. The following table represents the revenue concentration by contract type:
YEARS ENDED SEPTEMBER 30, ------------------------- 2003 2002 2001 ----- ----- ---- Fixed-Price Contracts 46% 49% 27% Cost-Reimbursement Contracts 51% 50% 72% Time and Materials Contracts 3% 1% 1%
Management reviews contract performance, costs incurred, and estimated completion costs regularly, and adjusts revenues and profits on contracts in the period in which changes become determinable. Anticipated losses on contracts are also recorded in the period in which they become determinable. Argon's policy for recognizing interim fee on award fee contracts is based on management's assessment as to the likelihood that the award fee or an incremental portion of the award fee will be earned on a contract-by-contract basis. Management's assessments are based on numerous factors including: contract terms, nature of the work to be performed, the relationship and history with the customer, the history with similar types of projects, and the current and anticipated performance on the specific contract. No award fee is recognized until management determines that it is probable that an award fee or portion thereof will be earned. Revenues recognized in excess of billings are recorded as unbilled accounts receivable. Cash collections in excess of revenues recognized are recorded as deferred revenues until the revenue recognition criteria are met. Reimbursements, including those related to travel, other out of pocket expenses and any third party costs, are included in revenues, and an equivalent amount of reimburseable expenses are included in cost of revenues. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and investments that are readily convertible into cash and have original maturities of three months or less. ACCOUNTS RECEIVABLE Argon reviews its receivables regularly to determine if there are any potential uncollectible accounts. The majority of Argon's receivables are from agencies of the United States government, where there is no credit risk. There were no material provisions for bad debts recorded during 2003, 2002 or 2001. PROPERTY, EQUIPMENT AND SOFTWARE Property, equipment and software are stated at cost. Depreciation is provided over the estimated useful lives of the assets, which range from three to five years, using the straight-line method. Leasehold improvements are amortized over the respective lease terms, which range from one to six years, using the straight-line method. 7 COMMON STOCK SPLITS Argon split its Class A and B common stock 3 to 1 on August 14, 2001 and 2 to 1 on August 23, 2002. All prior share and per share information presented in the accompanying financial statements have been retroactively restated to reflect the stock splits. STOCK-BASED COMPENSATION Argon accounts for stock-based employee compensation arrangements in accordance with provisions of Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," (APB No. 25) and complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," (SFAS No. 123) and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure. The following tables illustrate the effect on net income if Argon had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-based Compensation, to stock-based employee compensation.
YEARS ENDED SEPTEMBER 30, NINE MONTHS NINE MONTHS ------------------------- ENDED ENDED 2003 2002 2001 JUNE 27, 2004 JUNE 29, 2003 ----- ----- ----- ------------- ------------- (UNAUDITED) Net Income, as Reported $5,568,719 $3,584,588 $2,029,264 $6,832,831 $3,187,640 Pro Forma Compensation (135,150) (38,443) (8,069) (168,146) (103,570) ---------- ---------- ---------- ---------- ---------- Expense, Net Pro Forma Net Income $5,433,569 $3,546,145 $2,021,195 $6,664,685 $3,084,070 ========== ========== ========== ========== ==========
YEARS ENDED SEPTEMBER 30, NINE MONTHS NINE MONTHS ------------------------- ENDED ENDED 2003 2002 2001 JUNE 27, 2004 JUNE 29, 2003 ---- ---- ---- ------------- ------------- (UNAUDITED) (UNAUDITED) Net Income Per Share -- Basic As Reported $ 0.95 $ 0.64 $ 0.41 $ 1.12 $ 0.55 Pro Forma $ 0.92 $ 0.64 $ 0.41 $ 1.09 $ 0.48 Net Income Per Share -- Diluted As Reported $ 0.88 $ 0.57 $ 0.32 $ 1.03 $ 0.48 Pro Forma $ 0.86 $ 0.56 $ 0.32 $ 1.00 $ 0.47
INCOME TAXES Argon accounts for deferred income taxes using the liability method, under which the expected future tax consequences of timing differences between the book and tax basis of assets and liabilities are recognized as deferred tax assets and liabilities. 8 USE OF ESTIMATES Management uses estimates and assumptions in preparing these financial statements in accordance with accounting principles generally accepted in the United States of America. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities. The Interpretation requires an investor with a majority of the variable interests in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling interest or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from the other parties. This pronouncement requires the consolidation of variable interest entities created after January 31, 2003. Consolidation provisions apply for periods ending after March 15, 2004 for variable interest entities, other than special purpose entities, created prior to February 1, 2003. Argon does not have any variable interest entities, including special purpose entities, that must be consolidated and therefore the adoption of the provision of FIN 46 will not have an impact on Argon's financial position or results of operations. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities . SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. Argon currently does not have any derivative instruments under SFAS 133. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity . SFAS 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as a liability (or an asset in some circumstances). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 did not have an impact on Argon's financial position or results of operations. 9 EARNINGS PER SHARE: Basic earnings per share is computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and common equivalent shares outstanding during each period. The following summary is presented for the years ended September 30:
2003 2002 2001 ---- ---- ---- Net Income $ 5,568,719 $ 3,584,588 $ 2,029,264 Weighted Average Shares Outstanding -- Basic 5,884,894 5,582,811 4,921,089 Basic Earnings per Share $ 0.95 $ 0.64 $ 0.41 Effect of dilutive securities: Net Shares Issuable Upon Exercise of 425,260 695,964 1,369,214 Stock Options ---------------- ---------------- ---------------- Weighted Average Shares Outstanding -- Diluted 6,310,154 6,278,775 6,290,303 Diluted Earnings per Share $ 0.88 $ 0.57 $ 0.32
NOTE 2 -- CUSTOMER CONCENTRATION AND CREDIT RISK CUSTOMER CONCENTRATIONS The following table identifies the source of Argon's revenues by major market:
YEARS ENDED SEPTEMBER 30, ------------------------- 2003 2002 2001 ---- ---- ---- One Branch of U.S. Military 68% 75% 81% Other U.S. Government Agencies 26% 19% 8% Foreign 6% 6% 11%
Revenues for the U.S. military can also be categorized as direct purchases and subcontracts, where Argon is a supplier to another contractor. The following table distinguishes revenue between these two categories:
YEARS ENDED SEPTEMBER 30, ------------------------- 2003 2002 2001 ---- ---- ---- Direct Purchases 69% 71% 87% Subcontracts 31% 29% 13%
10 CASH BALANCES At times during the year, Argon maintains cash balances at a commercial bank in excess of Federal Deposit Insurance Corporation (FDIC) limits. Management believes the risk in these situations to be minimal. Argon had cash on hand with a commercial bank in the amount of $6,479,889 as of September 30, 2003. The federally insured limit is $100,000. An officer and stockholder of Argon is a director and significant stockholder of the commercial bank. NOTE 3 -- ACCOUNTS RECEIVABLE Accounts receivable consists of the following as of:
SEPTEMBER 30, ------------- JUNE 27, 2003 2002 2004 ---- ---- ---- (UNAUDITED) Amounts Billed and Billable $ 8,810,283 $ 8,015,133 $ 28,294,174 Unbilled 6,102,429 2,240,447 10,053,622 Retainages 938,650 588,230 873,222 Reserves -- -- (597,000) ------------ ------------ ------------ $ 15,851,362 $ 10,843,810 $ 38,624,018 ============ ============ ============
Unbilled amounts result from recognition of contract revenue in advance of contractual billing or progress billing terms. A substantial portion of payments to Argon under government contracts are provisional payments that are subject to potential adjustment upon audit by the U.S. Defense Contract Audit Agency (DCAA) or other appropriate agencies of the U.S. Government. Historically, such audits have not resulted in any significant disallowed costs. When final determination and approval of the allowable rates have been made, receivables may be adjusted accordingly. In management's opinion, any adjustments will not be material. Incurred cost audits have been completed by DCAA through September 30, 2001. Reserves are determined based on management's best estimate of potentially uncollectible accounts receivable. Argon writes off accounts receivable when such amounts are determined to be uncollectible. NOTE 4 -- PROPERTY, EQUIPMENT AND SOFTWARE Property, equipment and software consists of the following as of:
SEPTEMBER 30, ------------- JUNE 27, 2003 2002 2004 ---- ---- ---- (UNAUDITED) Computer and Test Equipment $2,480,804 $1,682,375 $3,381,667 Leasehold Improvements 1,278,849 1,047,944 1,728,956 Computer Software 718,851 669,354 1,197,607 Furniture and Fixtures 444,298 427,537 490,124 ---------- ---------- ---------- 4,922,802 3,827,210 6,798,354 Less Accumulated Depreciation and Amortization 2,463,178 1,646,649 3,385,692 ---------- ---------- ---------- $2,459,624 $2,180,561 3,412,662 ========== ========== =========
