**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ANNUALREPORT**

 

**Pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

**For the Fiscal Year Ended September 30, 2004**

 

**1-8931**

**Commission File Number**

 

**CUBIC CORPORATION**

Exact Name of Registrant as Specified in itsCharter

 

| **Delaware**           | **95-1678055**                  |
|------------------------|---------------------------------|
| State of Incorporation | IRS Employer Identification No. |

 

**9333 Balboa Avenue**

**San Diego, California 92123**

**Telephone (858) 277-6780**

 

| Common Stock        |   | American Stock Exchange, Inc.        |
|---------------------|--------|--------------------------------------|
| Title of each class |   | Name of exchange on which registered |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes ý     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K.

 

Yes ý     No o

 

Indicate by check mark whether the registrant is an accelerated filer.

 

Yes ý     No o

 

The aggregate market value of 16,029,954 shares of voting stock held bynon-affiliates of the registrant is: $408,763,800 as of November 15, 2004,based on the closing stock price on that date.

 

Number of shares of common stock outstanding as of November 15, 2004including shares held by affiliates is: 26,719,845 (after deducting 8,944,884shares held as treasury stock).

 

Parts I and III incorporate information by reference from theRegistrant’s definitive proxy statement which will be filed no later than 120days after the close of the Registrant’s year-end, and no later than 30 daysprior to the Annual Shareholders’ Meeting.

 

 

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**PART I**

 

**Item 1.  BUSINESS.**

 

**GENERAL**

 

CUBIC CORPORATION (“Cubic” or “the Company”), was incorporated in theState of California in 1949 and began operations in 1951.  In 1984, the Company moved its corporatedomicile to the State of Delaware.

 

We design, develop, manufacture and install products which are mainlyelectronic in nature, such as:

 

Equipment for use in customized military range instrumentation,training and applications systems, simulators, communications and surveillancesystems, surveillance receivers, power amplifiers, and avionics systems.

 

Automated revenue collection systems, including contactless smartcards, passenger gates, central computer systems and ticket vending machinesfor mass transit networks, including rail systems, buses, and parking lots.

 

We also perform a variety of services, such as computer simulationtraining, distributed interactive simulation and development of militarytraining doctrine, as well as field operations and maintenance. We manufacturereplacement parts for the products we produce. In addition, we operate a corrugated paper converting facility throughour subsidiary, Consolidated Converting Company.

 

Our sales continued the growth pattern of recent years through bothstrategic acquisitions and by key contract wins in the defense andtransportation systems segments. We diversified our offering of defensetraining products through an acquisition made in September 2003 and continuedthe growth of our government services business. Although transportation systemssales leveled off in 2004 because of the completion of the initial phase of thefare collection system in London, the segment grew in other markets and decreased its reliance on a single customer. Weachieved the highest level of net income in our history in fiscal 2004 due tosignificant operating profit improvements in the defense segment and continuedstrong operating profits in the transportation systems segment.

 

During fiscal year 2004, approximately 50% of our total business wasconducted, either directly or indirectly, with various agencies of the UnitedStates government.  Most of the remainderof our revenue was from local, regional and foreign governments or agencies.

 

Cubic’s internet address is www.Cubic.com. The content on our websiteis available for information purposes only. It should not be relied upon forinvestment purposes, nor is it incorporated by reference into this Form 10-K.We make available free of charge on or through our Internet website under theheading “Investor Information,” our reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to those reports as soonas reasonably practicable after we electronically file such material with theSecurities and Exchange Commission.

 

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**BUSINESS SEGMENTS**

 

Information regarding the amounts of revenue, operating profit and lossand identifiable assets attributable to each of our business segments, is setforth in Note 11 to the Consolidated Financial Statements for the year endedSeptember 30, 2004. Additional information regarding the amounts of revenue andoperating profit and loss attributable to major classes of products andservices is set forth in Management’s Discussion and Analysis which follows atItem 7.

 

**DEFENSE**

 

Cubic’s defense business segment operates as the Cubic DefenseApplications (CDA) group consisting of three market-focused business units:Training Systems, Mission Support, and Communications & Electronics.  Our products include customized militaryrange instrumentation systems, tactical engagement simulation systems, firearmsimulation systems, communications and surveillance systems, surveillancereceivers, power amplifiers, and avionics systems.  Our services include training missionsupport, computer simulation training, distributed interactive simulation,development of military training doctrine, and field operations and maintenance.  We market our capabilities directly tovarious US government departments and agencies and foreign governments.  In addition, we frequently contract or teamwith other leading defense suppliers.

 

**Training Systems**

 

Our Training Systems Business Unit (TSBU) is a pioneer and marketleader in the design and production of instrumented training systems formilitary customers.  These systemsgenerally permit live training in air and land combat environments, with weaponsand other effects simulated by electronic and/or laser technology.  The systems also enable the collection (basedon Global Positioning System technology) and analysis of behavior and eventdata for determination of combat effectiveness and lessons learned.  As such, the systems generally have a highdegree of communications and software sophistication.

 

TSBU’s business is organized into Air Combat Training, Land CombatTraining, Tactical Engagement Simulation, and Simulation Systems.  In Air Combat Training, Cubic was the initialdeveloper and supplier of Air Combat Maneuvering Instrumentation (ACMI)capability during the Vietnam War and continues to lead that market with thecompetitive award in 2003 of a 10-year, $525 million indefinite delivery,indefinite quantity (IDIQ) contract to provide upgraded air combat trainingcapability to the US Air Force, Navy and Marine Corps.  The latest ACMI systems permit forces totrain on either a fixed geographic range or in a “rangeless” environment.  Many other nations employ Cubic’s ACMIsystems.

 

TSBU’s Land Combat Training involves systems analogous to air rangesfor ground force training.  TSBU providedturnkey systems to instrument two of the three US Army training centers in pastyears at Fort Polk, LA (Joint Readiness Training Center – JRTC) and Hohenfels,Germany (Combat Maneuver Training Center – CMTC).  The group also built ranges in recent years,in the UK and Canada, for the British Army. The TSBU is currently working on similar land combat training centersfor Canada, Australia and in the Middle East. To meet new customer demand formobile instrumented training, TSBU has also developed a transportable,deployable system, known as IHITS, now being fielded by the US Army.

 

Laser-based Tactical Engagement Simulation systems, generally known asMILES (Multiple Integrated Laser Engagement Simulators), are used at combattraining centers (CTC) and in other training environments to permit weapons tobe used realistically, registering hits or kills, without live ammunition.  TSBU supplies MILES equipment as part of CTCcontracts and as an independent product line. Cubic MILES systems are being heavily utilized by US Army and MarineCorps forces, as well as Air Force security forces, other US agencies and manyinternational customers.  We produceMILES equipment in the US and at our New Zealand-based subsidiary, OscmarInternational.

 

TSBU’s newest division, Simulation Systems, is the result of acquiringECC International Corporation at the end of fiscal 2003.  Simulation Systems Division (SSD) producesvirtual training systems, employing actual or realistic weapons and systemstogether with visual imagery to simulate actual battlefield or otherenvironments.

 

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**Mission Support**

 

CDA’s Mission Support Business Unit (MSBU), along with the separateAnalysis & Learning Technology Division (ALTD), is a leading provider oftactical knowledge-based services to the US Government and allied nations, withan emphasis on military training.  Ourmission support business consists of nearly 3,100 people located in variousplaces throughout the world.  Ourpersonnel serve with their clients in their actual environment and prepareforces through comprehensive training, education and exercises to meet the fullscope of their missions, from large scale combat operations, to specialoperations, peacekeeping or humanitarian assistance operations worldwide.  We plan, prepare, execute and documentrealistic and focused mission rehearsal exercises (live and computer-based) asfinal preparation of forces prior to their deployment to mission areas.  In addition, we provide high levelconsultation and advisory services to the governments and militaries of alliednations.  US government service contractsare typically awarded on a competitive basis with options for multipleyears.  In this competitive market,MSBU/ALTD are viewed as premier service providers and formidablecompetitors.  We typically compete as primecontractors to the government, but also team with other companies depending onthe skills required.  Much of our earlywork centered on battle command simulation and training, in which militarycommanders are taught to make correct decisions in battle situations.  More recently, the business base hasbroadened to include live training support, distance learning, weapons effectsmodeling, intelligence analysis and military force modernization.

 

Our programs include providing mission support services to two of theArmy’s major CTCs, JRTC, as prime contractor, and the National Training Center(NTC), as a subcontractor.  Theseservices include planning, executing and documenting large scale exercisesaimed at stressing US forces in situations as close to actual combat aspossible.

