##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549
 Form 10-Q [X]
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended June 30, 2004 or [   ]
    
    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 SENSYTECH, INC. 
 )
 Delaware
(State or other jurisdiction of
incorporation or organization)
    
    38-1873250
(I.R.S. Employer
Identification No.)
 8419 Terminal Road, Newington, Virginia 22122-1430 
  Issuers telephone number (703)550-7000 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
[ü]      No [   ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes [   ]       No [ü] As of August 4, 2004, there were 6,634,589 shares of the Registrants
Common Stock, par value $.01 per share, outstanding.




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##### 



SENSYTECH, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED JUNE 30, 2004 TABLE OF CONTENTS PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at June 30, 2004 and September 30, 2003
    
    
    3Condensed Consolidated Statements of Income for the
Three Months and Nine Months Ended June 30, 2004 and June 30, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 2004 and June 30, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-12Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13-20Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    21Item 6. Exhibits and Reports on Form 8-K
    
    
    21Signatures
    
    
    22
 2




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##### 



SENSYTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS June 30, 2004
    
    September 30, 2003(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    11,130,000
    
    
    $
    13,445,000Accounts receivable, net of allowance for
doubtful accounts of $200,000
    
    
    11,419,000
    
    
    
    15,916,000Unbilled contract costs, net
    
    
    15,919,000
    
    
    
    8,486,000Inventories
    
    
    1,253,000
    
    
    
    1,690,000Prepaid income taxes
    
    
    358,000
    
    
    
    Deferred income taxes
    
    
    602,000
    
    
    
    793,000Other current assets
    
    
    807,000
    
    
    
    328,000TOTAL CURRENT ASSETS
    
    
    41,488,000
    
    
    
    40,658,000PROPERTY AND EQUIPMENT, NET
    
    
    5,934,000
    
    
    
    3,350,000OTHER ASSETSDeferred income taxes
    
    
    196,000
    
    
    
    224,000Intangibles, net
    
    
    58,000
    
    
    
    133,000Goodwill
    
    
    2,163,000
    
    
    
    Other assets
    
    
    199,000
    
    
    
    73,000TOTAL ASSETS
    
    $
    50,038,000
    
    
    $
    44,438,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts
payable, including related party payables of $27,000 and $51,000
    
    $
    4,315,000
    
    
    $
    3,780,000Accrued salaries, benefits, and related expenses
    
    
    2,605,000
    
    
    
    2,628,000Other accrued expenses
    
    
    977,000
    
    
    
    862,000Billings in excess of costs
    
    
    749,000
    
    
    
    1,172,000Income taxes payable
    
    
    
    
    
    
    63,000TOTAL CURRENT LIABILITIES
    
    
    8,646,000
    
    
    
    8,505,000Commitments and ContingenciesSTOCKHOLDERS EQUITYCommon Stock, $.01 par value; 25,000,000 shares
authorized; 6,759,634 and 6,617,223 shares issued
at June 30, 2004 and September 30, 2003
    
    
    68,000
    
    
    
    66,000Additional paid-in capital
    
    
    27,215,000
    
    
    
    25,172,000Treasury stock, at cost, 126,245 shares
    
    
    (534,000
    )
    
    
    (534,000
    )Retained earnings
    
    
    14,643,000
    
    
    
    11,229,000TOTAL STOCKHOLDERS EQUITY
    
    
    41,392,000
    
    
    
    35,933,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    50,038,000
    
    
    $
    44,438,000
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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##### 



SENSYTECH, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the Three Months Ended
    
    For the Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003REVENUESContract revenues
    
    $
    17,280,000
    
    
    $
    13,100,000
    
    
    $
    43,964,000
    
    
    $
    37,676,000COSTS AND EXPENSESCost of revenues, including related
party expenses (Note 11)
    
    
    12,629,000
    
    
    
    9,704,000
    
    
    
    31,984,000
    
    
    
    28,443,000General and administrative expenses
including related party expenses
(Note 11)
    
    
    2,215,000
    
    
    
    1,645,000
    
    
    
    6,439,000
    
    
    
    4,267,000Total costs and expenses
    
    
    14,844,000
    
    
    
    11,349,000
    
    
    
    38,423,000
    
    
    
    32,710,000INCOME FROM OPERATIONS
    
    
    2,436,000
    
    
    
    1,751,000
    
    
    
    5,541,000
    
    
    
    4,966,000OTHER INCOME (EXPENSES)Interest income
    
    
    18,000
    
    
    
    36,000
    
    
    
    60,000
    
    
    
    79,000Interest expense
    
    
    (5,000
    )
    
    
    (1,000
    )
    
    
    (5,000
    )
    
    
    (49,000
    )Other income (expenses), net
    
    
    4,000
    
    
    
    5,000
    
    
    
    11,000
    
    
    
    2,000INCOME BEFORE INCOME TAXES
    
    
    2,453,000
    
    
    
    1,791,000
    
    
    
    5,607,000
    
    
    
    4,998,000INCOME TAX PROVISION
    
    
    (943,000
    )
    
    
    (733,000
    )
    
    
    (2,193,000
    )
    
    
    (2,049,000
    )NET INCOME
    
    $
    1,510,000
    
    
    $
    1,058,000
    
    
    $
    3,414,000
    
    
    $
    2,949,000PER SHARE AMOUNTBasic earnings per share
    
    $
    0.23
    
    
    $
    0.16
    
    
    $
    0.52
    
    
    $
    0.49Diluted earnings per share
    
    $
    0.22
    
    
    $
    0.16
    
    
    $
    0.51
    
    
    $
    0.48
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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##### 



SENSYTECH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Nine Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    3,414,000
    
    
    $
    2,949,000Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    860,000
    
    
    
    980,000Stock-based compensation expense
    
    
    144,000
    
    
    