11 Depreciation and amortization expense totaled $1,065,182, $828,483, $401,892, $922,516 (unaudited) and $748,335 (unaudited) for the years ended September 30, 2003, 2002, 2001 and for the nine months ended June 27, 2004 and June 29, 2003, respectively. NOTE 5 -- REVOLVING LINE OF CREDIT Argon has a revolving line of credit in the amount of $5,000,000 with a commercial bank. An officer and stockholder of Argon is a director and significant stockholder of the bank. (See Note 2). There were no amounts outstanding at September 30, 2003 and 2002 or at June 27, 2004. Amounts outstanding under the line bear interest at prime plus one-half percent. The bank also requires quarterly and annual line fees. The line is due for renewal on December 31, 2004. There is a letter of credit in the amount of $712,632 outstanding at September 30, 2003 securing Argon's obligations under its office lease agreement. The amount of the letter of credit was increased to $976,425 in April 2004. Borrowings on the line are collateralized by all assets of Argon. The financing and security agreement for the line contains covenants relating to certain financial ratios and minimum net worth requirements. For the year ended September 30, 2003, Argon did not meet a covenant relating to required ownership by certain key stockholders. The bank waived the requirement through December 31, 2004. NOTE 6 -- NOTE PAYABLE Notes Payable consists of the following as of:
SEPTEMBER 30, ------------- JUNE 27, 2003 2002 2004 ---- ---- ---- (UNAUDITED) Note payable calling for quarterly payments including interest at 6%, guaranteed by certain stockholders $ 34,375 $171,875 $ -- Note payable to former employee for purchase of stock, bearing interest at 4%, due in quarterly installments through November 2005 -- -- 338,454 Less Current Portion 34,375 137,500 225,637 -------- -------- -------- Notes Payable, Net of Current Portion $ -- $ 34,375 $112,817 ======== ======== ========
NOTE 7 -- STOCK OPTION PLAN Argon has a stock option plan providing for the distribution of qualified incentive stock options (ISOs), restricted stock awards, and non-qualified stock options to key employees. All stock of Argon, including any shares issued as a result of this plan, is subject to a Shareholders Buy-Sell Agreement. 12 The plan provides that all employees may be granted the option to purchase shares at the price determined by the Board of Directors. Stock options granted to date were granted at fair market value as determined by the board of directors through July of 2001 and an annual independent appraisal since that date. The options are exercisable starting one year after grant and expire ten years after the date of the grant, subject to vesting provisions attached to the individual grant. An option may not be exercised following termination of employment except in special circumstances as defined in the plan. The following table summarizes Argon's activity for all of its stock option awards granted under the plan:
NUMBER OF RANGE OF WEIGHTED-AVERAGE OPTIONS EXERCISE PRICES EXERCISE PRICE ------- --------------- -------------- Balance, September 30, 2000 1,595,030 $ 0.08 - $ 0.16 $ 0.11 Granted 311,100 $ 0.20 - $ 1.81 $ 1.38 Exercised (664,224) $ 0.08 - $ 0.20 $ 0.09 Canceled (14,640) $ 0.08 - $ 0.20 $ 0.16 --------- ---------------- ------- Balance, September 30, 2001 1,227,266 $ 0.08 - $ 1.81 $ 0.44 Granted -- $ 0.00 - $ 0.00 $ 0.00 Exercised (354,618) $ 0.08 - $ 1.81 $ 0.11 Canceled (6,240) $ 0.20 - $ 1.81 $ 0.82 --------- ---------------- ------- Balance, September 30, 2002 866,408 $ 0.08 - $ 1.81 $ 0.57 Granted 235,750 $ 8.21 - $ 8.21 $ 8.21 Exercised (333,391) $ 0.08 - $ 1.81 $ 0.23 Canceled (23,700) $ 0.20 - $ 8.21 $ 3.04 --------- ---------------- ------- Balance, September 30, 2003 745,067 $ 0.08 - $ 8.21 $ 3.06 Granted 200,200 $ 11.37 - $11.37 $ 11.37 Exercised (30,904) $ 0.08 - $ 8.21 $ 2.37 Canceled (15,860) $ 0.08 - $11.37 $ 7.02 --------- ---------------- ------- Balance, June 27, 2004 (Unaudited) 898,503 $ 0.08 - $11.37 $ 4.87 ========= ================ =======
Options to purchase 221,457, 168,541, 66,848, and 383,377 (unaudited) shares of Argon's common stock were exercisable as of September 30, 2003, 2002, 2001 and June 27, 2004, respectively, at weighted-average per share exercise prices of $.67, $.57, $.12 and $2.35 (unaudited), respectively. The following table summarizes additional information about stock options outstanding as of September 30, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE NUMBER OF CONTRACTUAL EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OPTIONS LIFE (YEARS) PRICE EXERCISABLE PRICE ------- ------------ ----- ----------- ----- $0.08 - $0.08 93,227 5.23 $ 0.08 93,227 $ 0.08 $0.20 - $0.20 186,070 6.79 $ 0.20 64,770 $ 0.20 $0.35 - $0.35 54,000 7.72 $ 0.35 -- -- $1.81 - $1.81 181,520 7.97 $ 1.81 61,280 $ 1.81 $8.21 - $8.21 230,250 9.11 $ 8.21 2,180 $ 8.21 ---------- --------- 745,067 7.67 $ 3.06 221,457 $ 0.67 ========== =========
13 Argon applies APB Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, compensation cost has been recognized for its stock plans based on the intrinsic value of the stock option at date of grant (i.e., the difference between the exercise price and the fair value of the Company's common stock). Had compensation cost for Argon's stock-based compensation plans been determined based on the fair value at the grant dates for awards under the plans in 2003, 2002, 2001 and for the nine months ended June 27, 2004 and June 29, 2003 and consistent with the method of SFAS No. 123, Argon's net earnings and net earnings per share would have been reduced to the pro forma amounts indicated below.