 

At US Joint Forces Command, Cubic supports and helps manage all aspectsof the operations of the Joint Warfighting Center (JWFC).  On the Marine Air Ground Task Force TrainingSystems Support (MTSS) contract, Cubic provides comprehensive training andexercise support to US Marine forces worldwide, including real-world missionrehearsals.  We have planned and executedvirtually all USMC simulation-based exercises worldwide since 1998, directlypreparing Marines for combat operations.

 

Cubic initiated and has continued to operate the Korea BattleSimulation Centers (KBSC) since their inception in 1991.  KBSC prepares US forces in Korea to deal withsituations which may develop in their area of responsibility and includes theworld’s largest and most complex training exercise, the annual ULCHI FOCUSLENS.

 

At the US Army I Corps Battle Simulation Center, Cubic provides alltechnical and operational expertise necessary to support worldwide training,exercises, evaluations and mission rehearsals for I Corps active and reservecomponent units, the new Stryker brigades, other services and jointorganizations.

 

Cubic supports the Defense Threat Reduction Agency (DTRA) withtechnology-based engineering and other services necessary to accomplish DTRA’smission of predicting and defeating the effects of chemical, biological,radiological, nuclear and high explosive weapons.  Cubic supports DTRA with modeling andsimulations to assess and predict the effects of such weapons in combat andother environments, as well as the training of US forces, first responders, andother users of DTRA products.

 

ALTD has multiple contracts with government agencies for developmentand deployment of distance learning tools and programs to improve the qualityand reach of training and education initiatives for large organizations.  ALTD’s principal business is in providingspecialized teams of military experts to advise the governments and militariesof the nations of the former Warsaw Pact and Soviet Union in the transformationof their militaries to a NATO environment. These very broad force modernization contracts entail both sweepingvision and minute detail, involving both the nations’ strategic foundation andthe detailed planning of all aspects of reform.

 

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In addition to providing contractor logistics support for CDA’s productdivisions, MSBU’s Worldwide Technical Services Division operates and maintainsa wide variety of flight simulation and other facilities worldwide for USforces under multiple long-term contracts.

 

**Communications & Electronics**

 

Our Communications and Electronics Business Unit (CEBU) is a supplierof secure data links, intelligence receivers, high power RF amplifiers andsearch and rescue avionics systems to the US military, other agencies andallied nations.  CEBU’s products supportthe strong military trend toward network-centric warfare and modernizationinitiatives.  The unit has long suppliedthe air/ground secure data link for the US Army/Air Force Joint STARS systemand supplies the principal datalink for the United Kingdom’s ASTORprogram.  Capitalizing on a multiyearinternal R&D program, CEBU won a competitive contract in fiscal 2003 todevelop and produce the next-generation Common Data Link Subsystem (CDLS) forthe US Navy.  CDLS is planned forinstallation on major surface ships of the US fleet.  Smaller, tactical versions of our Common DataLink are strong candidates for new military platforms, such as Unmanned AerialVehicles (UAV), which require high performance in a small package.  In 2004 the business unit was selected toparticipate in the United Kingdom’s new Watchkeeper UAV program.

 

CEBU’s Personnel Locator System (PLS) is standard equipment on USaircraft with a search-rescue mission.  We received initialorders for an upgraded PLS which has been redesigned to interface with allmodern search and rescue system standards, thus positioning us for majorplatform upgrades expected over the next few years.

 

CEBUhas also begun to successfully leverage its communications products portfolioto move into larger subsystem and system level programs in the areas ofcommunications intercept and jamming (Electronic Warfare) and communicationsintelligence.  We have been awardedcontracts by the US Navy and intelligence services for the initial developmentof these systems which could evolve to production contracts and potentiallylead to new opportunities within these services.

 

**Raw Materials**:

 

The principal raw materials used by the defense segment are sheetaluminum and steel, copper electrical wire, and composite products.  A significant portion of the segment’s endproduct is composed of purchased electronic components and subcontracted partsand supplies. These items are primarily procured from commercial sources.  In general, supplies of raw materials andpurchased parts are adequate to meet the requirements of the segment.

 

**Backlog**:

 

Funded sales backlog of the defense segment at September 30, 2004 was$452 million compared to $388 million at September 30, 2003.  Total backlog, including unfunded orunexercised customer orders, was $756 million at September 30, 2004 compared to$743 million at September 30, 2003. Approximately $465 million of the September30, 2004 total backlog is not expected to be completed by September 30, 2005.

 

**Competition**:

 

CDA’s broad defense business portfolio means we compete with numerouscompanies, large and small, domestic and international.  In many cases, we have also teamed with thesesame companies on specific bid opportunities. Well known CDA competitors include Lockheed Martin, Northrop Grumman,General Dynamics, Boeing, L3 Communications and SAIC.  While CDA is generally smaller than itscompetition, we believe our competitive advantages include past performance,incumbent relationships and the ability to rapidly focus technology andinnovation to solve customer problems.

 

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Competition also exists among projects for funding in the defensebudget.  While the US defense budget has seenabove average increases in recent years, long-term growth will only occur inthose segments which offer very high payoff and are consistent with warfightingpriorities.  The US defense market todaycan be characterized as highly dynamic, with priorities and funding shifting inreaction to, or anticipation of, world events much more rapidly than during theCold War or since.  Overarching militarypriorities include lighter, faster, more lethal forces with the ability andtraining to rapidly adapt to new situations based on superior knowledge of thebattle environment.  Superior knowledgeis enabled by systems which rapidly collect, process and disseminate the rightinformation to the right place at the right time, resulting in what DoD callsnetwork-centric warfare.  Cubic’straining systems, training support and intelligence, surveillance andreconnaissance capabilities are well matched to these sustainable defensepriorities.

 

**TRANSPORTATION SYSTEMS**

 

Cubic Transportation Systems is theleading turnkey solution provider of automated fare collection systems forpublic transport authorities worldwide. We provide a range of services and systems solutions for the bus, busrapid transit, light rail, commuter rail, heavy rail, ferry and parkingmarkets.  These solutions and servicesinclude system design, central computer systems, equipment design andmanufacturing, device-level software, integration, test, installation,warranty, maintenance, computer hosting services, call center services, cardmanagement and distribution services, financial clearing and settlement,multi-application support and outsourcing services.  In addition, Cubic designs, develops andmanufactures its own technology components, such as smart card readers,magnetic ticket transports, and controller boards, for use within its suite offare collection equipment consisting of on-bus solutions, access controlsolutions, vending solutions, retail and card issuing solutions, and mobileinspection and sales solutions.

 

Overthe years, the transportation segment has been awarded over 400 projects in 40major markets on 5 continents.  Activeprojects include London, New York / New Jersey region, Washington, D.C. /Baltimore / Virginia region, Los Angeles region, San Diego region, SanFrancisco, Minneapolis/St. Paul, Chicago, Houston, Atlanta, South Florida,Vancouver and Edmonton, Canada, Brisbane, Australia, and Scandinavia.

 

Theseprograms provide a solid base of current business and the potential foradditional future business as the systems are expanded.  In 1998, Transaction Systems Limited (TranSys),a joint venture company in which Cubic has a 37.5% ownership, was awarded acontract called “PRESTIGE” to privatize the London Transport fare collectionsystem.  This 17-year contract, now inits seventh year, is the largest automated fare collection contract everawarded.  Our share of the work,including all options exercised to date, exceeds $800 million over the 17-yearlife of the contract.

 

**IndustryOverview**

 

Transportagencies, particularly those based in the US, rely heavily on federal, stateand local government for subsidies in capital investments, including newprocurements and/or upgrades of automated fare collection systems.  The average lifecycle for fare collectionsystems is 12 to 15 years.  Procurementstend to follow a long and strict competitive bid process where the lowest pricebid typically wins.

 

Theautomated fare collection business is a niche market able to sustain only arelatively few number of suppliers. Because of the long life expectancy of these systems and only a fewcompanies able to supply them, there is fierce competition to win these jobs,often resulting in low initial contract profitability.

 

Advancesin communications, networking and security technologies are enablinginteroperability of multiple modes of transportation within a single networkedsystem as well as interoperability of multiple operators within a singlenetworked system.  As such, there is agrowing trend for regional ticketing systems, usually built around a largetransit agency and including neighboring operators, all sharing a commonregional smart card.  There is anemerging trend for other applications to be added to these regional systems toexpand the utility of the smart card, offering higher value and incentives tothe end users and lowering costs and creating new revenue streams for theregional system operators.  As a result,

 

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theseregional systems have created opportunities for new levels of systems supportand services including call center support, smart card production anddistribution, financial clearing and settlement and multi-applicationsupport.  In some cases, operators arechoosing to outsource the capital development, ongoing operations andcommercialization of these regional ticketing systems. This growing new marketprovides the opportunity to establish lasting relationships and grow revenuesand profits over the long-term.