    201,000Deferred taxes
    
    
    219,000
    
    
    
    (37,000
    )Cash provided (used) by assets and liabilitiesAccounts receivable
    
    
    4,693,000
    
    
    
    (715,000
    )Unbilled contract costs
    
    
    (6,934,000
    )
    
    
    1,546,000Inventories
    
    
    867,000
    
    
    
    1,002,000Other assets
    
    
    (578,000
    )
    
    
    93,000Accounts payable
    
    
    (139,000
    )
    
    
    (1,133,000
    )Other accrued expenses
    
    
    
    
    
    
    1,110,000Billing in excess of costs
    
    
    (423,000
    )
    
    
    (764,000
    )Income taxes payable and prepaid income taxes
    
    
    (183,000
    )
    
    
    (125,000
    )Net cash provided by operating activities
    
    
    1,940,000
    
    
    
    5,107,000Cash flows from investing activities:Acquisition of property and equipment
    
    
    (2,802,000
    )
    
    
    (837,000
    )Acquisition of Imaging Sensors and Systems, Inc.
    
    
    (1,916,000
    )
    
    
    Net cash used in investing activities
    
    
    (4,718,000
    )
    
    
    (837,000
    )Cash flows from financing activities:Stock issuance costs
    
    
    
    
    
    
    (1,933,000
    )Proceeds from line of credit
    
    
    
    
    
    
    2,055,000Repayments of line of credit
    
    
    
    
    
    
    (4,955,000
    )Proceeds from stock issuance
    
    
    
    
    
    
    18,400,000Proceeds of stock option exercises
    
    
    463,000
    
    
    
    241,000Purchase of treasury stock
    
    
    
    
    
    
    (9,000
    )Net cash provided by financing activities
    
    
    463,000
    
    
    
    13,799,000Net (decrease) increase in cash and cash equivalents
    
    
    (2,315,000
    )
    
    
    18,069,000Cash and cash equivalents, beginning of period
    
    
    13,445,000
    
    
    
    700,000Cash and cash equivalents, end of period
    
    $
    11,130,000
    
    
    $
    18,769,000Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    5,000
    
    
    $
    43,000Cash paid for income taxes
    
    $
    2,170,000
    
    
    $
    2,212,000Non-cash investing and financing activities (Note 12):Acquisition of equipment included in property and equipment and
accounts payable
    
    $
    
    
    
    $
    6,000Acquisition expenses included in accounts payable
    
    $
    17,000
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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##### 



SENSYTECH, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and 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 nine-month period ended June 30, 2004 are
not necessarily indicative of the results that may be expected for the fiscal
year ending September 30, 2004. Inter-company accounts and transactions have
been eliminated in consolidation. For further information, refer to the
consolidated financial statements and footnotes thereto included in Sensytech,
Inc.s Annual Report on Form 10-K for the fiscal year ended September 30, 2003. 2. RECLASSIFICATIONS Certain reclassifications, including segment information discussed in Note
6, were made to conform the prior year financial statements to the presentation
adopted in the 2004 consolidated financial statements. 3. INVENTORIES Inventories consist of the following: June 30, 2004
    
    September 30, 2003Raw materials
    
    $
    1,194,000
    
    
    $
    515,000Component parts, work in process
    
    
    
    
    
    
    1,141,000Finished component parts
    
    
    59,000
    
    
    
    34,000$
    1,253,000
    
    
    $
    1,690,000
 4. 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 three month and nine month periods ended June 30: 6




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##### 



Three Months Ended
    
    Nine months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    1,510,000
    
    
    $
    1,058,000
    
    
    $
    3,414,000
    
    
    $
    2,949,000Weighted average shares
outstanding  basic
    
    
    6,615,057
    
    
    
    6,457,086
    
    
    
    6,549,201
    
    
    
    5,975,103Effect of dilutive securities:Net shares issuable upon
exercise of stock options
    
    
    189,900
    
    
    
    160,307
    
    
    
    172,953
    
    
    
    141,471Weighted average shares
outstanding  dilutive
    
    
    6,804,957
    
    
    
    6,617,393
    
    
    
    6,722,154
    
    
    
    6,116,574Basic earnings per share
    
    $
    .23
    
    
    $
    .16
    
    
    $
    .52
    
    
    $
    .49Dilutive earnings per share
    
    $
    .22
    
    
    $
    .16
    
    
    $
    .51
    
    
    $
    .48
 During the three
months ended June 30, 2004, 212,500 options were issued.
Earning per share for the quarter included the effect of these options, however
for the nine months period ended June 30, 2004, the effect of those options are
excluded since the option prices exceed the average stock price for the nine
month period. 5. STOCK OPTION COMPENSATION The Company continues to account for stock-based compensation in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations using
the intrinsic value method, which resulted in compensation cost for options
granted of $0 and $144,000 for the three and nine month periods ended June 30,
2004. Compensation expense of $110,000 and $201,000 were recorded for the
three and nine months ended June 30, 2003. Had compensation expense for the
Companys four stock-based compensation plans been determined based upon fair
values at the grant dates for awards under those plans in accordance with SFAS
No. 123, Accounting for Stock-Based Compensation as amended by SFAS 148, the
Companys net income and earnings per share for the three and nine months ended
June 30, would have been reduced to the pro forma amounts indicated below. Three Months Ended
    
    Nine months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    1,510,000
    
    
    $
    1,058,000
    
    
    $
    3,414,000
    
    
    $
    2,949,000Add: Stock-based employee
compensation expense included
in reported net income, net of
related tax effects
    
    
    
    
    
    
    65,000
    
    
    
    86,000
    
    
    
    119,000Less: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax effects
    
    
    286,000
    
    
    
    98,000
    
    
    
    565,000
    
    
    
