##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended April 3, 2005 or o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition period from _______________ to ________________ Commission File Number 000-08193 ARGON ST, INC. 
 )
 Delaware
    
    38-1873250(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 12701 Fair Lakes Circle, Suite 800, Fairfax, Virginia 22033
(Address of principal executive offices) Registrants telephone number (703) 322-0881 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and
(2) has been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act.) Yes þ No o As of May 3, 2005, there were 19,813,189 shares of the Registrants Common Stock, par
value $.01 per share, outstanding.




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##### 



ARGON ST, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED APRIL 3, 2005 TABLE OF CONTENTS PART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at April 3, 2005 and September 30, 2004
    
    
    3Condensed Consolidated Statements of Earnings for the
Second Quarter and Six Months ended April 3, 2005 and March 28, 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Six Months ended April 3, 2005 and March 28, 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10-20Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21Item 5.
    
    Other Information
    
    
    21Item 6.
    
    Exhibits
    
    
    21Signatures
    
    
    23Exhibits
    
    
    24-28
 2




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##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS April 3, 2005
    
    
    September 30, 2004(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    32,221,000
    
    
    $
    29,732,000Accounts receivable, net
    
    
    64,794,000
    
    
    
    59,716,000Inventory
    
    
    1,921,000
    
    
    
    1,574,000Deferred income tax asset
    
    
    5,008,000
    
    
    
    4,822,000Prepaids and other
    
    
    1,482,000
    
    
    
    1,288,000TOTAL CURRENT ASSETS
    
    
    105,426,000
    
    
    
    97,132,000Property, equipment and software, net
    
    
    14,668,000
    
    
    
    13,949,000Goodwill
    
    
    107,776,000
    
    
    
    107,776,000Intangibles, net
    
    
    1,704,000
    
    
    
    2,190,000Other assets
    
    
    686,000
    
    
    
    694,000TOTAL ASSETS
    
    $
    230,260,000
    
    
    $
    221,741,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    12,017,000
    
    
    $
    12,727,000Accrued salaries and related expenses
    
    
    9,775,000
    
    
    
    10,606,000Deferred revenue
    
    
    27,326,000
    
    
    
    28,336,000Notes payable  current portion
    
    
    170,000
    
    
    
    226,000Income taxes payable
    
    
    839,000
    
    
    
    5,810,000Deferred rent
    
    
    61,000
    
    
    
    200,000TOTAL CURRENT LIABILITIES
    
    
    50,188,000
    
    
    
    57,905,000Deferred income tax liability, long term
    
    
    1,591,000
    
    
    
    1,901,000Notes payable, net of current portion
    
    
    
    
    
    
    56,000Deferred rent
    
    
    1,382,000
    
    
    
    954,000Commitments and contingencies
    
    
    
    
    
    
    STOCKHOLDERS EQUITYCommon stock:$.01 Par Value, 100,000,000 shares authorized,
19,928,214 and 19,468,734 shares issued
at April 3, 2005 and September 30, 2004
    
    
    199,000
    
    
    
    195,000Additional paid in capital
    
    
    155,349,000
    
    
    
    149,043,000Treasury stock at cost, 126,245 shares
    
    
    (534,000
    )
    
    
    (534,000
    )Retained earnings
    
    
    22,085,000
    
    
    
    12,221,000TOTAL STOCKHOLDERS EQUITY
    
    $
    177,099,000
    
    
    $
    160,925,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    230,260,000
    
    
    $
    221,741,000
 The accompanying notes are an integral part of these consolidated financial statements. 3




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ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) Second Quarter Ended
    
    
    Six Months EndedApril 3, 2005
    
    
    March 28, 2004
    
    
    April 3, 2005
    
    
    March 28, 2004CONTRACT REVENUES
    
    $
    55,952,000
    
    
    $
    22,683,000
    
    
    $
    112,462,000
    
    
    $
    49,976,000COST OF REVENUES
    
    
    43,641,000
    
    
    
    17,887,000
    
    
    
    88,979,000
    
    
    
    41,146,000GENERAL AND ADMINISTRATIVE
EXPENSES
    
    
    4,496,000
    
    
    
    1,744,000
    
    
    
    7,831,000
    
    
    
    3,478,000INCOME FROM OPERATIONS
    
    
    7,815,000
    
    
    
    3,052,000
    
    
    
    15,652,000
    
    
    
    5,352,000OTHER INCOME (EXPENSE)Interest income
    
    
    205,000
    
    
    
    42,000
    
    
    
    345,000
    
    
    
    50,000Interest expense
    
    
    (7,000
    )
    
    
    (4,000
    )
    
    
    (9,000
    )
    
    
    (4,000
    )198,000
    
    
    
    38,000
    
    
    
    336,000
    
    
    
    46,000INCOME BEFORE INCOME TAXES
    
    
    8,013,000
    
    
    
    3,090,000
    
    
    
    15,988,000
    
    
    
    5,398,000PROVISION FOR INCOME TAXES
    
    
    3,069,000
    
    
    
    1,141,000
    
    
    
    6,124,000
    
    
    
    1,992,000NET INCOME
    
    $
    4,944,000
    
    
    $
    1,949,000
    
    
    $
    9,864,000
    
    
    $
    3,406,000EARNINGS PER SHARE (Basic)
    
    $
    0.25
    
    
    $
    0.16
    
    
    $
    0.50
    
    
    $
    0.28EARNINGS PER SHARE (Diluted)
    
    $
    0.24
    
    
    $
    0.14
    
    
    $
    0.48
    
    
    $
    0.25WEIGHTED-AVERAGE SHARES
OUTSTANDINGBasic
    
    
    19,751,000
    
    
    
    12,214,000
    
    
    
    19,584,000
    
    
    
    12,241,000Diluted
    
    
    20,676,000
    
    
    
    13,328,000
    
    
    
    20,537,000
    
    
    
    13,322,000
 The accompanying notes are an integral part of these consolidated financial statements. 4




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##### 



ARGON ST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months EndedApril 3, 2005
    
    
    March 28, 2004Cash flows from operating activitiesNet income
    
    $
    9,864,000
    
    
    $
    3,406,000Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    2,095,000
    
    
    
    604,000Deferred income tax (benefit) provision
    
    
    (496,000
    )
    
    
    Change in:Billed accounts receivable
    
    
    (3,424,000
    )
    
    
    442,000Unbilled accounts receivable
    
    
    (1,654,000
    )
    
    
    (2,250,000
    )Inventory
    
    
    (347,000
    )
    
    
    Prepaids and other
    
    
    (222,000
    )
    
    
    42,000Accounts payable and accrued expenses
    
    
    (710,000
    )
    
    
    (146,000
    )Accrued salaries and related expenses
    
    
    (831,000
    )
    
    
    (1,169,000
    )Deferred revenue
    
    
    (1,010,000
    )
    
    
    5,011,000Income taxes payable
    
    
    (1,931,000
    )
    
    
    1,113,000Deferred rent
    
    
    289,000
    
    
    
    230,000Net cash provided by operating activities
    
    
    1,623,000
    
    
    