YEARS ENDED SEPTEMBER 30, NINE MONTHS NINE MONTHS ------------------------- ENDED ENDED 2003 2002 2001 JUNE 27, 2004 JUNE 29, 2003 ---- ---- ---- ------------- ------------- (UNAUDITED) (UNAUDITED) Net Income, as Reported $ 5,568,719 $ 3,584,588 $ 2,029,264 $ 6,832,831 $ 3,187,640 Pro Forma Compensation Expense, Net (135,150) $ (38,443) (8,069) (168,146) (103,570) ----------- ----------- ----------- ----------- ----------- Pro Forma Net Income $ 5,433,569 $ 3,546,145 $ 2,021,195 $ 6,664,685 $ 3,084,070 =========== =========== =========== =========== ===========
YEARS ENDED SEPTEMBER 30, NINE MONTHS NINE MONTHS ------------------------- ENDED ENDED 2003 2002 2001 JUNE 27, 2004 JUNE 29, 2003 ---- ---- ---- ------------- ------------- (UNAUDITED) (UNAUDITED) Net Income Per Share -- Basic As Reported $0.95 $0.64 $0.41 $1.12 $0.55 Pro Forma $0.92 $0.64 $0.41 $1.09 $0.48 Net Income Per Share -- Diluted As Reported $0.88 $0.57 $0.32 $1.03 $0.48 Pro Forma $0.86 $0.56 $0.32 $1.00 $0.47
The fair value of each option grant is established on the date of grant using the minimum value method, with the following assumptions used for grants in the years ended September 30, 2003 and 2001 and the nine months ended June 27, 2004 (unaudited) and June 29, 2003 (unaudited), respectively: no dividends yield; risk-free interest rates of approximately 2.95 percent, 4.05 percent, 3.19 percent and 2.95 percent; and expected lives of 5 years. Argon assumed no dividend yield due to a lack of history of paying dividends and no assurance that dividends will be paid in the future. The weighted average fair value per share for stock option grants that were awarded in fiscal years 2003, 2001 and for the nine months ended June 27, 2004 was $1.12, $.27 and $1.72 (unaudited), respectively. No grants were awarded in fiscal year 2002. 14 NOTE 8 -- RESCISSION OF PRIOR YEAR STOCK TRANSACTIONS During the year ended September 30, 2001, Argon rescinded and restructured certain common stock transactions that previously occurred to correct technical errors in the stock option plan. The effect of the rescission was recognized by restating the stockholders' equity accounts as of September 30, 2000. All share and per share information in the financial statements was also restated to reflect the rescission. The effect of the rescinded transactions included reinstating notes payable to stockholders of $110,747, originally converted to Class B common stock. These notes were repaid to the stockholders during the year ended September 30, 2001. Argon also rescinded the exercise of certain Class A stock options and refunded $4,890 to stockholders during the year ended September 30, 2001. Other transactions included rescission of certain option grants and retroactive stock splits of both Class A and B common stock. NOTE 9 -- RETIREMENT PLAN Argon has a 401(k) profit sharing plan and a money purchase pension plan covering employees who have worked at least 1,000 hours and meet certain other eligibility requirements. Argon can voluntarily match employee 401(k) salary deferrals up to a maximum of six percent of eligible compensation, as well as make a discretionary profit sharing contribution. Profit sharing contributions to the 401(k) plan are determined annually by Argon. The 401(k) plan match, discretionary profit sharing, and money purchase pension plan contributions were $2,419,179, $2,047,901 and $1,208,807 for the years ended September 30, 2003, 2002, and 2001, respectively. NOTE 10 -- INCOME TAXES The provisions for income taxes consist of the following:
YEARS ENDED SEPTEMBER 30, ------------------------- 2003 2002 2001 ---- ---- ---- Current Federal $ 950,734 $ 2,098,699 $ 1,493,272 State 267,012 426,108 292,508 ----------- ----------- ----------- Total Current 1,217,746 2,524,807 1,785,780 Deferred Federal 1,256,386 (431,722) (544,452) State 221,715 (72,013) (102,213) ----------- ----------- ----------- Total Deferred 1,478,101 (503,735) (646,665) ----------- ----------- ----------- Income Tax Expense $ 2,695,847 $ 2,021,072 $ 1,139,115 =========== =========== ===========
The components of Argon's net deferred tax (liability) asset are as follows:
AS OF SEPTEMBER 30, ------------------- 2003 2002 ---- ---- Total deferred tax assets $ 1,744,928 $ 2,155,246 Total deferred tax liabilities $(2,162,563) $(1,094,780) Valuation allowance $ -- $ -- ----------- ----------- Net Deferred Tax (Liability) Asset $ (417,635) $ 1,060,466 =========== ===========
15 The tax effect of temporary differences that give rise to the net deferred tax (liability) asset are as follows:
AS OF SEPTEMBER 30, ------------------- 2003 2002 ---- ---- Unbilled Receivables $(2,018,562) $(1,046,013) Deferred Revenues 1,419,130 1,875,696 Property, Equipment and Software (144,001) (48,767) Accrued Vacation 312,644 239,756 Deferred Rent 13,154 39,794 ----------- ----------- Net Deferred Tax (Liability) Asset $ (417,635) $ 1,060,466 =========== ===========
A reconciliation between Argon's statutory tax rate and the effective tax rate is as follows:
YEARS ENDED SEPTEMBER 30, ------------------------- 2003 2002 2001 ---- ---- ---- Statutory Federal Rate 34.0% 34.0% 34.0% State Income Taxes, Net of Federal Benefit 4.0% 4.0% 4.0% Research and Development Tax Credit (4.1)% (2.3)% (2.0)% Other (1.3)% 0.4% 0.0% ---- ---- ---- 32.6% 36.1% 36.0% ==== ==== ====