    275,000Pro forma net income
    
    $
    1,224,000
    
    
    $
    1,025,000
    
    
    $
    2,935,000
    
    
    $
    2,793,000Earnings per share:Basic  as reported
    
    $
    .23
    
    
    $
    .16
    
    
    $
    .52
    
    
    $
    .49Basic  pro forma
    
    $
    .19
    
    
    $
    .16
    
    
    $
    .45
    
    
    $
    .47Diluted  as reported
    
    $
    .22
    
    
    $
    .16
    
    
    $
    .51
    
    
    $
    .48Diluted  pro forma
    
    $
    .18
    
    
    $
    .15
    
    
    $
    .44
    
    
    $
    .46
 7




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##### 



6. SEGMENT INFORMATION The Company operates in the passive surveillance and countermeasures
market for domestic and international clients. The Companys systems are
globally applicable to the defense markets and their allied information
agencies for land, air, and sea-based applications. The Company believes that
its passive surveillance and countermeasures products and services are among
the best in the world. The Companys goal is to provide its customers with
total system surveillance solutions across the electromagnetic spectrum, using
products manufactured by it and by others. The Company consolidated the
Communications and Imaging Groups to form the Surveillance Technology Group for
fiscal year 2004. As a result, the Company reports in two business segments,
which better reflects its strategy and business focus for the future.
Accordingly, information from prior years has been reclassified to reflect that
change. The Company is customer-focused and provides tailored, solution-based
systems through the following groups:  
    
    Defense Systems (DS) Group designs, develops, manufactures, and
supports products which intercept, analyze, classify, identify, locate
and track microwave signals from radars and weapons, which may
originate from potentially hostile sources. It provides communication
data links and remote targeting systems and provides equipment and
systems, which are used to carry out defensive measures against hostile
signals or their sources to protect high value assets. The groups
systems are used on military platforms, such as ships, submarines,
patrol aircraft, as well as at ground installations.
    
    Surveillance Technology (Surveillance) Group designs, develops,
manufactures, and supports products which intercept signals and analyze
communications in a variety of transmission media, and then identify
and locate the sources of these signals and communication. These
systems are generally used by operators on board aircraft, ships and
ground installations to intercept various kinds of transmissions over
established communications networks. Surveillance also designs,
develops, manufactures and supports products that are installed on
special purpose aircraft and land vehicles and use multispectral,
infrared, and light imaging systems to perform remote surveys.
Applications of this technology include environmental pollution,
facility inspection, utility monitoring, surface mineral exploration
and other special purpose inspections where on-site inspections are not
possible or desirable. Both business segments offer applicable system engineering services which
provide concept studies, system definition and services to aid in specification
of customer requirements. These activities are performed for either present or
prospective customers and are principally undertaken to assist the customer in
the procurement of major integrated passive surveillance systems and, where
applicable, active electronic countermeasures. 8




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The Surveillance Group manufactures in its Newington, Virginia, Winter
Park, Florida, and Ann Arbor, Michigan facilities. The Defense Systems Group
manufactures in its Newington, Virginia, Camarillo, California, and Smithfield,
Pennsylvania facilities. The Company does not have a significant amount of inter-segment revenue
and evaluates segment performance based upon revenue and income from operations
by group. The combined segments income from operations equals the income from
operations as reported in the Consolidated Income Statements of the Company.
The Company does not allocate interest, other income and expenses or income
taxes to the two segments and does not produce separate balance sheet
information for each segment. The revenue and income from operations by segment
for the three and nine months ended June 30 are as follows: Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenue:DS
    
    $
    8,865,000
    
    
    $
    7,863,000
    
    
    $
    26,383,000
    
    
    $
    21,813,000Surveillance
    
    
    8,415,000
    
    
    
    5,237,000
    
    
    
    17,581,000
    
    
    
    15,863,000Total
    
    $
    17,280,000
    
    
    $
    13,100,000
    
    
    $
    43,964,000
    
    
    $
    37,676,000Income from operations:DS
    
    $
    581,000
    
    
    $
    76,000
    
    
    $
    1,123,000
    
    
    $
    969,000Surveillance
    
    
    1,855,000
    
    
    
    1,675,000
    
    
    
    4,418,000
    
    
    
    3,997,000Total
    
    $
    2,436,000
    
    
    $
    1,751,000
    
    
    $
    5,541,000
    
    
    $
    4,966,000
 7. NOTE PAYABLE  LINE OF CREDIT The Company entered into a line of credit and related note payable with
Bank of America in February 2001. Effective February 2004, the company renewed
its $15,000,000 line of credit, 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 borrowing base at June 30, 2004 was $6,625,000. 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 June 30, 2004, there were no borrowings under the line of credit.
A stand-by letter of credit is 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. Total letters of credit
at June 30, 2004 were $1,180,000. The bank agreement establishes the interest rate at the LIBOR plus 200 to
285 basis points, determined by the Companys ratio of funded debt to earnings
before interest, taxes, depreciation and amortization. All borrowings under the
line of credit are collateralized by the Companys accounts receivable,
equipment, contracts, and general intangibles. 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. 9




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##### 



8. RECENTLY ISSUED ACCOUNTING STANDARD The Emerging Issues Task Force (EITF) reached final consensuses on Issue
03-6, Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share at its March 17-18, 2004 meeting. Issue 03-6 addresses
a number of questions regarding the computation of earnings per share (EPS)
by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of
the company when, and if, it declares dividends on its common stock. The issue
also provides further guidance in applying the two-class method of calculating
EPS. It clarifies what constitutes a participating security and how to apply
the two-class method of computing EPS once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. The Company does not have participating securities as defined in
EITF 03-6. In December 2003, the FASB issued Interpretation (FIN) No. 46-R,
Consolidation of Variable Interest Entities. FIN No. 46-R, which modifies
certain provisions and effective dates of FIN No. 46, sets forth criteria to be
used in determining whether an investment in a variable interest entity should
be consolidated, and is based on the general premise that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. The Company does not have any variable
interest entities. 9. PRODUCT WARRANTY The Company records estimated warranty costs on the accrual basis of
accounting. These reserves are based on the expected cost of providing
materials and service within the agreed upon period. Activity in the warranty
accrual is as follow: Three Months Ending
    
    Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Balance  beginning of period
    
    $
    504,000
    
    
    $
    660,000
    
    
    $
    412,000
    
    
    $
    275,000Accruals for warranties issued during the period
    
    
    53,000
    
    
    
    391,000
    
    
    
    256,000
    
    
    
    946,000Settlements during the period
    
    
    (156,000
    )
    
    
    (130,000
    )
    
    
    (267,000
    )
    
    
    (300,000
    )Balance  end of period
    
    $
    401,000
    
    
    $
    921,000
    
    
    $
    401,000
    
    
    $
    921,000
 10. COST ASSOCIATED WITH EXIT ACTIVITY On July 15, 2003, the Company announced its intention to close its
facility in Farmingdale, New Jersey and move these operations to Smithfield,
Pennsylvania. In September 2003, the Company signed a lease for a 60,000
square foot facility for its Smithfield, Pennsylvania operations. The term of
the lease is for ten years with two five year options. As of March 31, 2004,
the Company completed its move to the new facility. The employees who did not
transfer to the new location and left the Company in accordance with the
Companys transition plan received severance pay and/or retention bonuses. The
costs associated with the severance and retention plan totaled approximately
$267,000. During the three months ended June 30, 2004, a credit of $20,000 was
included in cost of revenues. During the nine months ended June 30, 2004,
$109,000 was included in cost of revenues and $35,000 was included in general
and administrative costs. Severance and retention bonuses of $8,000 remain
accrued but unpaid as of June 30, 2004. 10




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##### 



Other exit costs associated with the transition are estimated to total
$875,000. These costs consist principally of training, employee relocation,
and moving costs. To date, $746,000 of these costs has been expensed. During
the three months ended June 30, 2004, $51,000 was included in cost of revenues.
During the nine months ended June 30, 2004, $584,000 was included in cost of
revenues while $23,000 was included in general and administrative costs. The
remaining estimated other exit costs include employee relocation costs and
clean-up cost related to the closed facility in New Jersey. These remaining
costs will be expensed as incurred. 11. RELATED PARTY TRANSACTIONS The Company has entered into an agreement with a privately owned company
controlled by S. Kent Rockwell, the Companys Chief Executive Officer, to rent
an aircraft from time to time to be used for Company business. The Company
believes that the terms of the rental agreement are at least as favorable as
those it could obtain from an unrelated third party. For the three months and
nine months ended June 30, 2004, the Company recorded expenses of $65,000 and
$250,000 respectively for the use of the aircraft of which $27,000 was unpaid
as of June 30, 2004. For the three months and nine months ended June 30, 2003,
the Company recorded expenses of $29,000 and $76,000 respectively. 12. ACQUISITIONS On April 14, 2004, the Company acquired 100 percent of the outstanding
common shares of Imaging Sensors and Systems, Inc. (ISS). The results of
ISSs operations have been included in the consolidated financial statements
since that date. ISS brings needed engineering capabilities and an existing
product line of mobile ground and airborne Forward Looking Infrared Radar
(FLIR) systems. ISS fits into the Companys marketing and product direction
for the airborne imaging component of the Surveillance Technology Group. The aggregate purchase price was $3,225,000, which included $2,000,000 in
cash, 67,077 shares of Sensytechs common stock and $25,000 of legal and
accounting fees related to the acquisition. The value of the shares issued was
based on the closing price of the Companys stock on April 8, 2004. The Company has followed the guidance of SFAS No. 141, Business
Consolidations, 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 asset believed
to have an indefinite life, shall not be amortized for financial accounting
purposes. The Company has recognized goodwill in the amount of $1,827,000 in
connection with this acquisition. In accordance with SFAS No. 142, Goodwill
and Other Intangible Assets, the goodwill will be reviewed periodically to
determine if there has been any impairment to its value. During the third
party valuation it was determined that there were no amortizable intangibles acquired. 11




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##### 



The following table summarizes the estimated fair value of the assets
acquired and the liabilities assumed at the date of acquisition. Sensytech has
obtained third party valuations of the tangible assets of ISS. Current assets
    
    $
    1,261,000Property, plant and equipment
    
    
    567,000Goodwill
    
    
    2,163,000Total assets acquired
    
    
    3,991,000Current liabilities assumed
    
    
    (766,000
    )Net assets acquired
    
    $
    3,225,000
 The following condensed proforma results of operations reflect the
proforma combination of the Company and the acquired ISS business as if the
combination had occurred at the beginning of the periods presented, compared
with the actual results of operations for the Company for the three and nine
months ended June 30. Three Months Ended June 30,2004
    
    2003Historical
    
    Proforma
    
    Historical
    
    ProformaRevenue
    
    $
    17,280,000
    
    
    $
    17,331,000
    
    
    $
    13,100,000
    
    
    $
    14,904,000Income from operations
    
    
    2,436,000
    
    
    
    2,347,000
    
    
    
    1,751,000
    
    
    
    2,787,000Net income
    
    
    1,510,000
    
    
    
    1,456,000
    
    
    
    1,058,000
    
    
    