    7,283,000Cashflows from investing activitiesAcquisitions of property, equipment and software
    
    
    (2,292,000
    )
    
    
    (658,000
    )Net cash used in investing activities
    
    
    (2,292,000
    )
    
    
    (658,000
    )Cash flows from financing activitiesPayment on note payable
    
    
    (112,000
    )
    
    
    (91,000
    )Retirement of common stock
    
    
    
    
    
    
    (233,000
    )Proceeds from exercise of stock options
    
    
    2,794,000
    
    
    
    38,000Proceeds from employee stock purchase plan exercise
    
    
    476,000
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,158,000
    
    
    
    (286,000
    )Net increase in cash and cash equivalents
    
    
    2,489,000
    
    
    
    6,339,000Cash and cash equivalents, beginning of period
    
    
    29,732,000
    
    
    
    4,100,000Cash and cash equivalents, end of period
    
    $
    32,221,000
    
    
    $
    10,439,000Supplemental disclosureIncome taxes paid
    
    $
    8,485,000
    
    
    $
    850,000Note payable issued for stock redemption
    
    $
    
    
    
    $
    451,000
 The accompanying notes are an integral part of these consolidated financial statements. 5




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##### 



ARGON ST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)  1.
    BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles of the United States of America for
interim financial information and the instructions to Form 10-Q. Accordingly, they do not include
all of the information and disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring items) considered necessary for fair presentation have been included. Operating results
for the periods ended April 3, 2005 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 2005. Inter-company accounts and transactions
have been eliminated in consolidation. For further information, refer to the consolidated financial
statements and footnotes thereto included in Argon ST, Inc.s Annual Report on Form 10-K for the
fiscal year ended September 30, 2004. Certain reclassifications have been made to the prior year
financial statements to conform to the 2005 presentation. Argon ST maintains a September 30 fiscal year-end for annual financial reporting purposes.
Argon ST presents its interim periods ending on the Sunday closest to the end of the month for each
quarter consistent with labor and billing cycles. As a result, each quarter of each year may
contain more or less days than other quarters of the year. Management does not believe that this
practice has a material effect on quarterly results. Argon ST 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 variances will be absorbed by expected
contract activities and control of costs during the remainder of the year. These rates are
reviewed regularly and adjustments for any material permanent variances are recorded in the period
they become determinable. As further described in Note 3, on September 29, 2004, Argon Engineering Associates, Inc.
(Argon Engineering) merged with a wholly owned subsidiary of Sensytech, Inc. (Sensytech). As a
result of this merger, each outstanding share of Argon Engineering stock was converted into two
shares of Sensytech common stock. Immediately following the merger, the combined company was
renamed Argon ST, Inc. (Argon ST). While Sensytech was the legal acquirer, the merger was accounted for as a reverse acquisition,
whereby Argon Engineering was deemed to have acquired Sensytech for financial reporting purposes.
This determination was based on factors including relative stock ownership and voting rights, board
control, and senior management composition. Consistent with the reverse acquisition accounting
treatment, the historical financial statements presented for periods prior to the acquisition date
are the financial statements of Argon Engineering. Earnings per share have been adjusted to
reflect the two for one exchange ratio. The operations of the former Sensytech businesses have
been included in the financial statements from the date of acquisition. Stockholders equity has been restated to give retroactive recognition to the exchange ratio
for all periods presented by reclassifying additional paid in capital and retained earnings to
reflect the additional shares. Argon Engineerings class A and class B shares have been combined
to report a single class of common stock for all periods presented. The names Argon ST, Sensytech, and Argon Engineering are used throughout this report. Argon
ST, also the Company, refers to the entity created by the merger of Argon Engineering and
Sensytech. Argon Engineering refers to Argon Engineering Associates, Inc. which operated as a
stand alone private company until the September 29, 2004 merger with Sensytech. Sensytech refers
to Sensytech Inc., which, combined with its wholly-owned 6




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subsidiaries, made up the publicly held entity Sensytech until the September 29, 2004 merger with Argon Engineering. Argon Engineering historically operated in a single business segment. Subsequent to the
merger, Argon ST management reviewed its business operations and has determined that it operates in
a single homogeneous business segment. The Companys financial information is reviewed and evaluated by the chief operating
decision maker on a consolidated basis relating to the single business segment. Argon ST sells
similar products and services that exhibit similar economic characteristics to similar classes of
customers, primarily the US Government. Revenue is internally reviewed monthly by our management
on an individual contract basis as a single business segment.  2.
    EARNINGS PER SHARE Basic earnings per share is computed by dividing the net income by the weighted average number
of common shares outstanding during each period. Diluted earnings per share is computed by dividing
the net income by the weighted average number of common and common equivalent shares outstanding
during each period. The following summary of basic and diluted shares is presented for the periods
indicated. Second Quarter Ended
    
    
    Six Months EndedApril 3, 2005
    
    
    March 28, 2004
    
    
    April 3, 2005
    
    
    March 28, 2004Net Income
    
    $
    4,944,000
    
    
    $
    1,949,000
    
    
    $
    9,864,000
    
    
    $
    3,406,000Weighted Average Shares
Outstanding  Basic
    
    
    19,751,000
    
    
    
    12,214,000
    
    
    
    19,584,000
    
    
    
    12,241,000Effect of Dilutive Securities:Net Shares Issuable Upon
Exercise of Stock Options
    
    
    925,000
    
    
    
    1,114,000
    
    
    
    953,000
    
    
    
    1,081,000Weighted Average Shares
Outstanding  Diluted
    
    
    20,676,000
    
    
    
    13,328,000
    
    
    
    20,537,000
    
    
    
    13,322,000Basic Earnings Per Share
    
    $
    0.25
    
    
    $
    0.16
    
    
    $
    0.50
    
    
    $
    0.28Diluted Earnings Per Share
    
    $
    0.24
    
    
    $
    0.14
    
    
    $
    0.48
    
    
    $
    0.25
  3.
    MERGER On September 29, 2004, a wholly owned subsidiary of Sensytech merged with and into Argon
Engineering in an acquisition whereby each outstanding share of Argon Engineering common stock was
exchanged for two shares of Sensytech common stock. As a result of the merger, the former Argon
Engineering stockholders acquired approximately 65.6% of the issued and outstanding shares of
Sensytech common stock. In accordance with SFAS 141 Business Combinations, the merger was
accounted for as a reverse acquisition, whereby Argon Engineering was deemed to have acquired
Sensytech for financial reporting purposes. Consistent with the reverse acquisition accounting
treatment, the historical financial statements presented for periods prior to the acquisition date
are the statements of Argon Engineering, except for stockholders equity which has been
retroactively restated for the equivalent number of shares of the legal acquirer. The Company has followed the guidance of SFAS No. 141 to record this purchase. SFAS No. 141
requires that the purchase method of accounting be used for all business combinations initiated
after June 1, 2001 and that goodwill, as well as any intangible assets believed to have an
indefinite life, not be amortized for financial accounting purposes. The Company has recognized
goodwill in the amount of $107,776,000 (none of which is tax deductible) in connection with this
acquisition. In accordance with SFAS No. 142, Goodwill and Other Intangible 7