 

**Raw Materials**:

 

Raw materials used in this segment include sheet steel, compositeproducts, copper electrical wire and castings. A significant portion of thesegment’s end product is composed of purchased electronic components andsubcontracted parts and supplies. All of these items are procured fromcommercial sources.  In general, suppliesof raw materials and purchased parts are adequate to meet the requirements ofthe segment.

 

**Backlog**:

 

Funded sales backlog of the transportation systems segment at September30, 2004 was $734 million compared to $620 million at September 30, 2003.  Total backlog, including unfunded orunexercised customer orders, was $734 million at September 30, 2004 compared to$762 million at September 30, 2003. Approximately $496 million of the September30, 2004 total backlog is not expected to be completed by September 30, 2005.

 

**Competition**:

 

Weare one of several companies involved in providing automated fare collectionsystems solutions and services for public transport operators worldwideincluding such foreign competitors as Thales, Ascom, Scheidt & Bachmann andERG.  In addition, there are many smallerlocal companies, particularly in European and Asian markets.  For large national tenders, it is commonpractice to form consortiums that include, in addition to the fare collectioncompanies noted above, telecommunications, consulting and computer servicescompanies including T-Systems, Siemens, Accenture, Metropolitan Transit RailwayCorporation, Control Data Corporation, Computer Sciences Corporation andEDS.  These procurement activities arevery competitive and require that we have highly skilled and experiencedtechnical personnel to compete. We believe that our competitive advantagesinclude intermodal and interagency regional integration expertise, technicalskills, past contract performance, systems quality and reliability, experiencein the industry and long-term customer relationships.

 

**OTHER OPERATIONS**

 

Consolidated Converting Company converts corrugated paper stock intopizza boxes and other food related corrugated products.

 

**Raw Materials**:

 

Raw materials used by Consolidated Converting Company consist of paperproducts which are procured from commercial sources.  In general, supplies of raw materials arepresently adequate to meet the requirements of this business.  Paper shortages could delay completion, orresult in the cancellation, of customer orders.

 

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**Backlog**:

 

Consolidated Converting Company had little sales backlog at September30, 2004 and 2003. The business does not track sales backlog due to theshort-term conversion of customer orders into sales and the absence oflong-term contracts.

 

**Competition**:

 

This business competes with concerns of varying size, including somevery large companies. It is not possible to predict the extent of thecompetition which present or future activities will encounter, particularlysince the market for this subsidiary’s products is subject to rapidly changingcompetitive conditions.

 

**BUSINESS STRATEGY**

 

Ourobjective is to consistently grow sales, improve profitability and deliver attractivereturns on capital.  We intend to buildon our position with US and foreign governments as the leading full spectrumsupplier of training systems and mission support services, grow our nicheposition as a supplier of network-centric technologies for communicationssystems and products, and maintain our position as the number one provider ofintegrated intermodal regional transit fare collection systems to transitauthorities worldwide. Our strategies to achieve these objectives include:

 

**LeverageLong-Term Relationships**

 

Weseek to maintain long-term relationships with our customers through repeatbusiness by continuing to achieve high levels of performance on our existingcontracts.  By achieving this goal we canleverage our returns through repeat business with existing customers and expandour presence in the market through sales of similar systems at “good value” toadditional customers.

 

Anexample of this in our defense segment is the recent competitive award of acontract to provide the next generation US air combat training systems for thenext 10 years.  Since pioneering thistechnology in the 1970’s we have played a significant role in developing thiskey training technology for US and foreign militaries.  Our earlier air combat training work gave usthe credibility and much of the technology to diversify into providing similarcapability for ground forces and to accelerate the expansion of our trainingservice offerings.

 

Inour transportation segment we have had a relationship with the WashingtonMetropolitan Area Transportation Authority (WMATA) for 30 years, since we firstimplemented their magnetic ticketing system, and have over the years installeda complete back office system and over 4,000 pieces of equipment.  In 1999, we upgraded their system withSmarTripÒ, the first contactless smart cardimplementation in the US and have since added other applications such asparking, security access and prepaid transit benefits to the system.  We are currently rolling out the SmarTripÒ system to 1,600 WMATA buses, to over 2,000buses throughout the Baltimore and Northern Virginia region and to the regionalrail system.  We are also supplying apoint-of-sale distribution network and upgrading the central computer system tooffer region-wide services and to interface to a third party operated customerservice center. Similarly we are regionalizing integrated fare collectionsystems in London, New York and Southern California.

 

**Maintaina Diversified Business Mix**

 

Wehave a diverse mix of business in our defense and transportation systemssegments. Approximately 50% of our sales are directly or indirectly to the USgovernment, however, this represents a wide variety of product and servicesales to many different US government agencies. While as much as 15% of oursales in recent years came from the PRESTIGE contract in London, its share oftotal sales decreased to less than 7% in 2004. While the London area is stillone of our strongest markets for transportation systems we believe thedecreased reliance on a single customer is a positive trend for thetransportation systems segment.

 

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We also seek a reasonable balance between systems and service work inboth the defense and transportation segments. In aggregate, approximately 41%of our sales revenue in 2004 was from service type work. We believe that astrong base of service work helps to smooth the revenue fluctuations inherentin systems type work.

 

**PursueStrategic Acquisitions**

 

Throughselective strategic acquisitions we seek to expand our customer base, broadenour technical solutions, gain staffing resources and leverage our entry intorelated new markets. In September 2003 we acquired ECC International, whichexpanded our presence in the training market by adding virtual training, whichcomplements our existing focus on live and constructive training. In August2004 we made a small but strategic acquisition of a company named Traf-Park for$2.4 million, which expands our product offerings in transportation, to includeparking systems for large regional transit authorities.

 

**OTHER MATTERS**

 

We pursue a policy of seeking patent protection for our products, wheredeemed advisable, but do not regard ourselves as materially dependent on ourpatents for the maintenance of our competitive position.

 

We do not engage in any significant business that is seasonal innature. Because our revenues are generated primarily from work on contractsperformed by our employees and subcontractors, first quarter revenues tend tobe lower than the other three quarters due to our policy of providing many ofour employees seven holidays in the first quarter, compared to one or two ineach of the other quarters of the year. This is not necessarily a consistentpattern as it depends upon actual activities in any given year.

 

The cost of Company sponsored research and development (R&D)activities was $5.5 million, $4.8 million, $8.4 million in 2004, 2003, 2002,respectively. We do not rely heavily on independent R&D, as most of our newproduct development occurs in conjunction with the performance of work on ourcontracts. The amount of contract required product development activityincreased in 2004 to $51 million, compared to $46 million and $41 million in2003 and 2002, respectively; however, these costs are included in cost of salesas they are directly related to contract performance.

 

We comply with federal, state and local laws and regulations regardingdischarge of materials into the environment and the handling and disposal ofmaterials classed as hazardous and/or toxic. Such compliance has no materialeffect upon the capital expenditures, earnings or competitive position of theCompany.

 

We employed approximately 5,700 persons at September 30, 2004.

 

Our domestic products and services are sold almost entirely by ouremployees.  Overseas sales are madeeither directly or through representatives or agents.

 

Typically our long-term contracts provide for progress or advancepayments by our customers, which provide assistance in financing the workingcapital requirements on those contracts.

 

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**RISK FACTORS**

 

Thefollowing are some of the factors we believe could cause our actual results todiffer materially from expected and historical results.  Additional risks anduncertainties not presently known to us, or that we currently see asimmaterial, may also harm our business. If any of the risks or uncertainties described below or any suchadditional risks and uncertainties actually occur, our business, results ofoperations or financial condition could be materially and adversely affected.

 

***We depend ongovernment contracts for substantially all of our sales and the loss ofgovernment contracts or a delay or decline in funding of existing or futuregovernment contracts could adversely affect our sales and cash flows and ourability to fund our growth.***

 

Oursales from contracts, directly or indirectly, with foreign and United States,state, regional and local governmental agencies represented more than 95% ofour total sales in fiscal year 2004. Although government agencies are subject to common budgetary pressuresand other factors, many of our government customers exercise independentpurchasing decisions.  Because of theconcentration of business with governmental agencies, we are vulnerable toadverse changes in our sales, income and cash flows if a significant number ofour government contracts or subcontracts or prospects are delayed or canceledfor budgetary or other reasons.