Provisions for income taxes for the interim periods are calculated based on the expected effective tax rates for the related annual periods. NOTE 11 -- OPERATING LEASE Argon leases office facilities and equipment under operating lease agreements. Rental payments on certain of the leases are subject to increases based on a three percent escalation factor and increases in the lessor's operating expenses. Rent expense amounted to $2,262,037, $1,712,554 and $1,118,654 for the years ended September 30, 2003, 2002 and 2001, respectively. Rent expense includes deferred rent relating to escalation clauses. The 2002 rent expense is reported net of sublease income of $589,513. Following is a schedule of future minimum lease payments due under the lease agreements:
YEAR ENDING FUTURE MINIMUM SEPTEMBER 30, PAYMENTS ------------- -------- 2004 $ 3,194,000 2005 3,964,000 2006 3,931,000 2007 3,931,000 2008 3,931,000 Thereafter 1,909,000 ----------- Total $20,860,000 ===========
16 NOTE 12 -- RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses amounted to $2,187,080, $3,014,875, $1,199,959, $1,159,812 (unaudited) and $1,708,720 (unaudited) for the years ended September 30, 2003, 2002, 2001 and for the nine months ended June 27, 2004 and June 29, 2003, respectively. NOTE 13 -- FAIR VALUE OF FINANCIAL INSTRUMENTS Based on existing rates, economic conditions and short maturities, the carrying amount of all of the financial instruments at September 30, 2003 and 2002 are reasonable estimates of their fair values. Argon's financial instruments include cash and cash equivalents, accounts receivable, accounts payable and notes payable. NOTE 14 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FOR THE QUARTER ENDED --------------------------- DECEMBER 30, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 29, MARCH 30, JUNE 29, 2001 2002 2002 2002 2002 2003 2003 ------------ ---------- -------- ------------- ------------ --------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Contract Revenue $ 16,547 $ 14,546 11,810 $ 18,856 $ 15,157 $ 18,920 $ 18,173 Direct and Allocable Contract Costs 15,233 13,467 10,755 16,760 13,964 17,126 16,192 -------- -------- ------ -------- -------- -------- -------- Income from Operations 1,314 1,079 1,055 2,096 1,193 1,794 1,981 Other Income (Expense), Net 20 13 18 11 15 (1) 7 -------- -------- ------ -------- -------- -------- -------- Income before Provision for Income Taxes 1,334 1,092 1,073 2,107 1,208 1,793 1,988 Provision for Income Taxes 481 393 386 761 436 647 718 -------- -------- ------ -------- -------- -------- -------- Net Income $ 853 $ 699 687 $ 1,346 $ 772 $ 1,146 $ 1,270 ======== ======== ====== ======== ======== ======== ======== Earnings Per Share Basic $ 0.16 $ 0.13 0.12 $ 0.23 $ 0.14 $ 0.19 $ 0.22 ======== ======== ====== ======== ======== ======== ======== Diluted $ 0.14 $ 0.11 0.11 $ 0.21 $ 0.13 $ 0.16 $ 0.19 ======== ======== ====== ======== ======== ======== ========
[Additional columns below] [Continued from above table, first column(s) repeated] 17
FOR THE QUARTER ENDED ----------------------- SEPTEMBER 30, DECEMBER 28, MARCH 28, JUNE 27, 2003 2003 2004 2004 ------------- ------------ --------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) Contract Revenue $27,099 $27,293 $22,683 $39,050 Direct and Allocable Contract Costs 23,833 24,993 19,631 33,653 ------- ------- ------- ------- Income from Operations 3,266 2,300 3,052 5,397 Other Income (Expense), Net 10 8 38 34 ------- ------- ------- ------- Income before Provision for Income Taxes 3,276 2,308 3,090 5,431 Provision for Income Taxes 895 851 1,141 2,004 ------- ------- ------- ------- Net Income $ 2,381 $ 1,457 $ 1,949 $ 3,427 ======= ======= ======= ======= Earnings Per Share Basic $ 0.40 $ 0.24 $ 0.32 $ 0.56 ======= ======= ======= ======= Diluted $ 0.40 $ 0.22 $ 0.29 $ 0.52 ======= ======= ======= =======
NOTE 15 -- SUBSEQUENT EVENT In June 2004, Argon entered into a definitive merger agreement with Sensytech, Inc., a publicly-held company traded on NASDAQ. The combined companies' intention is to create a unique command, control, communications, computers, intelligence, surveillance and reconnaissance company with a strong research and development heritage, that delivers cutting-edge technologies to defense, intelligence and homeland security markets. After completion of the transaction, which is expected to close in September 2004, each stockholder of Argon will receive two shares of Sensytech common stock. Argon's existing shareholders will own approximately 66% of the combined company on a fully-diluted basis. The transaction is subject to the approval of the stockholders of Argon and Sensytech, government regulatory reviews and other closing conditions described in the Merger Agreement. In August 2004, Argon declared a dividend to its stockholders in the amount of $1.24 per share, or approximately $8.0 million in the aggregate, payable subject to the approval of the merger transaction with Sensytech by both the Sensytech and Argon stockholders. 