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##### 



Assets, the goodwill will be reviewed periodically to determine if there has been any impairment to its value. The
Company will perform its annual impairment test in September of each fiscal year, unless
circumstances or events indicate that an impairment test should be performed sooner. The following unaudited condensed pro forma results of operations reflect the pro forma
combination of Argon Engineering and Sensytech as if the combination had occurred at the beginning
of the period presented, compared with the actual results of operations of Argon Engineering for
the same period. Second Quarter Ended
    
    
    Six Months EndedMarch 28, 2004
    
    
    March 28, 2004Historical
    
    
    Pro forma
    
    
    Historical
    
    
    Pro formaRevenue
    
    $
    22,683,000
    
    
    $
    36,702,000
    
    
    $
    49,976,000
    
    
    $
    76,660,000Income from operations
    
    
    3,052,000
    
    
    
    4,341,000
    
    
    
    5,352,000
    
    
    
    7,741,000Net income
    
    
    1,949,000
    
    
    
    2,759,000
    
    
    
    3,406,000
    
    
    
    4,868,000Basic earnings per share
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.28
    
    
    $
    0.26Diluted earnings per share
    
    $
    0.14
    
    
    $
    0.14
    
    
    $
    0.25
    
    
    $
    0.24Basic wt average shares
    
    
    12,214,000
    
    
    
    18,749,000
    
    
    
    12,241,000
    
    
    
    18,758,000Diluted wt average shares
    
    
    13,328,000
    
    
    
    20,025,000
    
    
    
    13,322,000
    
    
    
    20,006,000
 Pro forma revenues attributable to Sensytech were $14,019,000 and $26,684,000 for the second
quarter and six months ended March 28, 2004, respectively. Pro forma income from operations
attributable to Sensytech was $1,647,000 and $3,105,000 for the second quarter and six months ended
March 28, 2004, respectively. Pro forma net income attributable to Sensytech was $1,031,000 and
$1,904,000, for the second quarter and six months ended March 28, 2004, respectively. Pro forma
depreciation and amortization on the write up of tangible and intangible assets, in accordance with
SFAS 141, was $358,000 and $716,000 for the second quarter and six months ended March 28, 2004,
respectively, and the after tax effect was $221,000 and $442,000, respectively.  4.
    STOCK-BASED COMPENSATION Argon ST 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 related interpretations using the intrinsic value method. Argon ST
complies with the disclosure provisions of Financial Accounting Board Statement 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 Company
currently uses the Black-Scholes model to estimate the fair value of options under SFAS No. 123.
Had compensation cost been determined based on the fair value at the grant dates for awards under
the plans consistent with the method of SFAS No. 123, net earnings per share for the periods
presented would have been reduced to the pro forma amounts indicated below. 8




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##### 



Second Quarter Ended
    
    
    Six Months EndedApril 3, 2005
    
    
    March 28, 2004
    
    
    April 3, 2005
    
    
    March 28, 2004Net income as reported
    
    $
    4,944,000
    
    
    $
    1,949,000
    
    
    $
    9,864,000
    
    
    $
    3,406,000Add: Stock-based employee
compensation expense included
included in reported net
income,
net of related tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Less: Total stock-based employee
compensation expense
determined under fair value
method for all awards, net of
related tax effects
    
    
    337,000
    
    
    
    35,000
    
    
    
    685,000
    
    
    
    70,000Pro forma net income
    
    
    4,607,000
    
    
    
    1,914,000
    
    
    
    9,179,000
    
    
    
    3,336,000Earnings per share:Basic  as reported
    
    $
    0.25
    
    
    $
    0.16
    
    
    $
    0.50
    
    
    $
    0.28Basic  pro forma
    
    $
    0.23
    
    
    $
    0.16
    
    
    $
    0.47
    
    
    $
    0.27Earnings per share:Diluted  as reported
    
    $
    0.24
    
    
    $
    0.14
    
    
    $
    0.48
    
    
    $
    0.25Diluted  pro forma
    
    $
    0.22
    
    
    $
    0.14
    
    
    $
    0.45
    
    
    $
    0.25
  5.
    REVOLVING LINE OF CREDIT The Company has a $15,000,000 line of credit with Bank of America, which expires on February
28, 2006. The total borrowing base generally cannot exceed the sum of 90% of qualified government
accounts receivable and 80% of qualified non-government accounts receivable. The line of credit
is available to finance the performance of government contracts, to support the issuance of
stand-by letters of credit, and for short-term working capital purposes. At April 3, 2005, there
were no borrowings under the line of credit. Stand-by letters of credit are issued to certain
foreign customers in lieu of posting a performance bond. Letters of credit are also used to cover
certain contract prepayments received from foreign customers and to satisfy domestic financial
obligations. Total letters of credit at April 3, 2005 were $578,000. The line of credit less the
letters of credit outstanding provided loan availability of $14,422,000 at April 3, 2005. The bank agreement establishes the interest rate at the LIBOR plus 200 to 285 basis points,
determined by Argon STs ratio of funded debt to earnings before interest, taxes, depreciation and
amortization. All borrowings under the line of credit are collateralized by all tangible assets of
Argon ST. The agreement also contains various covenants as to dividend restrictions, working
capital, tangible net worth, earnings and debt-to-equity ratios. Unused commitment fees of one
quarter of one percent per annum are required. At April 3, 2005, the Company was in compliance
with all covenants.  6.
    RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which is a revision of FASB
Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) requires that the
compensation cost related to share-based payment transactions be recognized in financial
statements. In April 2005, the Securities and Exchange
Commission issued Release 33-8568 which
allows companies to implement Statement 123(R) at the beginning of the annual reporting period that
begins after June 15, 2005. Consistent with the new rule, the Company intends to adopt Statement
123(R) in the first quarter of its 2006 fiscal year, and to implement the standard on a prospective
basis. The Company has not yet concluded what impact the adoption of Statement 123(R) may have on
its results of operations or financial position. 9




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The names Argon ST, Sensytech, and Argon Engineering are used throughout this discussion.
Argon ST, also the Company, refers to the entity created by the merger of Argon Engineering and
Sensytech. Argon Engineering refers to Argon Engineering Associates, Inc. which operated as a

