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:
<Table>
<Caption>
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
============ ============ ============
</Table>
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:
<Table>
<Caption>
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
========== ========== =========
</Table>
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:
<Table>
<Caption>
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
======== ======== ========
</Table>
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:
<Table>
<Caption>
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
========= ================ =======
</Table>
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:
<Table>
<Caption>
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
========== =========
</Table>
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.
<Table>
<Caption>
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
=========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
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
</Table>
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:
<Table>
<Caption>
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
=========== =========== ===========
</Table>
The components of Argon's net deferred tax (liability) asset are as
follows:
<Table>
<Caption>
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
=========== ===========
</Table>
15
The tax effect of temporary differences that give rise to the net deferred
tax (liability) asset are as follows:
<Table>
<Caption>
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
=========== ===========
</Table>
A reconciliation between Argon's statutory tax rate and the effective tax
rate is as follows:
<Table>
<Caption>
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%
==== ==== ====
</Table>
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:
<Table>
<Caption>
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
===========
</Table>
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)
<Table>
<Caption>
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
======== ======== ====== ======== ======== ======== ========
</Table>
[Additional columns below]
[Continued from above table, first column(s) repeated]
17
<Table>
<Caption>
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
======= ======= ======= =======
</Table>
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