18 EX-99.2 3 w68860exv99w2.txt EXHIBIT 99.2 EXHIBIT 99.2 UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined consolidated statements of income for the nine months ended June 30, 2004 and the year ended September 30, 2003 and the unaudited pro forma condensed combined consolidated balance sheet at June 30, 2004 have been prepared based on the historical financial statements of Argon under the assumptions set forth in the accompanying footnotes, because for accounting purposes, the merger is treated as a reverse acquisition business combination. On June 7, 2004 Argon and Sensytech entered into a definitive agreement pursuant to which Argon will merge with Sensytech. Under the terms of the agreement, Argon stockholders will receive two shares of Sensytech common stock for each share of Argon common stock they own. Because Argon's stockholders will receive approximately 66% of the shares of Sensytech after the merger, Argon's designees to the combined company's board of directors will represent a majority of the combined company's board of directors, Argon's senior management will represent a majority of the senior management of the combined company and Argon's business will represent the largest portion of the combined company in terms of revenue and market capitalization, Argon is deemed to be the acquiring company for accounting purposes, and the merger will be accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with accounting principles generally accepted in the United States. Argon will allocate the purchase price to the fair value of tangible and intangible assets acquired and liabilities assumed from Sensytech at the effective time of the merger, with the excess purchase price being recorded as goodwill. The effect of this transaction is reflected in the Pro Forma Adjustments in the unaudited pro forma consolidated financial statements. The unaudited pro forma condensed combined consolidated statements of income for the nine months ended June 30, 2004 and the year ended September 30, 2003 assume the merger transaction occurred on October 1, 2002. The unaudited pro forma condensed combined consolidated balance sheet at June 30, 2004 assumes the merger transaction occurred on that date. We believe the assumptions used provide a reasonable basis for presenting the significant effects directly attributable to the merger transaction. The unaudited pro forma condensed combined consolidated financial statements do not purport to represent what our results of operations would have been if such transaction had occurred on such dates. In accordance with Statement of Financial Accounting Standards No. 141 "Business Combinations" (SFAS 141), Sensytech's tangible and intangible net assets will be adjusted to their fair values and the excess of the purchase price over the fair value of Sensytech's net assets will be recorded as goodwill. The pro forma adjustments to tangible and intangible net assets including goodwill that are shown in these unaudited pro forma consolidated financial statements are based on various preliminary estimates by management. A final determination of these fair values, which cannot be made prior to the completion of the merger, will include management's consideration of certain valuation studies to be conducted based on the actual net tangible and intangible assets of Sensytech that exist as of the completion date of the merger.
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET HISTORICAL ------------------------------------ JUNE 27, 2004 JUNE 30, 2004 PRO FORMA PRO FORMA ARGON SENSYTECH ADJUSTMENTS COMBINED ----------------- --------------- ----------------- ---------------- ASSETS Current Assets Cash and Cash Equivalents $ 5,627,865 11,130,000 $ (1,650,000) (3) 6,302,865 $ (8,000,000) (2) $ (805,000) (14) Accounts Receivable, Net 38,624,018 27,338,000 65,962,018 Inventories -- 1,253,000 -- 1,253,000 Income Taxes Receivable -- 358,000 -- 358,000 Deferred Income Tax Asset -- 602,000 (243,448) (10) 358,552 Other Current Assets 1,331,445 807,000 -- 2,138,445 ------------- ------------- ------------- ------------- Total Current Assets 45,583,328 41,488,000 (10,698,448) 76,372,880 Property, Equipment and Software, Net 3,412,662 5,934,000 1,676,000 (4) 11,022,662 Deferred Income Taxes -- 196,000 (196,000) (10) -- Goodwill -- 2,163,000 110,511,000 (6) 110,511,000 2,163,000 (15) Acquired Intangible Assets, Net -- 58,000 960,000 (5) 1,018,000 Other Assets 226,760 199,000 -- 425,760 ------------- ------------- ------------- ------------- Total Assets $ 49,222,750 $ 50,038,000 $ 100,089,552 $ 199,350,302 ============= ============= ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts Payable and Accrued Expenses $ 12,943,585 $ 5,292,000 -- $ 18,235,585 Accrued Salaries and Related Expenses 5,465,409 2,605,000 820,000 (12) 8,890,409 Deferred Revenue 10,840,670 749,000 -- 11,589,670 Notes Payable - Current Portion 225,637 -- -- 225,637 Income Taxes Payable 987,408 -- -- 987,408 Deferred Rent 995,084 -- -- 995,804 Deferred Income Tax Liability, Current 243,448 -- (243,448) (10) -- ------------- ------------- ------------- ------------- Total Current Liabilities 31,701,241 8,646,000 576,552 40,923,793 Deferred Income Tax Liability, Long Term 174,187 -- 970,000 (9) 948,187 (196,000) (10) Notes payable, Net of Current Portion 112,817 -- -- 112,817 Stockholders' Equity Common Stock 61,238 68,000 (68,000) (1) 188,811 127,573 (8) Additional Paid In Capital 211,617 27,215,000 (27,215,000) (1) 148,215,044 148,003,427 (8) Treasury Stock, at Cost (534,000) 534,000 (1) -- Retained Earnings 16,961,650 14,643,000 (11,675,000) (1) 8,961,650 (8,000,000) (2) (805,000) (14) (2,163,000) (15) ------------- ------------- ------------- ------------- Total Stockholders' Equity 17,234,505 41,392,000 98,739,000 157,365,505 ------------- ------------- ------------- ------------- $ 49,222,750 $ 50,038,000 $ 100,089,552 $ 199,350,302 ============= ============= ============= =============