stand alone private company until the September 29, 2004 merger with Sensytech. Sensytech refers
to Sensytech Inc., which, combined with its wholly-owned subsidiaries made up the publicly held
entity Sensytech until the September 29, 2004 merger with Argon Engineering. The following discussion provides information which management believes is relevant to an
assessment and an understanding of the Companys operations and financial condition. This
discussion should be read in conjunction with the attached unaudited condensed consolidated
financial statements and accompanying notes as well as our annual report on Form 10-K for the
fiscal year ended September 30, 2004. Forward-looking Statements Statements in this filing which are not historical facts are forward-looking statements under
the provision of the Private Securities Litigation Reform Act of 1955. Such forward-looking
statements include, without limitation, statements with respect to total estimated remaining
contract values and the Companys expectations regarding the U.S. governments procurement
activities. All forward-looking statements involve risks and uncertainties. These statements are
based upon numerous assumptions about future conditions that could prove not to be accurate.
Actual events, transactions or results may materially differ from the anticipated events,
transactions or results described in such statements. The Companys ability to consummate such
transactions and achieve such events or results is subject to certain risks and uncertainties. In
addition to those risks specifically mentioned in this report and in the other reports filed by the
Company with the Securities and Exchange Commission (including the Companys Form 10-K for the
fiscal year ended September 30, 2004), such risks and uncertainties include, but are not limited
to: the availability of U.S. government funding for the Companys products and services; changes in
the U.S. federal government procurement laws, regulations, policies and budgets (including changes
to respond to budgetary constraints and cost-cutting initiatives); the number and type of contracts
and task orders awarded to the Company; the exercise by the government of options to extend the
Companys contracts; the Companys ability to retain contracts during any rebidding process;
difficulties in developing and producing operationally advanced technology systems; the timing and
customer acceptance of contract deliverables; the Companys ability to attract and retain qualified
personnel, including technical personnel; charges from any future impairment reviews; the future
impact of any acquisitions or divestitures the Company may make; the competitive environment for
defense and intelligence information technology products and services; general economic, business
and political conditions domestically and internationally; and other factors affecting the
Companys business that are beyond the Companys control. All of the forward-looking statements
should be considered in light of these factors. You should not put undue reliance on any
forward-looking statements. The Company undertakes no obligation to update these forward-looking
statements to reflect new information, future events or otherwise, except as provided by law. Overview General Argon ST designs, develops, and manufactures systems and sensors for the Intelligence,
Surveillance, and Reconnaissance markets including signals intelligence (SIGINT), electronic
support measures (ESM), electronic warfare (EW), imaging and acoustic systems serving domestic and
worldwide markets. These systems are used for threat warning and monitoring, simulation, force
protection, and communication. Recently, Argon ST has begun to use the technology developed for
these systems in other applications, such as software radios, high accuracy targeting,
counter-terrorism, and wideband communications. 10




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Basis of Discussion/Acquisition On September 29, 2004, a wholly owned subsidiary of Sensytech merged with and into Argon
Engineering in an acquisition whereby each outstanding share of Argon Engineering common stock was
converted into two shares of Sensytech common stock. As a result of the merger, the former Argon
Engineering stockholders acquired approximately 65.6% of the issued and outstanding shares of
Sensytech common stock. As part of the overall transaction, Sensytech changed its name to ARGON
ST, Inc. While Sensytech was the legal acquirer, the acquisition was accounted for as a reverse
acquisition, whereby Argon Engineering was deemed to have acquired Sensytech for financial
reporting purposes. Managements discussion and analysis addresses the Companys historical results of operations
and financial condition as shown in its consolidated financial statements for the second quarter
and six months ended April 3, 2005 and March 28, 2004, respectively. Consistent with the reverse
acquisition accounting treatment applied to the merger, the historical financial statements of the
Company presented in this Form 10-Q for periods prior to the acquisition date are the statements of
Argon Engineering (except for stockholders equity which has been retroactively restated for the
equivalent number of shares of the Company as the legal acquirer). Therefore, the consolidated
historical financial statements included in this Form 10-Q differ from the consolidated historical
financial statements of the Company as previously reported. The operations of the former Sensytech
businesses have been included in the financial statements and other financial information from the
date of acquisition. Revenues Argon STs revenues are primarily generated from the design, development, installation and
support of complex sensor systems under contracts primarily with the U.S. Government and major
domestic prime contractors, as well as with foreign governments, agencies and defense contractors. Argon STs contracts can be divided into three major types: cost reimbursable contracts, fixed
price contracts, and time and material contracts. Cost reimbursable contracts are primarily used
for system design and development activities involving considerable risks to the contractor,
including risks related to cost estimates on complex systems, performance risks associated with
real time signal processing, embedded software, high performance hardware requirements that are not
fully understood by the customer or the company, the development of technology that has never been
used, and interfaces with other systems that are in development or are obsolete without adequate
documentation. Fees under these contracts are usually fixed at the time of negotiation; however, in
some cases the fee is an incentive or award fee based on cost, schedule, and performance or a
combination of those factors. Although the government customer assumes the cost risk on these
contracts, the contractor is not allowed to exceed the cost ceiling on the contract without the
approval of the customer. Fixed price contracts are typically used for the production of systems. Development activities
similar to activities performed under previous contacts are also usually covered by fixed price
contracts, due to the low risk involved. In these contracts, cost risks are borne entirely by the
contractor. Some fixed price contracts include an award fee or an incentive fee as well as the
negotiated profit. Most foreign customers, and some U.S. customers, use fixed price contracts for
design and development work even when the work is considered high risk. Time and material
contracts are based on hours worked, multiplied by approved labor rates, plus other costs incurred
and allocated. The following table represents the Companys revenue concentration by contract type for the
periods indicated: 11




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Second Quarter Ended
    
    
    Six Months EndedContract Type
    
    April 3, 2005
    
    
    March 28, 2004
    
    
    April 3, 2005
    
    
    March 28, 2004Cost Reimbursable Contracts
    
    
    17
    %
    
    
    19
    %
    
    
    16
    %
    
    
    21
    %Firm Fixed Price Contracts
    
    
    78
    %
    
    
    70
    %
    
    
    79
    %
    
    
    71
    %Time and Material Contracts
    
    
    5
    %
    
    
    11
    %
    
    
    5
    %
    
    
    8
    %
 Generally, the Company experiences revenue growth when systems move from the development stage
to the production stage due to increases in sales volumes from production of multiple systems and
when the Company adds new customers or is successful in selling new systems to existing customers.
Argon STs current production work has been derived from programs for which the Company has
performed the initial development work. These programs are next generation systems replacing
existing, obsolete systems that were developed by other companies. Argon ST was able to displace
these companies primarily on the basis of technological capability. Argon ST believes that the
current state of world affairs and the U.S. governments emphasis on protecting U.S. citizens will
cause funding of these programs to continue. Backlog Argon ST defines backlog as the funded and unfunded amount provided in our contracts less
previously recognized revenue and excludes all unexercised options on contracts. Some contracts
where work has been authorized carry a funding ceiling that does not allow Argon ST to continue
work on the contract once the customer obligations have reached the funding ceiling. In such cases,
the Company is required to stop work until additional funding is added to the contract. Argon STs
experience in this case is very rare and therefore it generally carries the entire amount that the
customer intends to execute as backlog when it is confident that the customer has access to the
required funding for the contract. In general, most of Argon STs backlog results in sales in subsequent fiscal years, as the
Company maintains very minimal inventory and therefore the lead time on ordering and receiving
material and increasing staff to execute programs has a lag time of several months from the receipt
of order. At the dates indicated, the Companys backlog consisted of the following: April 3, 2005
    
    
    March 28, 2004Funded
    
    $
    219,507,000
    
    
    $
    185,422,000Unfunded
    
    
    5,755,000
    
    
    