 

Thefactors that could cause us to lose these contracts or could otherwisematerially harm our business, prospects, financial condition or results ofoperations include:

 

•                  re-allocationof government resources as the result of actual or threatened terrorism or hostileactivities;

 

•                  budgetconstraints affecting government spending generally, or specific departments oragencies such as US or foreign defense and transit agencies and regionaltransit agencies, and changes in fiscal policies or a reduction of availablefunding;

 

•                  changes ingovernment programs or requirements or their timing;

 

•                  curtailmentof government’s use of technology products and service providers;

 

•                  the adoptionof new laws or regulations pertaining to government procurement;

 

•                  governmentappropriations delays or shutdowns;

 

•                  suspensionor prohibition from contracting with any significant agency;

 

•                  impairmentof our ability to provide third-party guarantees and letters of credit;

 

•                  impairmentof our reputation or relationships with any significant government agency; and

 

•                  delays inthe payment of our invoices by government payment offices.

 

***Governmentspending priorities may change in a manner adverse to our businesses.***

*** ***

Inthe past, our businesses have been adversely affected by significant changes ingovernment spending during periods of declining budgets.  A significant decline in overall spending, orthe decision not to exercise options to renew contracts, or the loss of orsubstantial decline in spending on a large program in which we participatecould materially adversely affect our business, prospects, financial conditionor results of operations.  As an example,the US defense and intelligence budgets generally, and spending in specificagencies with which we work, such as the Department of Defense, have declinedfrom time to time for extended periods since the mid-1980s, resulting inprogram delays, program cancellations and a slowing of new program starts.  Although spending on defense-related programsby the US government has recently increased, future levels of expenditures andauthorizations for those programs may decrease, remain constant or shift toprograms in areas where we do not currently provide products or services.

 

Eventhough our contract periods of performance for a program may exceed one year,Congress must usually approve funds for a given program each fiscal year andmay significantly reduce funding of a

 

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programin a particular year.  Significantreductions in these appropriations or the amount of new defense contractsawarded may affect our ability to complete contracts, obtain new work and growour business.  Congress does not alwaysenact spending bills by the beginning of the new fiscal year.  Such delays leave the affected agenciesunder-funded which delays their ability to contract.  Future delays and uncertainties in fundingcould impose additional business risks on us.

 

***Our contracts withgovernment agencies may be terminated or modified prior to completion, whichcould adversely affect our business.***

*** ***

Governmentcontracts typically contain provisions and are subject to laws and regulationsthat give the government agencies rights and remedies not typically found incommercial contracts, including providing the government agency with theability to unilaterally:

 

•                  terminateour existing contracts;

 

•                  reduce thevalue of our existing contracts;

 

•                  modify someof the terms and conditions in our existing contracts;

 

•                  suspend orpermanently prohibit us from doing business with the government or with anyspecific government agency;

 

•                  control andpotentially prohibit the export of our products;

 

•                  cancel ordelay existing multiyear contracts and related orders if the necessary fundsfor contract performance for any subsequent year are not appropriated;

 

•                  decline toexercise an option to extend an existing multiyear contract; and

 

•                  claim rightsin technologies and systems invented, developed or produced by us.

 

MostUS government agencies can terminate their contracts with us for convenience,and in that event we generally may recover only our incurred or committedcosts, settlement expenses and profit on the work completed prior totermination.  If an agency terminates acontract with us for default, we are denied any recovery, and may be liable forexcess costs incurred by the agency in procuring undelivered items from analternative source.  We may receiveshow-cause or cure notices under contracts that, if not addressed to the agency’ssatisfaction, could give the agency the right to terminate those contracts fordefault or to cease procuring our services under those contracts.

 

Inthe event that any of our contracts were to be terminated or adverselymodified, there may be significant adverse effects on our revenues, operatingcosts and income that would not be recoverable.

 

***Failure to retainexisting contracts or win new contracts under competitive bidding processes mayadversely affect our revenue.***

*** ***

Weobtain most of our contracts through a competitive bidding process, andsubstantially all of the business that we expect to seek in the foreseeablefuture likely will be subject to a competitive bidding process.  Competitive bidding presents a number ofrisks, including:

 

•                  the need tocompete against companies or teams of companies with more financial andmarketing resources and more experience in bidding on and performing majorcontracts than we have;

 

•                  the need tocompete against companies or teams of companies that may be long-termincumbents for a particular contract for which we are competing and that have,as a result, greater domain expertise and better customer relations;

 

•                  the need tocompete to retain existing contracts that have in the past been awarded to uson a sole-source basis;

 

•                  the expenseand delay that may arise if our competitors protest or challenge new contractawards;

 

•                  the need tobid on programs in advance of the completion of their design, which may resultin unforeseen technological difficulties, cost overruns or both;

 

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•                  thesubstantial cost and managerial time and effort, including design, developmentand marketing activities, necessary to prepare bids and proposals for contractsthat may not be awarded to us;

 

•                  the need todevelop, introduce, and implement new and enhanced solutions to our customers’needs;

 

•                  the need tolocate and contract with teaming partners and subcontractors; and

 

•                  the need toaccurately estimate the resources and cost structure that will be required toperform any fixed-price contract that we are awarded.

 

Wemay not be afforded the opportunity to bid on contracts that are held by othercompanies and are scheduled to expire if the agency decides to extend theexisting contract.  If we are unable towin contracts that are awarded through the competitive bidding process, we maynot be able to operate in the market for services that are provided under thosecontracts for a number of years.  If wewin a contract, and upon expiration, if the customer requires further servicesof the type provided by the contract, there is frequently a competitiverebidding process and there can be no assurance that we will win any particularbid, or that we will be able to replace business lost upon expiration orcompletion of a contract.

 

Becauseof the complexity and scheduling of contracting with government agencies, weoccasionally incur costs before receiving contractual funding by the governmentagency.  In some circumstances, we maynot be able to recover these costs.

 

Ifwe are unable to consistently retain existing contracts or win new contractawards, our business, prospects, financial condition and results of operationswill be adversely affected.

 

***Government audits of our contracts could result ina material charge to our earnings and have a negative effect on our cashposition following an audit adjustment.***

 

Manyof our government contracts are subject to cost audits which may occur severalyears after the period to which the audit relates.  If an audit identifies significantunallowable costs, we could incur a material charge to our earnings orreduction in our cash position.

 

***Our international business exposes us to additional risks, includingexchange rate fluctuations, foreign tax and legal regulations and political or economicinstability that could harm our operating results.***

 

Ourinternational operations, including our contract for the London Transport farecollection system, subject us to risks associated with operating in and sellingproducts or services in foreign countries, including:

 

•                  devaluationsand fluctuations in currency exchange rates;

 

•                  changes inforeign laws that adversely affect our ability to sell our products or servicesor our ability to repatriate profits to the United States;

 

•                  increases orimpositions of withholding and other taxes on remittances and other payments byforeign subsidiaries or joint ventures to us;

 

•                  increases ininvestment and other restrictions or requirements by foreign governments inorder to operate in the territory or own the subsidiary;

 

•                  costs ofcompliance with local laws, including labor laws;

 

•                  exportcontrol regulations and policies which govern our ability to supply foreigncustomers;

 

•                  unfamiliarbusiness practices and customs;

 

•                  domestic andforeign government policies, including requirements to expend a portion ofprogram funds locally and governmental industrial cooperation requirements;

 

•                  thecomplexity and necessity of using foreign representatives and consultants;

 

•                  theuncertainty of the ability of foreign customers to finance purchases;

 

•                  impositionof tariffs or embargoes, export controls and other trade restrictions;

 

12

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•                  thedifficulty of management and operation of an enterprise in various countries; and

 

•                  economic andgeopolitical developments and conditions, including international hostilities,acts of terrorism and governmental reactions, inflation, trade relationshipsand military and political alliances.

 

Ourforeign subsidiaries and joint ventures generally conduct business in foreigncurrencies and enter into contracts and make purchase commitments that aredenominated in foreign currencies.   Weare exposed to fluctuations in exchange rates, which could have a significantimpact on our results of operations.  Wehave no control over the factors that generally affect this risk, such aseconomic, financial and political events and the supply of and demand forapplicable currencies.  While we useforeign exchange forward and option contracts to hedge significant contractsales and purchase commitments that are denominated in foreign currencies, ourhedging strategy may not prevent us from incurring losses due to exchangefluctuations.

 

***Our operating margins may decline under our fixed-pricecontracts if we fail to estimate accurately the time and resources necessary tosatisfy our obligations.***

 

Approximately85% of our contracts in 2004 were fixed-price contracts under which we bear therisk of cost overruns.  Our profits areadversely affected if our costs under these contracts exceed the assumptions weused in bidding for the contract.  Often,we are required to fix the price for a contract before the projectspecifications are finalized, which increases the risk that we will incorrectlyprice these contracts.