See accompanying notes to unaudited pro forma condensed combined consolidated financial statements. UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF EARNINGS YEAR ENDED SEPTEMBER 30, 2003
HISTORICAL ---------------------------------- PRO FORMA PRO FORMA ARGON SENSYTECH ADJUSTMENTS COMBINED -------------- -------------- ------------- ---------------- CONTRACT REVENUE $ 79,349,052 $ 53,183,000 -- $ 132,532,052 DIRECT AND ALLOCABLE CONTRACT COSTS Cost of Revenues 65,271,039 40,614,000 191,200 (7) 106,269,239 193,000 (8) General and Administrative Expenses 5,844,251 5,876,000 353,600 (8) 12,121,651 47,800 (7) ------------- ------------- ------------- ------------- 71,115,290 46,490,000 785,600 118,390,890 ------------- ------------- ------------- ------------- INCOME FROM OPERATIONS 8,233,762 6,693,000 (785,600) 14,141,162 OTHER INCOME (EXPENSE), Net 30,804 94,000 -- 124,804 ------------- ------------- ------------- ------------- INCOME BEFORE PROVISION FOR INCOME TAXES 8,264,566 6,787,000 (785,600) 14,265,966 PROVISION FOR INCOME TAXES 2,695,847 2,735,000 (298,500) (11) 5,132,347 ------------- ------------- ------------- ------------- NET INCOME $ 5,568,719 $ 4,052,000 $ (487,100) $ 9,133,619 ============= ============= ============= ============= EARNINGS PER SHARE Basic $ 0.95 $ 0.66 $ 0.51 ============= ============= ============= Diluted $ 0.88 $ 0.65 $ 0.48 ============= ============= ============= WEIGHTED-AVERAGE SHARES OUTSTANDING Basic 5,884,894 6,104,000 5,884,894 (13) 17,873,788 ============= ============= ============= ============= Diluted 6,310,154 6,262,000 6,310,154 (13) 18,882,308 ============= ============= ============= =============
See accompanying notes to unaudited pro forma condensed combined consolidated financial statements. UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF EARNINGS NINE MONTHS ENDED
HISTORICAL NINE MONTHS ENDED ----------------------------------- JUNE 27, 2004 JUNE 30, 2004 PRO FORMA PRO FORMA ARGON SENSYTECH ADJUSTMENTS COMBINED ------------------------------------------------------ -------------------- CONTRACT REVENUE $ 89,025,689 $ 43,964,000 -- $ 132,989,689 DIRECT AND ALLOCABLE CONTRACT COSTS Cost of Revenues 73,527,614 31,984,000 95,600 (7) 105,751,964 144,750 (8) General and Administrative Expenses 4,749,004 6,439,000 286,500 (8) 11,498,404 23,900 (7) ------------- ------------- ------------- ------------- 78,276,618 38,423,000 550,750 117,250,368 ------------- ------------- ------------- ------------- INCOME FROM OPERATIONS 10,749,071 5,541,000 (550,750) 15,739,321 OTHER INCOME (EXPENSE), Net 79,760 66,000 -- 145,760 ------------- ------------- ------------- ------------- INCOME BEFORE PROVISION FOR INCOME TAXES 10,828,831 5,607,000 (550,750) 15,885,081 PROVISION FOR INCOME TAXES 3,996,000 2,193,000 (209,300)(11) 5,979,700 ------------- ------------- ------------- ------------- NET INCOME $ 6,823,831 $ 3,414,000 $ (341,450) $ 9,905,381 ============= ============= ============= ============= EARNINGS PER SHARE Basic $ 1.12 $ 0.52 $ 0.53 ============= ============= ============= Diluted $ 1.03 $ 0.51 0.49 ============= ============= ============= WEIGHTED-AVERAGE SHARES OUTSTANDING Basic 6,117,754 6,549,201 6,117,754 (13) 18,784,709 ============= ============= ============= ============= Diluted 6,653,870 6,722,154 6,653,870 (13) 20,029,894 ============= ============= ============= =============
See accompanying notes to unaudited pro forma condensed combined consolidated financial statements. NOTES TO PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION The unaudited pro forma condensed combined consolidated financial statements present the pro forma financial position and results of operations of the combined company based upon historical financial information after giving effect to the transaction and adjustments described in these footnotes. Under purchase accounting, the merger of Argon and Sensytech is accounted for such that Argon is treated as the acquirer and Sensytech as the acquired company. These unaudited pro forma condensed combined consolidated financial statements are not necessarily indicative of the results of operations that would have been achieved had the transaction actually taken place at the dates indicated and do not purport to be indicative of the effects that may be expected to occur in the future. The financial statements of Argon and Sensytech are prepared in accordance with accounting principles generally accepted in the United States of America. On April 14, 2004, Sensytech acquired all of the outstanding stock of Imaging Sensors and Systems, Inc. (ISS) for $2,000,000, 67,077 shares of Sensytech stock and a contingent payment of up to $3,000,000. The unaudited pro forma condensed combined consolidated statements of earnings for the year ended September 30, 2003 and the nine months ended June 30, 2004 do not include the effects of the acquisition of ISS by Sensytech because it was not deemed a significant acquisition under Rule 3-05(b) and 11-01(b)(1) of Regulation S-X. NOTE 2 -- PRO FORMA TRANSACTION On June 7, 2004 Argon and Sensytech entered into a definitive agreement