    3,284,000Total
    
    $
    225,262,000
    
    
    $
    188,706,000
 Cost of Revenues Cost of revenues consist of direct costs incurred on contracts such as labor, materials,
travel, subcontracts and other direct costs and indirect costs associated with overhead expenses
such as facilities, fringe benefits and other costs that are not directly related to the execution
of a specific contract. Argon ST plans indirect costs on an annual basis and on cost reimbursable
contracts receives government approval to bill those costs as a percentage of Argon STs direct
labor, other direct costs and direct materials as the Company executes its contracts. The
government approves the planned indirect rates as provisional billing rates near the beginning of
each fiscal year. General and Administrative Expenses Argon STs general and administrative expenses include administrative salaries, costs related
to proposal activities, internally funded research and development, and other administrative costs. 12




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Interest Income, net Net interest income is derived solely from interest earned on cash reserves maintained in
short term bank accounts and are therefore subject to short-term interest rates that have minimal
risk. Research and Development Argon ST conducts internally funded research and development into complex signal processing,
system and software architectures, and other technologies that are important to continued
advancement of its systems and are of interest to its current and prospective customers. For the
six months ended April 3, 2005 and March 28, 2004, internal research and development expenditures
were $2,971,000 and $1,106,000, representing 2.6% and 2.2% of revenues in those periods,
respectively. The increase of $1,865,000 is reflective of the Companys emphasis on increasing its
technical advantage in a number of key technology areas. Internal research and development is a small portion of Argon STs overall research and
development, as government funded research and development constitutes the majority of the
Companys activities in this area. Most of Argon STs cost type contracts are research and
development contracts, and historically more than 30% of Argon STs fixed price contract work has
been of a research and development nature. Critical Accounting Practices and Estimates General Argon STs discussion and analysis of its financial condition and results of operations are
based upon its financial statements. These financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ significantly from those estimates. Argon ST
believes that the estimates, assumptions, and judgments involved in the accounting practices
described below have the greatest potential impact on Argon STs financial statements and,
therefore, consider these to be critical accounting practices. Revenue and Cost Recognition The majority of Argon STs contracts, which are with the U.S. government, are 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 ST to design,
develop, manufacture and/or modify complex products and systems, and perform related services
according to specifications provided by the customer. Argon ST 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 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. In the case of contracts with materials
requirements, revenue is recognized as those materials are applied to the production process in
satisfaction of the contracts end objectives. Argon ST accounts for cost reimbursable contracts by
charging contract costs to operations as incurred and recognizing contract revenues and profits by
applying the negotiated fee rate to actual costs on an individual contract basis. 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. Unexpected increases in the cost to develop or manufacture a product, whether due to
inaccurate estimates in the bidding process, unanticipated increases in material costs,
inefficiencies, or other factors are borne by Argon ST on fixed-price contracts, and could have a
material adverse effect on results of operations and financial condition. 13




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Unexpected cost increases in cost reimbursable contracts may be borne by Argon ST for purposes of maintaining customer
relationships. If the customer agrees to fund cost increases on cost type contracts, the additional
work does not have any profit and therefore dilutes margin. Argon ST historically recorded the AN/SLQ-25A Surface Ship Torpedo Defense System (SSTD)
contract at zero margin. Revenue from this contract amounted to approximately 6.2% of Argon STs
revenues for the second quarter ending April 3, 2005 and approximately 7.5% of the pro forma revenues for the second
quarter ending March 28, 2004. Revenue from this contract amounted to approximately 4.7% of Argon
STs revenues for the six months ending April 3, 2005 and approximately 6.9% of the pro forma
revenues for the six months ending March 28, 2004 (see Pro Forma Financial Results of Operation
below). This contract was acquired as part of Sensytechs acquisition of certain assets of FEL
Corporation during 2002 and was performing at a potential loss at the date of acquisition. Based
on the historical experience of awarded change orders on the SSTD contract and Argon STs ongoing
discussions with the customer, Argon ST has deemed future change orders probable to enable the
contract to break even (i.e., eliminating any potential loss on the contract). Argon ST has
favorably performed under the contract since the date the contract was acquired from FEL
Corporation and management has worked with the customer to reduce any potential loss through change
orders approved to date. As of April 3, 2005 there have been 24 change orders awarded for a total
contract value of $38,425,000. While management currently estimates that the contract will be
profitable, the profitability is dependent upon future change orders, expected by management, but
that have not yet been finalized. Based upon the current funding of the contract, should no
additional funding be received, a loss of approximately $2,070,000 would be recognized. However,
after considering the effect of anticipated change orders, the Company projects the contract to
complete at a modest profit. Change orders are under continuous negotiation with the customer.
When these change orders are received, Argon ST will reassess the contract based on current
estimates, and such reassessments are currently expected to result in increases to the margins
recorded on the contract. Such increases would impact operations in the period such change orders
are finalized as well as future periods. If such change orders are not finalized under currently
expected terms, or if Argon ST does not perform as expected under the contract, contract losses may
be required to be accrued. Management expects that the change orders to be received during the
third quarter of fiscal year 2005 will be sufficient to enable the contract to realize a marginal
profit projected to begin in the third quarter of fiscal year 2005 and continuing through the
completion date of the contract in fiscal year 2008. Until such time, Argon ST will continue to
recognize zero margin on the contract. Goodwill Costs in excess of the fair value of tangible and identifiable intangible assets acquired and
liabilities assumed in a business combination are recorded as goodwill. In accordance with SFAS
No. 142, Goodwill and Other Intangible Assets, companies no longer amortize goodwill, but instead
test for impairment at least annually using a two-step approach. Impairment of goodwill is tested
at the reporting unit level by comparing the reporting units carrying amount, including goodwill,
to the fair value of the reporting unit. The fair value of the reporting units is estimated using
a combination of the income, or discounted cash flows approach and the market approach, which
utilizes comparable companies data. If the carrying amount of the unit exceeds its fair value,
goodwill is considered impaired and a second step is performed to measure the amount of impairment
loss, if any. The Company will test for impairment annually beginning in the fourth quarter of its
2005 fiscal year. Award Fee Recognition Argon STs practice for recognizing interim fee on its cost-plus-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 performed, Argon STs relationship
and history with the customer, Argon STs history with similar types of projects, and Argon STs
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.
Actual fees awarded are typically within managements estimates. However, changes could arise
within an 14




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award fee period causing management to either lower or raise the award fee estimate in the period in which it occurs. Accounts Receivable Argon ST is required to estimate the collectibility of its accounts receivables. Judgment is
required in assessing the realization of such receivables, and the related reserve requirements are
based on the best facts available to Argon ST. Since most of Argon STs revenue is generated under
U.S. Federal Government contracts, its current accounts receivable reserve is not significant. Historical Operating Results Second Quarter Ended April 3, 2005 compared to Second Quarter Ended March 28, 2004 The following table sets forth certain items, including consolidated revenues, cost of
revenues, general and administrative expenses, income tax expense and net income, and the changes
in these items for the periods indicated: Second Quarter Ended
    
    
    Increase 2005April 3, 2005
    
    
    March 28, 2004
    
    
    Compared to 2004Contract revenues
    
    $
    55,952,000
    
    
    $
    22,683,000
    
    
    $
    33,269,000Cost of revenues
    
    
    43,641,000
    
    
    