 

***We may be liablefor civil or criminal penalties under a variety of complex laws andregulations, and changes in governmental regulations could adversely affect ourbusiness and financial position.***

*** ***

Ourbusinesses must comply with and are affected by various government regulationsthat impact our operating costs, profit margins and our internal organizationand operation of our businesses. These regulations affect how we do businessand, in some instances, impose added costs. Any changes in applicable laws could adversely affect our financialperformance.  Any material failure tocomply with applicable laws could result in contract termination, price or feereductions or suspension or debarment from contracting.  The more significant regulations include:

 

•                  the FederalAcquisition Regulations and all department and agency supplements, whichcomprehensively regulate the formation, administration and performance of USgovernment contracts;

 

•                  the Truth inNegotiations Act, and implementing regulations, which require certification anddisclosure of all cost and pricing data in connection with contractnegotiations;

 

•                  laws,regulations and executive orders restricting the use and dissemination ofinformation classified for national security purposes and the exportation ofcertain products and technical data;

 

•                  regulationsof most state and regional agencies and foreign governments similar to thosedescribed above;

 

•                  the SarbanesOxley Act of 2002; and

 

•                  tax laws andregulations in the US and in other countries in which we operate.

 

***Our failure toidentify, attract and retain qualified technical and management personnel couldadversely affect our existing businesses.***

*** ***

Wemay not be able to attract and retain the highly qualified technical personnel,including engineers, computer programmers, and personnel with securityclearances required for classified work, or management personnel to supervisesuch activities that are necessary for maintaining and growing our existingbusinesses.

 

13

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***We may incursignificant costs in protecting our intellectual property which could adverselyaffect our profit margins. Our inability to protect our patents and proprietaryrights could adversely affect our businesses’ prospects and competitivepositions.***

*** ***

Weseek to protect proprietary technology and inventions through patents and otherproprietary-right protection.  The lawsof some foreign countries do not protect proprietary rights to the same extentas the laws of the United States.  If weare unable to obtain or maintain these protections, we may not be able toprevent third parties from using our proprietary rights. In addition, we mayincur significant expense both in protecting our intellectual property and indefending or assessing claims with respect to intellectual property owned byothers.

 

Wealso rely on trade secrets, proprietary know-how and continuing technologicalinnovation to remain competitive.  Wehave taken measures to protect our trade secrets and know-how, including theuse of confidentiality agreements with our employees, consultants andadvisors.  These agreements may bebreached and remedies for a breach may not be sufficient to compensate us fordamages incurred.  We generally controland limit access to our product documentation and other proprietaryinformation.  Other parties mayindependently develop our know-how or obtain access to our technology.

 

***We compete primarily for government contractsagainst many companies that are larger, better financed and better known thanus.  If we are unable to competeeffectively, our business and prospects will be adversely affected.***

** **

Ourbusinesses operate in highly competitive markets.  Many of our competitors are larger, betterfinanced and better known companies who may compete more effectively than wecan.  In order to remain competitive, wemust keep our capabilities technically advanced and compete on price and onvalue added to our customers.  Ourability to compete may be adversely affected by limits on our capital resourcesand our ability to invest in maintaining and expanding our market share.

 

***The terms of ourfinancing arrangements may restrict our financial and operational flexibility,including our ability to invest in new business opportunities.***

*** ***

Wecurrently have unsecured borrowing arrangements.  The terms of these borrowing arrangementsinclude provisions that require and/or limit our levels of working capital,debt and tangible net worth and coverage of fixed charges.  We also have provided performance guaranteesto various customers that include financial covenants including limits onworking capital, debt, tangible net worth and cash flow coverage.

 

Wemay incur future obligations that would subject us to additional covenants thataffect our financial and operational flexibility or subject us to differentevents of default.

 

***Our revenues couldbe less than expected if we are not able to deliver services or products asscheduled due to disruptions in supply.***

*** ***

Becauseour internal manufacturing capacity is limited, we use contract manufacturers.While we use care in selecting our manufacturers, we have less control over thereliability of supply, quality and price of products or components than if wemanufactured them.  In some cases, weobtain products from a sole supplier or a limited group of suppliers.  Consequently, we risk disruptions in oursupply of key products and components if our suppliers fail or are unable toperform because of strikes, natural disasters, financial condition or otherfactors.  Any material supply disruptionscould adversely affect our ability to perform our obligations under ourcontracts and could result in cancellation of contracts or purchase orders,penalties, delays in realizing revenues, payment delays, as well as adverselyaffect our ongoing product cost structure.

 

***Failure to perform by one of our subcontractors could materially andadversely affect our prime contract performance and our ability to obtainfuture business.***

 

Ourperformance of contracts may involve subcontracts, upon which we rely todeliver the products to our customers. We may have disputes with subcontractors.  A failure by a subcontractor tosatisfactorily deliver products or services may adversely affect our ability toperform our obligations as a prime contractor. Any subcontractor performance deficiencies could result in the customerterminating our contract for default, which could expose us to liability forexcess costs of reprocurement by the customer and have a material adverse effecton our ability to compete for other contracts.

 

14

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***We may acquire other companies, which could increase our costs orliabilities or be disruptive.***

 

Partof our strategy involves the acquisition of other companies.  We may not be able to integrate acquiredentities successfully without substantial expense, delay or operational orfinancial problems.  The acquisition andintegration of new businesses involves risk. The integration of acquired businesses may be costly and may adverselyimpact our results of operations or financial condition:

 

•                  we may needto divert management resources to integration, which may adversely affect ourability to pursue other more profitable activities;

 

•                  integrationmay be difficult as a result of the necessity of coordinating geographicallyseparated organizations, integrating personnel with disparate businessbackgrounds and combining different corporate cultures;

 

•                  we may noteliminate redundant costs in selecting acquisition candidates; and

 

•                  one or moreof our acquisition candidates also may have unexpected liabilities or adverseoperating issues.

 

***Our results ofoperations have historically fluctuated and may continue to fluctuatesignificantly in the future, which could adversely affect the market price ofour common stock.***

*** ***

Ourrevenues are affected by factors such as the unpredictability of contractawards due to the long procurement process for most of our products andservices, the potential fluctuation of governmental agency budgets, the time ittakes for the new markets we target to develop and for us to develop andprovide products and services for those markets, competition and generaleconomic conditions.  Our contract type/productmix and unit volume, our ability to keep expenses within budget, and ourpricing affect our gross margins. These factors and other risk factorsdescribed herein may adversely affect our results of operations and cause ourfinancial results to fluctuate significantly on a quarterly or annualbasis.  Consequently, we do not believethat comparison of our results of operations from period to period isnecessarily meaningful or predictive of our likely future results ofoperations. In some future financial period our operating results may be belowthe expectations of public market analysts or investors.  If so, the market price of our securities maydecline significantly.

 

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**CAUTIONARY STATEMENT ABOUTFORWARD-LOOKING INFORMATION**

 

Thisreport, including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended, that are subject to the “safe harbor” createdby those sections. Any statements about our expectations, beliefs, plans,objectives, assumptions or future events or our future financial and/oroperating performance are not historical and may be forward-looking. Thesestatements are often, but not always, made through the use of words or phrasessuch as “may,” “will,” “anticipate,” “estimate,” “plan,” “project,” “continuing,”“ongoing,” “expect,” “believe,” “intend,” “predict,” “potential,” “opportunity”and similar words or phrases or the negatives of these words or phrases.  These statements involve estimates,assumptions and uncertainties, including those discussed in “Risk Factors” andelsewhere throughout this filing and in the documents incorporated by referenceinto this filing that could cause actual results to differ materially fromthose expressed in these statements.

 

Becausethe risk factors referred to above could cause actual results or outcomes todiffer materially from those expressed in any forward-looking statements madeby us or on our behalf, you should not place undue reliance on anyforward-looking statements.  In addition,past financial and/or operating performance is not necessarily a reliableindicator of future performance and you should not use our historicalperformance to anticipate results or future period trends.  Further, any forward-looking statement speaksonly as of the date on which it is made, and we undertake no obligation toupdate any forward-looking statement to reflect events or circumstances afterthe date on which the statement is made or to reflect the occurrence ofunanticipated events. New factors emerge from time to time, and it is notpossible for us to predict which factors will arise. In addition, we cannotassess the impact of each factor on our business or the extent to which any factor,or combination of factors, may cause actual results to differ materially fromthose contained in any forward-looking statements.