    1,669,000Basic earnings per share
    
    $
    0.23
    
    
    $
    0.22
    
    
    $
    0.16
    
    
    $
    .26Diluted earning per share
    
    $
    0.22
    
    
    $
    0.21
    
    
    $
    0.16
    
    
    $
    .25
 Nine Months Ended June 30,2004
    
    2003Historical
    
    Proforma
    
    Historical
    
    ProformaRevenue
    
    $
    43,964,000
    
    
    $
    44,890,000
    
    
    $
    37,676,000
    
    
    $
    40,794,000Income from operations
    
    
    5,541,000
    
    
    
    4,020,000
    
    
    
    4,966,000
    
    
    
    5,955,000Net income
    
    
    3,414,000
    
    
    
    2,482,000
    
    
    
    2,949,000
    
    
    
    3,500,000Basic earnings per share
    
    $
    0.52
    
    
    $
    0.38
    
    
    $
    0.49
    
    
    $
    0.59Diluted earning per share
    
    $
    0.51
    
    
    $
    0.37
    
    
    $
    0.48
    
    
    $
    0.57
 13. DEFINITIVE MERGER AGREEMENT Argon
Engineering Associates, Inc. (Argon), headquartered in Fairfax, VA and Sensytech, Inc.
announced on June 7, 2004, that they have entered into a definitive merger
agreement, to create a unique command, control, communications, computers,
intelligence, surveillance, and reconnaissance (C4ISR) company with a strong
research and development heritage that plans to deliver cutting-edge
technologies to defense, intelligence and homeland security markets. This
strategic combination is intended to bring together the employees, technologies
and customers of two fast-growing companies to produce a strong competitor in
these high priority markets. The Board of Directors of each company has approved the stock-for-stock
transaction. After consummation of the transaction, which is expected to close
at the end of September 2004. Argons existing shareholders will
own approximately 66% of the combined company on a fully-diluted basis. They
will receive two shares of Sensytech common stock for each existing share of
Argon common stock outstanding. The transaction is subject to the approval of each companys shareholders,
government regulatory reviews and other closing conditions described in the
Merger Agreement. 12




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The following discussion provides information which management believes is
relevant to an assessment and an understanding of the Companys operations and
financial condition. This discussion should be read in conjunction with the
condensed consolidated financial statements and accompanying notes. Forward-looking Statements Statements in this filing which are not historical facts are
forward-looking statements under the provisions of the Private Securities
Litigation Reform Act of 1995. All forward-looking statements involve risks
and uncertainties. These statements are based upon numerous assumptions about
future conditions that could prove not to be accurate. Actual events,
transactions or results may materially differ from the anticipated events,
transactions or results described in such statements. The Companys ability to
consummate such transactions and achieve such events or results is subject to
certain risks and uncertainties. In addition to those specifically mentioned
above, such risks and uncertainties include, but are not limited to, the
existence of demand for, and acceptance of the Companys products and services,
regulatory approvals, export approvals, economic conditions both domestically
and internationally, the impact of competition and pricing, results of
financing efforts and other factors affecting the Companys business that are
beyond the Companys control. All of 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 The Company is a designer, developer and manufacturer of electronics,
communications and technology products for the defense and intelligence
markets. Specifically, the Company specializes in integrated passive
surveillance, communications and data links, electronic countermeasures and
threat simulators, and airborne imaging and scanning systems. Its products are
developed for use primarily by U.S. federal government customers and U.S.
approved foreign governments, including U.S. defense and intelligence agencies,
foreign government and civilian agencies. The Companys revenues are primarily derived from fixed-price contracts,
under which it performs specific tasks for a fixed price. Under fixed-price
contracts the Company assumes the risk of cost overruns and receives the
benefit of cost savings. All of the Companys U.S. federal government
contracts, whether it is the prime contractor or a subcontractor, are subject
to audit and cost controls. As a result, the U.S. federal government
contracting authorities typically have the right to object to the Companys
costs as not allowable or as unreasonable, which can result in it bearing all
or a portion of these costs itself rather than recovering them from the U.S.
federal government. 13




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##### 



To estimate revenues for performance under U.S. federal government
fixed-price and cost-reimbursement contracts, including customer-funded
research and development, the Company uses the
percentage of completion method of accounting under which estimated
revenues are determined on the basis of completion to date (i.e., the total
contract amount multiplied by percent of performance to date less revenue value
recognized in previous periods). The Company records revenues under
cost-reimbursement contracts as costs are incurred and it includes estimated
earned fees in the proportion that costs incurred to date bear to total
estimated costs. The Company increases or decreases fees under certain U.S.
federal government contracts in accordance with cost or performance incentive
provisions which measure actual performance against established targets or
other criteria. The Company includes such incentive fee awards or penalties,
which historically are not material, in revenues at the time the amounts can be
determined reasonably. The Company recognizes anticipated probable losses at
the time they become known. The Companys future operating results may be
affected if actual contract costs incurred differ from our current estimates of
total contract costs. The Company expenses operating costs such as cost of revenues, general and
administrative, independent research and development expenses, and bid and
proposal costs in the period incurred. The major components of these costs are
compensation, materials, and overhead. Intangible assets are amortized over
their useful lives. The Companys results of operations, particularly its revenues, gross
profit and cash flow, may vary significantly from period to period depending on
a number of factors, including the progress of contract performance, revenues
earned on contracts, the timing of customer orders and billing of other direct
costs, timing of receipt of significant change orders, the commencement and
completion of contracts during any particular quarter, the timing of government
contract awards, the term of each contract that it has been awarded, foreign
budget reallocations, currency fluctuations, and general political and economic
conditions. Because a significant portion of the Companys expenses, such as
personnel and facilities costs, are fixed in the short term, successful
contract performance and variation in the volume of activity, as well as in the
number of contracts commenced or completed during any period may cause
significant variations in operating results. As a result of the factors above,
period-to-period comparisons of its revenues and operating results may not be
meaningful. Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 Revenues: Revenues increased $4,180,000, or 31.9%, to $17,280,000 for the three
months ended June 30, 2004 from $13,100,000 for the three months ended June 30,
2003. The increase was due primarily to new contract awards or modifications of
existing contracts in the Defense Systems Group of $1,002,000 and an increase
in the Surveillance Technology Group of $3,178,000. During the three months
ended June 30, 2004, the four largest non-classified revenue producing
contracts were the AN/SLQ-25A Surface Ship Torpedo Defense System, the Q4
Shells Production, MIL-ADF Antenna Assembly and the AN/SLQ-25A Engineering R&D,
which contributed 32.0% of revenues. The total amount of negotiated backlog, including both unfilled firm
orders for the Companys products for which funding had been authorized and
appropriated by the customer and firm orders for which funding had not been
appropriated as of June 30, 2004 and 2003, was $38,033,000 and $35,898,000,
respectively. 14