    17,887,000
    
    
    
    25,754,000General and
administrative expenses
    
    
    4,496,000
    
    
    
    1,744,000
    
    
    
    2,752,000Provision for income taxes
    
    
    3,069,000
    
    
    
    1,141,000
    
    
    
    1,928,000Net income
    
    
    4,944,000
    
    
    
    1,949,000
    
    
    
    2,995,000
 Revenues: Revenues increased approximately 147% for the second quarter ended April 3, 2005, as compared
to the second quarter ended March 28, 2004. The increase is primarily attributable to additional
revenues generated from the merger with Sensytech (see pro forma data below), increased
international contract activity, the continued transition to full rate production on three major
systems programs in the second quarter ended April 3, 2005, and increased activity on a new
airborne program. Cost of Revenues: Cost of revenues increased approximately 144% for the second quarter ended April 3, 2005 as
compared to the second quarter ended March 28, 2004. The increase is attributable to the merger
with Sensytech (see pro forma data below) and the related material and labor costs associated with
the increased business volume from the Companys fixed price production contracts. Cost of
revenues as a percentage of revenues was 78% and 79% for the second quarters ended April 3, 2005
and March 28, 2004, respectively. Labor cost increases have been controlled, as the Company has
leveraged its growing software product line across a broader base of programs, thereby enabling it
to achieve cost efficiencies in satisfying its program requirements for software deliveries.
Material cost savings have been achieved as a result of improved pricing from vendors through the
practice of purchasing in higher volumes across multiple programs. General and Administrative Expenses: General and administrative expenses increased approximately 158% for the second quarter ended
April 3, 2005, as compared to the second quarter ended March 28, 2004. The increase was due to an
increase in internal research and development of $1,142,000; an increase in salaries expense of
$472,000 as a result of increased staff; cost associated with financial systems consolidation
related to the Sensytech merger and Sarbanes-Oxley Section 404 compliance cost of $470,000,
comprised primarily of external consulting expenses. 15




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Interest Income and Interest Expense: Interest income increased approximately $163,000 for the second quarter ended April 3, 2005,
as compared to the second quarter ended March 28, 2004. This increase was a result of much higher
average cash balances due to increased retained earnings, proceeds from common stock options
exercises, and higher short-term interest rates during the second quarter ended April 3, 2005
compared to the second quarter ended March 28, 2004. Interest expense was not significant in the
second quarters ended April 3, 2005 and March 28, 2004. Income Tax Expense: The Companys effective income tax rate increased to 38.3% for the second quarter ended April
3, 2005, compared to an effective rate of 36.9% for the second quarter ended March 28, 2004. This
increase was primarily due to the reduced impact that the research and development tax credit had
on the fiscal 2005 period effective tax rate compared to the fiscal 2004 period effective tax rate
and a higher federal statutory tax rate of 35%. Net Income: As a result of the above, net income increased approximately $2,995,000, or 154%, for the
second quarter ended April 3, 2005 compared to the second quarter ended March 28, 2004. The effect
of increased sales volume, the merger with Sensytech and operations cost savings noted above has
yielded increased efficiencies.. Six Months Ended April 3, 2005 compared to Six Months Ended March 28, 2004 The following table sets forth certain items, including consolidated revenues, cost of
revenues, general and administrative expenses, income tax expense and net income, and the changes
in these items for the periods indicated: Six Months Ended
    
    
    Increase 2005April 3, 2005
    
    
    March 28, 2004
    
    
    Compared to 2004Contract revenues
    
    $
    112,462,000
    
    
    $
    49,976,000
    
    
    $
    62,486,000Cost of revenues
    
    
    88,979,000
    
    
    
    41,146,000
    
    
    
    47,833,000General and
administrative expenses
    
    
    7,831,000
    
    
    
    3,478,000
    
    
    
    4,353,000Provision for income taxes
    
    
    6,124,000
    
    
    
    1,992,000
    
    
    
    4,132,000Net income
    
    
    9,864,000
    
    
    
    3,406,000
    
    
    
    6,458,000
 Revenues: Revenues increased approximately 125% for the six months ended April 3, 2005, as compared to
the six months ended March 28, 2004. The increase is primarily attributable to the additional
revenues generated from the merger with Sensytech (see pro forma data below), increased
international contract activity, the continued transition to full rate production on three major
systems programs in the six months ended April 3, 2005, and the increased activity on a new
airborne program. Cost of Revenues: Cost of revenues increased approximately 116% for the six months ended April 3, 2005 as
compared to the six months ended March 28, 2004. The increase is attributable to the merger with
Sensytech (see pro forma data below) and the related material and labor costs associated with the
increased business volume from the Companys fixed price production contracts. Cost of revenues as
a percentage of revenues was 79% and 82% for the six months ended April 3, 2005 and March 28, 2004,
respectively. Labor cost increases have been controlled, as the Company has leveraged its growing
software product line across a broader base of programs, thereby enabling it to achieve
cost efficiencies in satisfying its program requirements for software deliveries. Material
cost savings have been 16




---



##### 



achieved as a result of improved pricing from vendors through the practice
of purchasing in higher volumes across multiple programs. General and Administrative Expenses: General and administrative expenses increased approximately 125% for the six months ended
April 3, 2005, as compared to the six months ended March 28, 2004. The increase was due to an
increase in salaries expense of $910,000 as a result of increased staff; costs associated with
financial systems consolidation related to the Sensytech merger and Sarbanes-Oxley Section 404
compliance cost of $623,000; and increase in internal research and development of $1,865,000. Interest Income and Interest Expense: Interest income increased approximately $295,000 for the six months ended April 3, 2005, as
compared to the six months ended March 28, 2004. This increase was a result of much higher average
cash balances due to increased retained earnings, proceeds from common stock options exercise, and
higher short-term interest rates during the six months ended April 3, 2005 compared to the six
months ended March 28, 2004. Interest expense was not significant in the six months ended April 3,
2005 and March 28, 2004. Income Tax Expense: The Companys effective income tax rate increased to 38.3% for the six months ended April 3,
2005, compared to an effective rate of 36.9% for the six months ended March 28, 2004. This
increase was primarily due to the reduced impact that the research and development tax credit had
on the fiscal 2005 period effective tax rate compared to the fiscal 2004 period effective tax rate
and a higher federal statutory tax rate of 35 %. Net Income: As a result of the above, net income increased approximately $6,458,000, or 190%, for the six
months ended April 3, 2005 compared to the six months ended March 28, 2004. The effect of increased
sales volume, the merger with Sensytech and operations cost savings noted above has yielded
increased efficiencies contributing to this increase. In addition, the Company successfully met
critical milestones on two fixed price programs, enabling increases to the profit rates on those
programs. Pro forma Financial Results of Operations The following unaudited condensed combined pro forma results of operations reflect the pro
forma combination of the Argon Engineering and the acquired Sensytech business as if the
combination had occurred at the beginning of the periods presented, compared with the historical
results of operations for Argon Engineering for the same periods. These unaudited pro forma condensed combined results of operations were prepared based on the
historical financial statements of Argon Engineering, and the historical financial statements of
Sensytech, adjusted in accordance with SFAS No. 141 as presented in note 3 of the accompanying
financial statements. The unaudited pro forma condensed combined results of operations do not
purport to represent what Argon STs results of operations would have been if such transaction had
occurred at the beginning of the periods presented, and are not necessarily indicative of Argon
STs future results. 17