 

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**Item 2.  PROPERTIES.**

 

We conduct our operations in approximately 1.6 million square feet ofboth owned and leased properties located in the United States and foreigncountries.  We own approximately 75% ofthe square footage, including 540,000 square feet located in San Diego,California and 468,000 square feet located in Orlando, Florida.  All owned and leased properties areconsidered in good condition and, with the exception of the Orlando facility,adequately utilized.  We are currentlyusing approximately 150,000 square feet of the Orlando facility and have hireda property management firm to assist us in leasing the excess space to thirdparties. The following table identifies significant properties by businesssegment:

 
| **Location  of Property**   | ** ** | **Owned or Leased** |
|-----------------------------|------------|---------------------|
|                        |       |                |
| **Corporate Headquarters:** |       |                |
| San Diego, CA               |       | Owned               |
|                        |       |                |
| **Defense:**                |       |                |
| Arlington, VA               |       | Leased              |
| Auckland, New Zealand       |       | Leased              |
| Hampton, VA                 |       | Leased              |
| Honolulu, HI                |       | Leased              |
| Kingstowne, VA              |       | Leased              |
| Lacey, WA                   |       | Leased              |
| Leavenworth, KS             |       | Leased              |
| Orlando, FL                 |       | Leased and owned    |
| San Diego, CA               |       | Leased and owned    |
| Santa Clara, CA             |       | Leased              |
| Shalimar, FL                |       | Leased              |
| Singapore                   |       | Leased              |
| Tijuana, Mexico             |       | Leased              |
|                        |       |                |
| **Transportation Systems:** |       |                |
| Auburn, NSW Australia       |       | Leased              |
| Glostrup, Denmark           |       | Leased              |
| Chantilly, VA               |       | Leased              |
| Chicago, IL                 |       | Leased              |
| Frankfurt, Germany          |       | Leased              |
| London, England             |       | Leased              |
| Los Angeles, CA             |       | Leased              |
| New York, NY                |       | Leased and owned    |
| Merthsham, Surrey, England  |       | Leased              |
| Salfords, Surrey, England   |       | Owned               |
| San Diego, CA               |       | Owned               |
| Tullahoma, TN               |       | Owned               |
|                        |       |                |
| **Other:**                  |       |                |
| Whittier, CA                |       | Leased              |
|                        |       |                |
| **Investment properties:**  |       |                |
| San Diego, CA               |       | Owned               |
| Teterboro, NJ               |       | Leased              |

 

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**Item 3.  LEGAL PROCEEDINGS.**

 

InOctober 2003, a former subcontractor of ECC International Corp. (which weacquired in September 2003) sued ECC in the United States District Court inOrlando, Florida seeking $15 million in compensatory and $10 million inpunitive damages. The suit claimed that ECC breached a non-competitioncovenant, misappropriated trade secrets and wrongfully terminated itssubcontract. In February 2004, we were able to settle this dispute for $500thousand, $250 thousand of which we paid immediately, with the remainder due in2005. Due to the fact that this potential liability existed as of the date ofthe acquisition of ECC, the settlement was treated as a component of thepurchase price.

 

Duringthe quarter ended March 31, 2003, a former subcontractor on the PRESTIGEproject in London filed a claim against us under arbitration provisions of thesubcontract, alleging wrongful termination. In July 2003 we filed our defenseand a counterclaim with the arbitrator. In October 2004, we reached anagreement in which the former subcontractor agreed to pay us £10 million(approximately $18 million) for unspecified damages, with each party beingresponsible for its own legal costs. Although this payment was notreceived until October 2004, after the end of the fiscal year, accountingprinciples related to long-term contract accounting require that this type ofsubsequent event be accounted for in the previous period if the event is knownprior to the issuance of the financial statements. Therefore, we recorded areceivable from the former subcontractor as of September 30, 2004 which isincluded in Trade and Other Receivables on the Consolidated Balance Sheet.Payment of the £10 million wasreceived in October 2004.

 

In 1991, the government of Iran commenced an arbitrationproceeding against us seeking $12.9 million for reimbursement of payments madefor equipment that was to comprise an Air Combat Maneuvering Range pursuant toa sales contract and an installation contract executed in 1977, and anadditional $15 million for unspecified damages. We contested the action andbrought a counterclaim for compensatory damages of $10.4 million.  In May 1997, the arbitral tribunal awardedthe government of Iran a decision in the amount of $2.8 million, plus simpleinterest at the rate of 12% per annum from September 21, 1991 through May 5,1997. In December 1998, the United States District Court granted a motion bythe government of Iran confirming the arbitral award but denied Iran’s requestfor additional interest and costs. Both parties have appealed. On October 8,2004, the 9th Circuit Court of Appeals issued a decision in the caseof two interveners who are attempting to claim an attachment on the amount thatwas awarded to Iran in the original arbitration. The Court denied one of theintervener’s liens but confirmed the second one’s lien. Under current UnitedStates law and policy, any payment to the Revolutionary Government of Iran mustfirst be licensed by the US government. The issuance of such a license has notbeen requested, and we are unaware of the likelihood of the US governmentgranting such a license. However, in its decision on the interveners’ case, theCourt expressed the opinion that a license would not be necessary for us to paythe intervener. We are continuing to pursue our appeal and believe that alicense from the US government would be required to make any payment to or onbehalf of Iran. However, in light of the Court’s decision in this related case,we have established a reserve of $6 million for our estimated potentialliability, including accrued interest at 5%, in the quarter ended September 30,2004.

 

We are not a party to any pending proceedings, other than ordinarylitigation incidental to the business. We believe the outcome of theseproceedings and the proceedings described above will not have a materiallyadverse effect on our financial position.

 

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**Item 4.  SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS.**

 

Information regarding submission of matters to a vote of securityholders is incorporated herein by reference from our definitive ProxyStatement, which will be filed no later than 30 days prior to the date of theAnnual Meeting of Shareholders.

 

**PART II**

 

**Item 5.  MARKET FOR THEREGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS**.

 

The principal market on which our common stock is being traded is theAmerican Stock Exchange under the symbol CUB. The closing high and low sales prices for the stock, as reported in theconsolidated transaction reporting system on the American Stock Exchange forthe quarterly periods during the past two fiscal years, and dividendinformation for those periods, are as follows.

 

MARKET AND DIVIDEND INFORMATION

 
| ** **     | ** ** | **Sales Price of Common Shares** | ** ** | ** **      | ** ** |
|----------------|------------|----------------------------------|------------|-----------------|------------|
| ** **     | ** ** | **Fiscal 2004**                  | ** ** | **Fiscal 2003** | ** ** | **Dividends per Share** | ** ** |
| ** **     | ** ** | **High**                         | ** ** | **Low**         | ** ** | **High** | ** ** | **Low** | ** ** | **Fiscal 2004** | ** ** | **Fiscal 2003** | ** ** |
| First quarter  |       | $                                | 30.10      |            | $          | 22.17 |   | $ | 19.30 |   | $ | 13.73 |   | — |   | — |   |
| Second quarter |       | 27.01                            |       | 21.13           |       | 22.72 |   | 14.27 |   | $ | .07 |   | $ | .07 |   |
| Third quarter  |       | 28.39                            |       | 20.52           |       | 23.05 |   | 16.54 |   | — |   | — |   |
| Fourth quarter |       | 25.31                            |       | 19.26           |       | 30.50 |   | 22.41 |   | $ | .09 |   | $ | .07 |   |
|                |            |                                  |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On November 15, 2004, the closing price of our common stock on theAmerican Stock Exchange was $25.50.

 

There were approximately 1,200 shareholders of record of our commonstock as of November 15, 2004.