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##### 



Cost of Revenues: Cost of revenues increased $2,925,000, or 30.1%, to $12,629,000 for the
three months ended June 30, 2004 from $9,704,000 for the three months ended
June 30, 2003. This increase corresponds with the increase in revenue due to
the variable nature of these costs. Cost of revenues as a percentage of
revenues decreased to 73.1% for the three months ended June 30, 2004 from 74.1%
for the three months ended June 30, 2003 due to improved profit margins in the
Defense Systems Group. General and Administrative Expenses: General and administrative expenses increased $570,000, or 34.7%, to
$2,215,000 for the three months ended June 30, 2004 from $1,645,000 for the
three months ended June 30, 2003. The increase was due principally to higher
salaries, benefits and travel cost over the prior year, offset by the decrease
in internal research and development. For the three months ended June 30, 2004, internal research and
development was $577,000 compared to $712,000 for the three months ended June
30, 2003 and represented 26.0% and 43.3% of general and administrative expense,
respectively. Income Tax Expense: Income tax expense consists of federal and state income taxes. Income tax
expense increased $210,000, or 28.6%, to $943,000 for the three months ended
June 30, 2004, from $733,000 for the three months ended June 30, 2003. The
increase was primarily due to an increase of income before income taxes and was
partially offset by a reduction of the Companys state income tax expense
related to its operations in Pennsylvania as a result of operating within the
Keystone Opportunity Zone. Our effective tax rate was 38.4% and 41.0% for the
three months ended June 30, 2004 and 2003, respectively, and varies from the
federal statutory rate primarily due to state taxes and other nondeductible
expenses. Net Income: Net income increased $452,000, or 42.7%, to $1,510,000 for the three
months ended June 30, 2004 from $1,058,000 for the three months ended June 30,
2004. The increase was the result of increased revenues and higher margins
reflected by the decrease in the percentage of cost of revenues to revenue. Net
income as a percentage of revenue was 8.7% and 8.1% for the three month periods
ended June 30, 2004 and 2003, respectively. Nine Months Ended June 30, 2004 Compared to Nine Months Ended June 30, 2003 Revenues: Revenues increased $6,288,000, or 16.7%, to $43,964,000 for the nine
months ended June 30, 2004 from $37,676,000 for the nine months ended June 30,
2003. The increase was due primarily to new contract awards or modifications of
existing contracts in the Defense Systems Group of $4,570,000 and in the
Surveillance Technology Group of $1,718,000. During the nine months ended June
30, 2004, the four largest non-classified revenue producing contracts were the
AN/SLQ-25A Surface Ship Torpedo Defense System, Alliant Missile System, MIL-ADF
Antenna Assembly, and the AN/SLQ-25A Engineering R&D, which contributed 31.6%
of revenues. 15




---



##### 



Cost of Revenues: Cost of revenues increased $3,541,000, or 12.4%, to $31,984,000 for the
nine months ended June 30, 2004 from $28,443,000 for the nine months ended June
30, 2003. The increase corresponds with the increase in revenues due to
variable nature of these costs. Cost of revenues as a percentage of revenues
decreased to 72.8% for the nine months ended June 30, 2004 from 75.5% for the
nine months ended June 30, 2003 due to improved profit margins in the Defense
Systems Group. General and Administrative Expenses: General and administrative expenses increased $2,172,000, or 50.9%, to
$6,439,000 for the nine months ended June 30, 2004 from $4,267,000 for the nine
months ended June 30, 2003. The increase was due principally to higher
salaries, benefits, travel and internal research and development. For the nine months ended June 30, 2004, internal research and development
was $1,660,000 compared to $1,344,000 for the nine months ended June 30, 2003
and represented 25.8% and 31.5% of general and administrative expense,
respectively. Income Tax Expense: Income tax expense consists of federal and state income taxes. Income tax
expense increased $144,000, or 7.0%, to $2,193,000 for the nine months ended
June 30, 2004, from $2,049,000 for the nine months ended June 30, 2003. The
increase was primarily due to an increase of income before income taxes which
was partially offset by a reduction of the Companys state income tax expense
related to its operations in Pennsylvania as a result of operating within the
Keystone Opportunity Zone. Our effective tax rate was 39.1% and 41.0% for the
nine months ended June 30, 2004 and 2003, respectively, and varies from the
federal statutory rate primarily due to state taxes and other nondeductible
expenses. Net Income: Net income increased $465,000, or 15.8%, to $3,414,000 for the nine months
ended June 30, 2004 from $2,949,000 for the nine months ended June 30, 2003.
The increase was the result of an increase in revenues that was partially
offset by an increase in costs and expenses. Net income as a percentage of
revenue was 7.8% and 7.8% for the nine month periods ended June 30, 2004 and
2003, respectively. Liquidity and Capital Resources Historically, our primary source of liquidity is cash provided by
operations and our line of credit. Our liquidity requirements depend on a
number of factors, including the timing of production under our federal
government and foreign sales contracts. We had cash and cash equivalents of
$11,130,000 at June 30, 2004, as compared to $18,769,000 at June 30, 2003. The
decrease was primarily due to cash used in operating activities and investing
activities. Cash provided by operating activities was approximately $1,940,000 for the
nine months ended June 30, 2004 compared to approximately $5,107,000 for the
nine months ended June 30, 2003, a decrease of approximately $3,167,000. The
primary reason for this decrease was an increase in billed and unbilled
accounts receivable of $3,072,000. 16