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Second Quarter Ended
    
    
    Six Months EndedMarch 28, 2004
    
    
    March 28, 2004Historical
    
    
    Pro forma
    
    
    Historical
    
    
    Pro formaRevenue
    
    $
    22,683,000
    
    
    $
    36,702,000
    
    
    $
    49,976,000
    
    
    $
    76,660,000Income from operations
    
    
    3,052,000
    
    
    
    4,341,000
    
    
    
    5,352,000
    
    
    
    7,741,000Net income
    
    
    1,949,000
    
    
    
    2,759,000
    
    
    
    3,406,000
    
    
    
    4,868,000Basic earnings per share
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.28
    
    
    $
    0.26Diluted earnings per share
    
    $
    0.14
    
    
    $
    0.14
    
    
    $
    0.25
    
    
    $
    0.24Basic wt average shares
    
    
    12,214,000
    
    
    
    18,749,000
    
    
    
    12,241,000
    
    
    
    18,758,000Diluted wt average shares
    
    
    13,328,000
    
    
    
    20,025,000
    
    
    
    13,322,000
    
    
    
    20,006,000
 Pro forma revenues attributable to Sensytech were $14,019,000 and $26,684,000 for the second
quarter and six months ended March 28, 2004, respectively. Pro forma income from operations
attributable to Sensytech was $1,647,000 and $3,105,000 for the second quarter and six months
ended March 28, 2004, respectively. Pro forma net income attributable to Sensytech was $1,031,000
and $1,904,000 for the second quarter and six months ended March 28, 2004, respectively. Pro forma depreciation
and amortization on the write up of tangible and intangible assets, in accordance with SFAS 141,
was $358,000 and $716,000 for the second quarter and six months ended March 28, 2004, respectively,
and the after tax effect was $221,000 and $442,000, respectively. Analysis of Liquidity and Capital Resources Argon STs primary source of liquidity is cash provided by operations. On April 3, 2005, Argon
ST had cash of $32,221,000 compared to cash of $29,732,000 on September 30, 2004. This increase in
cash of $2,489,000 was the result of net income earned during the six months ending April 3, 2005
of $9,864,000, partially offset by an increase in billed and unbilled receivables of $5,078,000,
and decrease in deferred revenue of $1,010,000 and a decrease in income taxes payable of
$1,931,000. Argon ST has a $15,000,000 line of credit with Bank of America. The line of credit is for two
years and is set to expire on February 28, 2006. The total borrowing base generally cannot exceed
the sum of 90% of qualified government accounts receivable and 80% of qualified non-government
accounts receivable. Total letters of credit at April 3, 2005 were $578,000. The line of credit is
available to finance the performance of government contracts, to support the issuance of stand-by
letters of credit, and for short-term working capital purposes. At April 3, 2005, there were no
borrowings under the line of credit. The line of credit less the letters of credit provided loan
availability of $14,422,000 at April 3, 2005. Based on current backlog, planned contract revenue,
and planned capital expenditures, Argon ST does not anticipate the need for any cash other than
cash generated from operations during the next twelve months. This planning does not assume any
acquisitions that would require cash. The bank agreement establishes the interest rate at the LIBOR plus 200 to 285 basis points,
determined by Argon STs ratio of funded debt to earnings before interest, taxes, depreciation and
amortization. All borrowings under the line of credit are collateralized by all personal property
of Argon ST. The agreement also contains various covenants as to dividend restrictions, working
capital, tangible net worth, earnings and debt-to-equity ratios. Unused commitment fees of one
quarter of one percent per annum are required. Net cash provided by operating activities was $1,623,000 for the six months ending April 3,
2005, compared to net cash provided by operating activities of $7,283,000 for the six months ending
March 28, 2004. The decrease in net cash from operating activities for the six months ending April
3, 2005 period compared to the six months ending March 28, 2004 was primarily caused by a decrease
in deferred revenues of $6,021,000 and a decrease in income taxes payable of $3,044,000, partially
offset by an increase in net income of $6,458,000. The 18




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decrease in deferred revenue resulted from
revenue recognized on contracts which have event-based payments
received in prior periods and had been accounted for as deferred revenue. During the six
months ended April 3, 2005, the Company made tax payments of $8,485,000. Net cash used by investing activities was $2,292,000 in the six months ending April 3, 2005,
compared to $658,000 in the six months ending March 28, 2004. The increase in cash used by
investing activities was due to the acquisition of test equipment, computer resources and software,
and completion of the Systems Engineering Test Center (SETC) in Fayette County, Pennsylvania. It
is expected that the equipment acquisition and related costs will continue as Argon ST replaces
older equipment and will increase in approximately the same proportion as Argon STs employee base
increases. Net cash provided by financing activities was $3,158,000 in six months ending April 3, 2005 as
compared to net cash used in financing activities of $286,000 in six months ending March 28, 2004.
The increase in cash provided by financing activities is primarily the result of proceeds from
exercises of stock options and purchases of common stock under the Companys employee stock plans.
During the six months ended March 28, 2004, Argon ST purchased and retired $664,000 of common stock
and in connection with the repurchase, issued a note payable of $451,000 of which $170,000 is
outstanding as of April 3, 2005. Contractual Obligations and Commitments Contractual Cash Obligations: Due in
    
    
    Due in
    
    
    Due in
    
    
    Due in
    
    
    Due inTotal
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterOperating leases
    
    $
    28,078,000
    
    
    $
    2,780,000
    
    
    $
    5,371,000
    
    
    $
    5,329,000
    
    
    $
    5,328,000
    
    
    $
    3,229,000
    
    
    $
    6,041,000Note Payable
    
    
    170,000
    
    
    
    114,000
    
    
    
    56,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    28,248,000
    
    
    $
    2,894,000
    
    
    $
    5,427,000
    
    
    $
    5,329,000
    
    
    $
    5,328,000
    
    
    $
    3,229,000
    
    
    $
    6,041,000
 Other Commercial Commitments: Total
    
    Less Than 1 Year
    
    1-3 YearsLetters of credit
    
    $578,000
    
    $74,000
    
    $504,000
 Argon ST has no long-term
debt obligations, capital lease obligations, other operating lease
obligations, contractual purchase obligations, or other long-term liabilities other than those
shown above. Argon ST also has no off-balance sheet arrangements of any kind. Recent Accounting Pronouncements On December 16, 2004, the Financial
Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), which is a revision of FASB
Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) requires that the
compensation cost related to share-based payment transactions be recognized in financial
statements. In April 2005, the Securities and Exchange
Commission issued Release 33-8568 which
allows companies to implement Statement 123(R) at the beginning of the annual reporting period that
begins after June 15, 2005. Consistent with the new rule, the Company intends to adopt Statement 123(R)
in the first quarter of its 2006 fiscal year, and to implement the standard on a prospective
basis. The Company has not yet concluded what impact the adoption of Statement 123(R) may have on
its results of operations or financial position. 19