pursuant to which Argon will merge with and into a subsidiary of Sensytech. Thus, Argon will become a wholly-owned subsidiary of Sensytech. Under the terms of the agreement, Argon stockholders will receive two shares of Sensytech common stock for each share of Argon common stock they own. Because Argon's stockholders will receive approximately 66% of the shares of Sensytech after the merger, Argon's designees to the combined company's board of directors will represent a majority of the combined company's board of directors, Argon's senior management will represent a majority of the senior management of the combined company and Argon's business will represent the largest portion of the combined company in terms of revenue and market capitalization, Argon is deemed to be the acquiring company for accounting purposes, and the merger will be accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with accounting principles generally accepted in the United States. As of June 7, 2004, Sensytech had 6,631,989 outstanding shares of common stock. Based on the average market value of Sensytech common stock for the period of two business days before and after the announcement date ($20.72 per share), Sensytech's purchase price is calculated as approximately $137,414,000. There are outstanding options to purchase a total of approximately 700,000 shares of Sensytech stock. The fair value of these shares was determined using the Black-Scholes option pricing model with the following assumptions: Expected volatility 48% Risk free interest rate 4.39% Expected life of options (years) 7.97 Expected dividend yield 0.0%
NOTE 3 -- PRO FORMA ADJUSTMENTS (1) Adjustment to eliminate Sensytech's historical stockholders' equity, net of pro forma adjustment charged to retained earnings. See Notes 14 and 15. (2) To reflect dividends declared by the Argon board payable to Argon stockholders subject to the approval of the merger by Sensytech and Argon stockholders. (3) To record payment of costs incurred for the merger by Argon, including financial advisor fees, legal and accounting fees and printing costs. (4) To record property and equipment at fair market value. The adjustment is an estimate, and will be finalized with the assistance of an independent appraiser for the actual adjustment to the books and records following closing. (5) Values and amortization periods for intangible assets were determined as follows:
Intangible Asset Estimated Fair Value Amortization Period ------------------------------- ------------------------------ ------------------------------------------- Customer contracts $ 361,000 15 Months - Expected Profit Market base 406,000 10 Years - Straight Line Technology 93,000 1 Year --------- $ 960,000 =========
(6) Calculation of purchase price and goodwill: Purchase price value of 100% of the 6,631,989 shares of Sensytech common $137,414,000 stock outstanding at June 30, 2004, valued at $20.72 per share 10,717,000 ------------------ Fair Value of 700,000 Sensytech options at $15.31 per share 148,131,000 ------------------ Plus: Transaction costs incurred by Argon (Note 3) 1,650,000 Retention liability assumed by Argon (Note 12) 820,000 Deferred tax liabilities (Note 9) 970,000 Less: Sensytech net assets at June 30, 2004 (38,424,000) Amount allocated to property plant and equipment (Note 4) (1,676,000) Amount allocated to other intangible assets (Note 5) (960,000) ------------------ Excess purchase price over the fair value of Sensytech's net assets acquired (goodwill), which is non-deductible for tax purposes, based upon preliminary purchase price allocations $110,511,000 ==================
This adjustment also reflects the deemed issuance by Argon of approximately 12,757,000 shares of common stock at the time of the merger. (7) To record additional depreciation of property and equipment, assuming average useful lives of 7 years. The expense was allocated 80% to cost of revenues and 20% to general and administrative expenses. (8) To record additional amortization of intangible assets, based on useful lives of Customer contracts -- 15 months (expected profits), Market Base -- 10 years and Technology -- 1 year. Amortization of Customer Contracts and Market Base are reflected as general and administrative expense. Amortization of Technology is reflected as cost of revenue. (9) To record deferred tax assets and liabilities relating to adjustments to property and equipment and other intangible assets. (10) To reclassify accounts to present net short-term and net long-term deferred income tax assets/liabilities. (11) To record deferred tax provision at the statutory rate of 38%. (12) To record retention liability assumed by Argon resulting from the change of control of Sensytech. (13) To record adjustment of additional shares to be owned by Argon stockholders. Under the terms of the merger agreement, Argon stockholders will receive two shares of Sensytech common stock for each share of Argon common stock they own. In addition, Argon will grant an additional 150,000 incentive (statutory) options prior to the closing of the merger at fair market value. (14) To record payment of merger costs incurred by Sensytech, including financial adviser fees, legal and accounting fees, which are recorded to retained earnings. (15) To eliminate existing balance of Sensytech's goodwill. -----END PRIVACY-ENHANCED MESSAGE-----