 

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**Item 6. SELECTED FINANCIAL DATA.**

 

FINANCIAL HIGHLIGHTS AND SUMMARY OF CONSOLIDATEDOPERATIONS

 

(amounts in thousands, except per share data)

 
| ** **                                    | ** ** | **Years Ended September 30,** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |
| **Results  of Operations:**                   |       |                          |       |   |   |   |   |   |   |   |   |
| Sales                                         |       | $                             | 722,012    |   | $ | 634,061 |   | $ | 559,604 |   | $ | 501,679 |   | $ | 531,516 |   |
| Cost of sales                                 |       | 549,170                       |       | 493,377 |   | 426,012 |   | 385,569 |   | 449,913 |   |
| Selling, general and administrative  expenses |       | 107,139                       |       | 87,888 |   | 85,459 |   | 76,052 |   | 76,016 |   |
| Interest expense                              |       | 4,658                         |       | 3,659 |   | 3,538 |   | 3,601 |   | 3,729 |   |
| Income taxes (benefit)                        |       | 19,394                        |       | 18,514 |   | 11,484 |   | 10,266 |   | (433 | ) |
| Net income                                    |       | 36,911                        |       | 36,519 |   | 29,437 |   | 20,842 |   | 674 |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |
| Average number of shares outstanding          |       | 26,720                        |       | 26,720 |   | 26,720 |   | 26,720 |   | 26,720 |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |
| **Per  Share Data:**                          |       |                          |       |   |   |   |   |   |   |   |   |
| Net income                                    |       | $                             | 1.38       |   | $ | 1.37 |   | $ | 1.10 |   | $ | 0.78 |   | $ | 0.03 |   |
| Cash dividends                                |       | 0.16                          |       | 0.14 |   | 0.13 |   | 0.13 |   | 0.13 |   |
|                                          |       |                          |       |   |   |   |   |   |   |   |   |
| **Year-End  Data:**                           |       |                          |       |   |   |   |   |   |   |   |   |
| Shareholders’ equity                     |       | $                             | 298,767    |   | $ | 255,292 |   | $ | 213,163 |   | $ | 190,895 |   | $ | 176,023 |   |
| Equity per share                              |       | 11.18                         |       | 9.55 |   | 7.98 |   | 7.14 |   | 6.59 |   |
| Total assets                                  |       | 542,924                       |       | 460,226 |   | 374,459 |   | 341,347 |   | 322,350 |   |
| Long-term debt                                |       | 50,037                        |       | 47,142 |   | 48,571 |   | 50,000 |   | 50,000 |   |

 

This summary should be read in conjunction with the relatedconsolidated financial statements and accompanying notes.

 

Per share amounts have been adjusted retroactively to reflect a 3-for-1stock split which occurred in April 2002.

 

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**Item 7.****    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

 

Our two primary businesses are in the defense and transportation industries. For the year ended September 30, 2004, 63% of sales were derived from defense, while 37% were derived from transportation fare collection systems and other commercial operations. These are high technology businesses that design, manufacture and integrate complex systems to meet the needs of various federal and regional government agencies in the US and other nations around the world. The US Government remains our largest customer, accounting for approximately 50% of sales in 2004 compared to 44% in 2003 and 39% in 2002.

 

Cubic DefenseApplications is a diversified supplier of constructive, live and virtualmilitary training systems, services and communication products to the USDepartment of Defense, other government agencies and allied nations. We designinstrumented range systems for fighter aircraft, armored vehicles and infantryforce-on-force live training; weapons effects simulations; laser-based tacticaland communication systems; and precision gunnery solutions.  Our services are focused on training missionsupport, computer simulation training, distributed interactive simulation, developmentof military training doctrine, force modernization services for NATO entrantsand field operations and maintenance. Our communications products are aimed atintelligence, surveillance, and search and rescue markets.

 

CubicTransportation Systems develops and delivers innovative fare collection systemsfor public transit authorities worldwide. We provide hardware, software and multiagency, multimodal transportationintegration technologies and services that allow the agencies to efficientlycollect fares, manage their operations, reduce shrinkage and make using publictransit a more convenient and attractive option for commuters.

 

**Consolidated Overview**

Fiscal 2004 sales grew to $722 million from $634 million in 2003, anincrease of 14%, and the third consecutive year of double-digit sales growth.The 2003 sales represented a 13% increase over 2002 sales of $560 million. Allof the sales growth in 2004 came from the defense segment, while transportationsystems sales were at the same level in 2004 as in 2003 despite an expected $47million decrease in revenues from the PRESTIGE contract in London. Nearly $40million of the growth in fiscal 2004 defense sales came from the trainingsystems business we acquired at the end of 2003. See the segment discussions following forfurther analysis of segment sales.

 

Operatingincome grew to $54.2 million in 2004 compared to $48.0 million in 2003, anincrease of 13%. Operating income in 2003 had increased by 21% over 2002operating income of $39.8 million. The increase in operating income came fromboth segments, with the larger increase coming from defense. Transportationoperating income was boosted $6.3 million in the fourth quarter by thesettlement of a dispute with a subcontractor on the PRESTIGE contract, but thishad virtually no impact on operating income for the full year, due to costsincurred in the first three quarters. Operating income was also impacted in the fourth quarter by a $6 millionprovision for a legal matter that arose from a contract with the government ofIran in 1977. While we are continuing to dispute the validity of the claim, anOctober 2004 court decision in a related case casts doubt on the likelihood wewill ultimately prevail. See Note 10 to the financial statements for further details.While the original contract to which this matter relates was a defense systemscontract, we have classified this loss provision separately in our segmentreporting due to the remote connection of this matter to our current defenseoperations since the events in question occurred more than 25 years ago. Seethe segment discussions following for further details of segment operatingresults.

 

Net income was nearly the same in 2004 as in 2003, at $36.9 million($1.38 per share) compared to $36.5 million ($1.37 per share). Net income in2003 had grown by 24% over 2002 net income of $29.4 million ($1.10 per share).However, there are important differences in how the net income was generatedbetween the three years. Approximately $2.3 million, after taxes, of the 2004net income was from a gain on the sale of a life insurance policy in the thirdquarter. The loss provision for the Iran legal matter described 

 

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above reduced 2004 net income in the fourth quarter by approximately$3.8 million after taxes. As discussed more fully under **TransportationSystems Segment** below, we settled a dispute with a formersubcontractor, resulting in the former subcontractor agreeing to pay usdamages, the 2004 impact of which was to approximately offset the costs ofpursuing our claim.  Approximately $5.3million, after taxes, of the 2003 net income was from gains on the sale of twoparcels of real estate in the second and third quarters, which were no longerused in the business. Net income in 2002 had included a fourth quarter taxbenefit of $2.5 million. The following table summarizes the effects on our netincome of these items and provides additional insight into our results ofoperations:

 
| ** **                               | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(in millions)** | ** ** |
| Earnings before certain identified items |       | $                 | 38.3       |     | $          | 33.7     |       | $ | 27.5 |   |
| Gains on sale of assets                  |       | 2.3               |       | 5.3      |       | —   |       |
| Provision for litigation (Iran)          |       | (3.8              | )          | —   |       | —   |       |
| Claim settlement (PRESTIGE)              |       | 6.9               |       | —   |       | —   |       |
| Claim settlement costs (PRESTIGE)        |       | (6.8              | )          | (2.5     | )          | —   |       |
| Tax benefit                              |       | —            |       | —   |       | 2.5      |       |
| Facility closing costs                   |       | —            |       | —   |       | (0.6     | )          |
| Net income as reported                   |       | $                 | 36.9       |     | $          | 36.5     |       | $ | 29.4 |   |

 

Without the items described above, net income would have grown by 13%in 2004 compared to 2003 and by about 23% from 2002 to 2003. These increaseswere the result of increased sales volume from the defense segment and improvedoperating performance from both segments, with the biggest increases comingfrom the defense business.

 

Gross margins improved to 23.9% in 2004 compared to 22.2% in 2003 and23.9% in 2002. This improvement resulted primarily from the settlement reachedwith a subcontractor on the PRESTIGE contract, the impact of which is describedmore fully in the transportation segment section following.

 

Selling,general and administrative (SG&A) expenses were 14.8% of sales compared to13.9% in 2003 and 15.3% in 2002. Higher SG&A expenses in the defensesegment came primarily from the business acquired in September 2003 and due toan increase in selling expenses incurred in pursuit of new businessopportunities. In the transportation systems segment the SG&A expenseincrease came primarily from legal, consulting and engineering support costsincurred related to a contractual dispute with a former subcontractor, which hasnow been settled. Fiscal 2003 SG&A spending decreased as a percentage ofsales due to an increase in sales volume without a significant increasein SG&A spending.

 

Research and development (R&D) costs continued to be incurredprimarily in connection with customer funded activities in 2004, while companysponsored R&D spending remained at about the same level as in 2003. We donot rely heavily on company sponsored R&D, as most of our new productdevelopment occurs in conjunction with the performance of work on ourcontracts. The amount of contract required product development activityincreased in 2004 to $51 million, compared to $46 million in 2003 and $41million in 2002; however, these costs are included in cost of sales as they aredirectly related to contract performance.

 

As mentioned above, we realized a gain from the sale of a split-dollarlife insurance policy in 2004 of $2.3 million after applicable income taxes ofapproximately $2.2 million. The gain from the sale of the policy was primarilyrealized in the third quarter, with a minor amount realized in the fourthquarter.

 

Interest and dividend income decreased in both 2004 and 2003, becauseof lower interest rates, and due to lower cash balances available forinvestment. Other income increased in 2004 primarily due to a gain on the saleof marketable securities after having decreased in 2003 due to lower rentalincome.

 

Our effective tax rate for 2004 was 34.4% of pretax income compared to33.6% in 2003 and 28.1% in 2002.