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##### 



Market Risks In addition to the risks inherent in its operations, Argon ST is exposed to financial, market,
political and economic risks. The following discussion provides additional detail regarding its
exposure to credit, interest rates and foreign exchange rates. Cash and Cash Equivalents: All unrestricted, highly liquid investments purchased with a remaining maturity of three
months or less are considered to be cash equivalents. Argon ST maintains cash and cash equivalents
with various financial institutions in excess of the amount insured by the Federal Deposit
Insurance Corporation. It believes that any credit risk related to these cash and cash equivalents
is minimal. Interest Rates: Argon STs line of credit financing provides available borrowing to it at a variable interest
rate tied to the banks prime interest rate or the LIBOR rate. There were no outstanding borrowings
under this line of credit at April 3, 2005. Accordingly, Argon ST does not believe that any
movement in interest rates would have a material impact on future earnings or cash flows Foreign Currency: Argon ST has contracts to provide services to U.S. approved foreign countries. Argon STs
foreign sales contracts require payment in U.S. dollars, and therefore are not affected by foreign
currency fluctuations. Argon ST occasionally issues orders or subcontracts to foreign companies in
local currency. The current obligations to foreign companies are of an immaterial amount and the
Company believes the associated currency risk is also immaterial. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The information called for by this item is provided under Item 2 - Managements Discussion
and Analysis of Financial Condition and Results of Operations. ITEM 4. CONTROLS AND PROCEDURES  a)
    The Companys management has evaluated, with the participation of the Companys
Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of the period covered by
this Quarterly Report on Form 10-Q. Based on this evaluation, the Companys Chief
Executive Officer and Chief Financial Officer have concluded that the Companys
disclosure controls and procedures are effective to ensure that information the Company
is required to disclose in reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and
forms.b)
    During the last quarter, there were no significant changes in the Companys
internal controls over financial reporting or in other factors that have materially
affected these controls, or are reasonably likely to materially affect these controls
subsequent to the evaluation of these controls. 20




---



##### 



PART II  OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 28, 2005, the Company held its Annual Meeting of Stockholders. The following
items were voted upon and approved by the requisite number of shares present in person or by proxy
at the meeting:  a)
    The inspector of election tabulated the following votes for the election of
directors: Number of Votes
    
    
    Number of VotesNominee for Office
    
    In Favor
    
    
    WithheldTerry L. Collins
    
    
    17,943,604
    
    
    
    415,064S. Kent Rockwell
    
    
    17,945,804
    
    
    
    412,864Victor F. Sellier
    
    
    18,029,859
    
    
    
    328,809Thomas E. Murdock
    
    
    18,029,859
    
    
    
    328,809Delores M. Etter
    
    
    18,027,370
    
    
    
    331,298David C. Karlgaard
    
    
    17,918,680
    
    
    
    439,988Peter A. Marino
    
    
    18,113,625
    
    
    
    245,043Robert McCashin
    
    
    18,043,119
    
    
    
    315,549John Irvin
    
    
    18,043,919
    
    
    
    314,749Lloyd A. Semple
    
    
    18,109,869
    
    
    
    248,799
  b)
    The inspector of election tabulated the following votes for the proposal to
approve and adopt an amendment to the Companys certificate of incorporation to
increase the total number of authorized shares of the Companys capital stock from 25
million to 100 million shares of common stock: Number of Votes
    
    Number of Votes
    
    Abstentions andIn
Favor


Against
    
    Broker Non-Votes16,135,467
    
    2,199,292
    
    23,909
 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS ExhibitNumber
    
    Description of Exhibit3.1
    
    Amended and Restated certificate of Incorporation of
the registrant (incorporated by reference to Exhibit
3.1 of registrants Registration Statement on Form
S-1 filed on August 26, 2002, Registration Statement
No. 333-98757)3.1.1
    
    Amendment, dated September 28, 2004, to the
registrants Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit
3.1 the registrants Current Report on Form 8-K
covering Items 2.10, 5.01, 5.02, 8.01 and 9.01 of
Form 8-K, filed October 5, 2004)3.1.2*
    
    Amendment, dated March 15, 2005, to the registrants
Amended and Restated Certificate of Incorporation3.2
    
    Amended and Restated Bylaws of the registrant
(incorporated by reference to Exhibit 13(a)(i) of
registrants Report on Form 10-KSB for the Year Ended
September 30, 2001, Commission File No. 000-08193)4.1
    
    Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 of registrants Registration
Statement on Form S-1 filed on August 26, 2002,
Registration Statement No. 333-987570)
 21




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##### 



ExhibitNumber
    
    Description of Exhibit10.1
    
    Amended and Restated Line of Credit Agreement with
Bank of America (incorporated by reference to Exhibit
10.1 of registrants Registration Statement on Form
S-1 filed on August 26, 2002, Registration Statement
No. 333-98757)10.1.1
    
    Third Amendment to Second Amended and Restated
Financing and Security Agreement (incorporated by
reference to Exhibit 10.1 of registrants Report on
Form 10-Q for the quarter ended March 31, 2004,
Commission File No. 000-08193)10.2+
    
    The Sensytech. Inc. 2002 Stock Incentive Plan
(incorporated by reference to registrants Schedule
14A filed with the Commissions on April 22, 2002,
Commission File No. 000-08193)10.3+
    
    Argon Engineering Associates, Inc. Stock Plan
(incorporated by reference to Exhibit 10.3 to
registrants Annual Report on From 10-K for the
fiscal year ended September 30, 2004, filed December
14, 2004)10.4+
    
    Retention Agreement dated February 17, 2004, by and
between the registrant and Donald F. Fultz
(incorporated by reference to Exhibit 10.3 of
registrants Registration Statement on Form S-4 filed
on July 16, 2004, Registration Statement No.
333-117430)10.5+
    
    Retention Agreement dated February 17, 2004, by and
between the registrant and S. Kent Rockwell
(incorporated by reference to Exhibit 10.3 of
registrants Registration Statement on Form S-4 filed
on July 16, 2004, Registration Statement No.
333-117430)31.1*
    
    Certification of the registrants Chief Executive
Officer pursuant to Rule 13a-14(a)/15d-14(a) under
the Securities Exchange Act31.2*
    
    Certification of the registrants Chief Financial
Officer pursuant to Rule 13a-14(a)/15d-14(a) under
the Securities Exchange Act32.1**
    
    Certification pursuant to Rule 13a-14(b)/15d-14(b)
under the Securities Exchange Act and Section 1350 of
chapter 63 of Title 8 of the United States Code
   *
    
    Filed herewith**
    
    Furnished herewith+
    
    Indicates management contract or compensatory plan or arrangement 22




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##### 



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARGON ST, INC.(Registrant)By: /s/ Terry L. CollinsTerry L. Collins, Ph.D.Chairman and Chief Executive OfficerBy: /s/ Donald F. FultzDonald F. FultzChief Financial OfficerDate: May 11, 2005
 23