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##### 



Cash used in investing activities was approximately $4,718,000 during the
nine months ended June 30, 2004 compared to approximately $837,000 for the nine
months ended June 30, 2003, an increase of approximately $3,881,000. The
primary reasons for this increase were property and equipment acquired for the
new facility in Smithfield, Pennsylvania and the acquisition of ISS during the
nine months ended June 30, 2004. Cash provided by financing activities was approximately $463,000 during
the nine months ended June 30, 2004 compared to approximately $13,799,000 for
the nine months ended June 30, 2003, a decrease of $13,336,000. The primary
reason for this decrease was the net proceeds of $16,467,000 received from the
sale of 2.3 million shares of common stock sold on November 21, 2002 and
December 12, 2002, which was partially offset by cash used for the repayment of
the line of credit in 2003 compared to only proceeds from stock options
exercises in 2004. The Company has a $15,000,000 line of credit with Bank of America. The
line of credit is for one year 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. 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 June 30, 2004, there were no
borrowings under the line of credit. The borrowing base at June 30, 2004 was
$6,625,000. A stand-by letter of credit is 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. Total
letters of credit at June 30, 2004 were $1,180,000. The bank agreement establishes the interest rate at the LIBOR plus 200 to
285 basis points, determined by the Companys ratio of funded debt to earnings
before interest, taxes, depreciation and amortization. All borrowings under
the line of credit are collateralized by the Companys accounts receivable,
equipment, contracts, and general intangibles. The agreement also contains
various covenants as to dividends 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. Market Risks In addition to the risks inherent in its operations, the Company is
exposed to certain 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 with a remaining maturity of
three months or less are considered to be cash equivalents. The Company
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: The Companys line of credit financing provides available borrowing at
variable interest rates. There were no outstanding borrowings at June 30,
2004. Accordingly, the Company does not believe that
any movement in interest rates would have a material impact on future
earnings or cash flows. However, if the Company were to significantly increase
borrowing under the current line of credit agreement, future interest rate
changes could potentially have a material impact. 17




---



##### 



Foreign Currency: The Company has contracts to provide services to U.S. approved foreign
countries. Its foreign sales contracts require payment in U.S. dollars, so it
is not affected by foreign currency fluctuations. Contractual Obligations and Commitments: (fiscal years ending September 30) Contractual Cash Obligations: Due in
    
    Due in
    
    Due in
    
    Due in
    
    Due inTotal
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterOperating leases
    
    $
    13,606,000
    
    
    $
    385,000
    
    
    $
    1,405,000
    
    
    $
    1,400,000
    
    
    $
    1,380,000
    
    
    $
    1,387,000
    
    
    $
    7,649,000Line of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,606,000
    
    
    $
    385,000
    
    
    $
    1,405,000
    
    
    $
    1,400,000
    
    
    $
    1,380,000
    
    
    $
    1,387,000
    
    
    $
    7,649,000
 Other Commercial Commitments: Total
    
    Less than 1 Year
    
    1-3 YearsLetters of credit
    
    $
    1,180,000
    
    
    $
    641,000
    
    
    $
    539,000
 Cost Associated with Exit Activity On July 15, 2003, the Company announced its intention to close its
facility in Farmingdale, New Jersey and move these operations to Smithfield,
Pennsylvania. In September 2003, the Company signed a lease for a 60,000
square foot facility for its Smithfield, Pennsylvania operations. The term of
the lease is for ten years with two five year options. As of March 31, 2004,
the Company completed its move to the new facility. The employees who did not
transfer to the new location and left the Company in accordance with the
Companys transition plan received severance pay and/or retention bonuses. The
costs associated with the severance and retention plan totaled approximately
$267,000. During the three months ended June 30, 2004, a credit of $20,000 was
included in cost of revenues. During the nine months ended June 30, 2004,
$109,000 was included in cost of revenues and $35,000 was included in general
and administrative costs. Severance and retention bonuses of $8,000 remain
accrued but unpaid as of June 30, 2004. Other exit costs associated with the transition are estimated to total
$875,000. These costs consist principally of training, employee relocation,
and moving costs. To date, $746,000 of these costs has been expensed. During
the three months ended June 30, 2004, $51,000 was included in cost of revenues.
During the nine months ended June 30, 2004, $584,000 was included in cost of
revenues while $23,000
was included in general and administrative costs. The remaining estimated
other exit costs include employee relocation costs and clean-up cost related to
the closed facility in New Jersey. These remaining costs will be expensed as
incurred. Acquisitions On
April 14, 2004, the Company acquired 100 percent of the
outstanding common shares of Imaging Sensors and Systems, Inc.
(ISS). The results of ISSs operations have been included
in the consolidated financial statements since that date.
ISS brings needed engineering capabilities and an existing product
line of mobile ground and airborne Forward Looking Infrared Radar (FLIR) systems.
ISS fits into the Companys marketing and product direction for the
airborne imaging component of the Surveillance Technology Group. The aggregate purchase
price was $3,225,000, which included $2,000,000 in cash, 67,077
shares of Sensytechs common stock and $25,000 of legal and accounting fees related to the
acquisition. The value of the shares issued was based on the closing
price of the Companys stock on April 8, 2004. 18




---



##### 



Critical Accounting Policies and Estimates The Companys consolidated financial statements are based on the
application of significant accounting policies, which require management to
make significant estimates and assumptions. The Company believes that the
following are the critical judgment areas in the application of its accounting
policies that affect its financial position and results of operations. Revenue Recognition: Most of the Companys sales are generated under U.S. Federal government
fixed-price and cost-type contracts, which require revenue recognition
judgments. Revenues are primarily recognized on the percentage of completion
basis. In doing so, the Company makes important judgments in estimating
revenue, cost and progress towards completion. The Company has an internal
process whereby it monitors contract performance and cost on a monthly basis.
Each quarter, management reviews, among other items, progress against schedule,
project staffing, risks and issues, subcontract management, incurred and
estimated costs, and disposition of prior action items. These judgments
underlie the Companys determinations regarding overall contract value,
contract profitability, and timing of revenue recognition. Revenue and cost
estimates are revised periodically based on changes in circumstances. To the
extent that a revised estimate affects contract profit or revenue previously
recognized, the Company records the effect of the revision in the period in
which the facts requiring the revision become known. If the estimated cost to
complete exceeds the value of the contract, a reserve for estimated loss is
recognized immediately. It is reasonably possible that future operating
results may be affected if actual contract costs incurred differ from total
contract costs currently estimated by management. Revenue under time and
material contracts is based on hours incurred times approved loaded labor rates
plus other costs incurred plus general and administrative expense allocated to
other costs incurred. The Company has no reason to believe that cost and
estimated earning in excess of billing on uncompleted contracts are not
realizable. Accounts Receivable: The Company is required to estimate the collectibility of its trade
receivables. Judgment is required in assessing the realization of receivables,
and the reserve requirements are based on the best facts available to the
Company. Since most of the Companys sales are generated under U.S. Federal
government contracts, its allowance for doubtful accounts is not significant. Inventories: The Company records its inventories at the lower of cost or market. In
assessing the ultimate realization of inventories, the Company is required to
make judgments as to the future demand requirements and compare these with the
current or committed inventory levels. Inventory is generally purchased to
fulfill a specific contract commitment. In 2003, the Company wrote down a
portion of its inventory that was purchased, built, and configured for a
specific project which was ultimately delayed and not awarded. During the
three months ended March 31, 2004, the Company was awarded a contract which
enabled it to utilize this written down inventory and to utilize other
components of its existing inventory. 19




---



##### 



Income Taxes: The Company currently has deferred tax assets resulting from net operating
loss carryforwards, which will reduce taxable income in future periods. At
June 30, 2004 and 2003, the Company did not provide a valuation allowance as it
believed it was more likely than not that the remaining net deferred tax assets
will be realized, principally based on forecasted taxable income. The
Companys new Pennsylvania production facility is within the Keystone
Opportunity Zone. As a result, income from that facility is exempt from state
and local taxes for a period of ten years. Recently Issued Accounting Standard The Emerging Issues Task Force (EITF) reached final consensuses on Issue
03-6, Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share at its March 17-18, 2004 meeting. Issue 03-6 addresses
a number of questions regarding the computation of earnings per share (EPS)
by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of
the company when, and if, it declares dividends on its common stock. The issue
also provides further guidance in applying the two-class method of calculating
EPS. It clarifies what constitutes a participating security and how to apply
the two-class method of computing EPS once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. The Company does not have participating securities as defined in
EITF 03-6. In December 2003, the FASB issued Interpretation (FIN) No. 46-R,
Consolidation of Variable Interest Entities. FIN No. 46-R, which modifies
certain provisions and effective dates of FIN No. 46, sets forth criteria to be
used in determining whether an investment in a variable interest entity should
be consolidated, and is based on the general premise that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. The Company does not have any variable
interest entities. Item 3. Quantitative and Qualitative Disclosure about Market Risk The information called for by this item is provided under Item 2 
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Item 4. Controls and Procedures  (a)
    
    Our management has evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered
by this Quarterly Report on Form 10-Q. Based on this evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that
our disclosure controls and procedures are effective to ensure that
information we are required to disclose in reports that we file or
submit 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 or in other factors that could
significantly affect these controls subsequent to the evaluation of
these controls. 20




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PART II  OTHER INFORMATION Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities On April 14, 2004, the Company acquired 100 percent of the outstanding common
shares of Imaging Sensors and Systems, Inc. for $3,200,000 plus $25,000 in
legal and accounting fees related to the acquisition. In the acquisition,
67,077 shares of the Companys $.01 par value common stock, which were
unregistered, were issued to the ISS shareholders. The Company believes an
exemption from registration under the Securities Act of 1933, as amended, (
the Securities Act) was available for this transaction under Section 4(2) of
the Securities Act based on the limited number of offerees and purchasers (two
in each case) and the financial sophistication of the purchasers. Item 6. Exhibits and Report on Form 8-K Exhibits 10.5
    
    Agreement and Plan of Merger
(incorporated by reference to Exhibit 2.1 of the
registrants Registration Statement on Form S-4 filed
on July 16, 2004, Registration Statement No. 333-117430).31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1*
    
    Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished but
not filed as an exhibit to this report of Form 10-Q.
   *
    
    Document filed herewith. Reports on Form 8-K
A Form 8-K was filed on April 16, 2004 providing information under Item 5.
A Form 8-K was filed on May 13, 2004 providing information under Item 12.
A Form 8-K was filed on June 6, 2004 providing information under Item 5. 21




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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. SENSYTECH, INC.August 12, 2004
    
    By:
    
    /s/ S. Kent RockwellS. Kent RockwellChairman and Chief Executive OfficerAugust 12, 2004
    
    By:
    
    /s/ Donald F. FultzDonald F. FultzVice President and Chief Financial Officer
 22