 

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The overall effective rate increased from 2003 to 2004 due to a highertax gain on the sale of the life insurance policy and reduced tax credits.  Income tax expense in 2002 was unusually lowdue to a $2.5 million tax benefit realized during the fourth quarter. Oureffective tax rate could be affected in future years by, among other factors,the mix of business between the US and foreign jurisdictions, our ability totake advantage of available tax credits, and audits of our records by taxingauthorities.

 

In light of recent tax legislation that provides incentives forrepatriation of capital to the US, we are currently evaluating the amount ofcapital we will require in Europe in the future and whether we might be able totake advantage of the provisions of the legislation by reinvesting some amountof capital in the United States. This decision will depend, in part, on theoutcome of contract proposals we have submitted in Europe that is not yetknown. Our policy is to not provide for US taxes on earnings from foreignoperations because our intention is to grow our business in those foreignlocations and we, therefore, consider the earnings to be indefinitelyreinvested. However, if we were to decide to reinvest a portion of this capitalin the U.S, we believe the related tax liability would not have a materialimpact on our results of operations or financial position.

 

**Defense Segment**

 
| **Years  ended September 30,**        | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **(in millions)** | ** ** |
|                                  |       |              |       |     |       |     |       |
| **Defense  Segment Sales**            |       |              |       |     |       |     |       |
| Communications and electronics        |       | $                 | 65.5       |     | $          | 55.0     |       | $ | 59.0 |   |
| Training systems                      |       | 181.6             |       | 161.2    |       | 113.5    |       |
| Government services                   |       | 205.8             |       | 148.9    |       | 141.9    |       |
|                                  |       | $                 | 452.9      |     | $          | 365.1    |       | $ | 314.4 |   |
|                                  |       |              |       |     |       |     |       |
| **Defense  Segment Operating Income** |       |              |       |     |       |     |       |
| Communications and electronics        |       | $                 | 6.6        |     | $          | 4.2      |       | $ | 3.7 |   |
| Training systems                      |       | 14.6              |       | 12.3     |       | 5.0      |       |
| Government services                   |       | 13.3              |       | 8.1      |       | 9.2      |       |
|                                  |       | $                 | 34.5       |     | $          | 24.6     |       | $ | 17.9 |   |

 

Defensesales in 2004 grew to $453 million from $365 million in 2003, a 24% increase.Growth in defense sales was 16% from 2002 to 2003. Of the increase in 2004sales, nearly $40 million came from the Simulation Systems Division (SSD)acquired in September 2003, which is included with training systems in theforegoing table. Not including SSD, overall defense sales increased 13% from2003 to 2004. This growth came despite a decrease of nearly $20 million intraining systems sales, other than from SSD, due primarily to a decline in aircombat training sales from the 2003 level. Activity on the major new air combattraining contract we won in 2003 was still in the early stages in 2004, whileseveral previous air combat training contracts were substantially completed inthe first quarter of 2004. MILES sales also decreased in 2004, but this decreasewas more than offset by higher sales from ground combat training systems.Training systems sales increased 42% in 2003 because of new orders for MILESproducts and air combat training systems. Communications and electronicsbusiness unit sales were also higher in 2004 because of a contract we won in2003 to develop a common data link subsystem (CDLS) for the US Navy.Communications and electronics sales decreased by 7% in 2003 from the 2002level. Government services sales increased by $57 million in 2004, a 38%increase. More than half of this increase came from a service contract at theJoint Readiness Training Center in Louisiana, due to a high level of activityrelated to the conflict in Iraq. Future sales volume from this contract willdepend on customer requirements which are yet to be determined. Even withoutthis one contract, government services sales grew by 20% in 2004, after havingincreased by 5% in 2003.

 

Operating income in thedefense segment was up by 40% in 2004, following an increase of 37% in2003.  Higher operating income came fromall three business units, with the most significant increase in 2004 comingfrom government services.

 

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Operatingincome in communications and electronics improved in 2004 over 2003 primarilybecause 2003 was impacted by a loss provision of $3 million related to ourinvestment in new communications technology for the Navy CDLS contract. Inaddition, communications and electronics operating income was bolstered in 2004by performance on another data link contract with a foreign customer which hasnow been substantially completed. Avionics products, such as personnel locatorsystems, generated higher operating income in 2004; however, this was offset byoperating losses from the surveillance receiver product line. Operating incomein communications and electronics improved in 2003 over the 2002 level becauseof improved performance from the surveillance receiver product line.

 

The newly acquired SSDadded $2.3 million to training systems operating income in 2004. Without SSD,training systems operating income would have been up slightly from the 2003level despite lower sales volume. Higher operating income from ground combattraining systems in 2004 more than offset the profit impact of lower salesvolume from air combat training systems and MILES products. Operating income in2003 from training systems increased substantially over the 2002 level due toincreased sales and higher profit margins from both air combat training systemsand MILES products. Training systems operating income was also impacted in 2003by cost growth of nearly $3 million on a contract which included thedevelopment of new ground combat training technology, however, this was offsetby the reversal of a reserve related to the MILES 2000 contract that was nolonger required due to the settlement of remaining contractual and financialissues.

 

Government servicesoperating income improved in 2004 compared to 2003 primarily because of highersales volume but also because of improved performance from operations andmaintenance (O&M) contracts. The O&M business recorded a loss in 2003on one particular contract which experienced cost growth in 2003, but wascompleted early in 2004. Operating income as a percentage of sales in 2004returned to the level it had been in 2002.

 

**Transportation Systems Segment**

Transportation systems sales remained at the same level in 2004 as 2003at $253 million, after having increased by 10% in 2003.  Transportation systems sales in North Americaand Australia and transportation service sales in Europe were considerablyhigher in 2004; however, these increases were offset by an expected $47 million decrease in revenuesfrom the PRESTIGE contract between 2003 and 2004. We view this decrease inreliance on a single customer as a positive trend for the transportationsegment and anticipate further growth of the transportation business outside ofthe UK. In addition, we anticipate additional orders in the UK for the nextseveral years related to the rollout of the OysterTM card and othersystem enhancement opportunities. The long-term prospects for growth in the UKmarket remain very strong as well as for the European continent, North Americaand the Far East. The sales increase in 2003 over 2002 was the result of newcontracts awarded in recent years in North America, as well as sales growthfrom the PRESTIGE contract.

 

Transportation systems operating income increased 16%, from $24.4million in 2003 to $28.2 million in 2004 after having increased 5% in 2003 fromthe 2002 level of $23.3 million. The increased operating income in 2004resulted from higher sales and operating income on service contracts in Europeand from a contract in the Far East. Profit margins on certain contracts in NorthAmerica were unfavorably affected by our investment in the development of newsoftware technologies for common fare collection solutions and the difficultiesinherent in the integration of these new technologies into actual farecollection systems. This integration effort is continuing and, although nosignificant further growth in these costs is anticipated, profit margins onthese contracts will continue to be low through fiscal 2005.

 

In October 2004, we reached a settlement agreement with a formersubcontractor on the PRESTIGE contract, whereby the subcontractor paid us £10million (approximately $18 million) for unspecified damages, but which we viewas partial reimbursement of costs we had incurred due to their failure toperform. The former subcontractor had previously filed a claim against usalleging wrongful termination, but these charges were dropped as a part of thesettlement agreement. Although this payment did not cover all of the additionalcosts we incurred, we believe that it was in our best interests to avoid a

 

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protracted legal battle which could cost more than any additionalamount we might eventually have recovered. Although this payment was notreceived until October 2004, after the end of our fiscal year, accountingprinciples related to long-term contract accounting require that this type ofsubsequent event be accounted for in the previous period if the event is knownprior to the issuance of the financial statements. Therefore, we recorded areceivable from the former subcontractor as of September 30, 2004, which isincluded in trade and other receivables on the consolidated balance sheet, andreduced cost of sales for this project, thereby increasing the overall profitmargin. The result of recording this settlement was to increase operatingincome in the fourth quarter by approximately $9.9 million, based on thepercentage completion of the project as of September 30, 2004. The remainingprofit improvement from this settlement will be realized throughout theremaining 11 year life of the contract as the percentage completion increases.In pursuing this claim settlement, we incurred approximately $9.7 millionduring fiscal 2004 for legal and consulting fees and for our own employees’time diverted to this effort. Therefore, the net effect on operating income in2004 from this settlement and the associated costs was minimal, althoughoperating income in the fourth quarter was increased by approximately $6.3million.

 

**Backlog**

Funded backlog increased in 2004 to $1.2 billion from the 2003 level of$1.0 billion, while total backlog remained at $1.5 billion. The biggestincrease in defense funded backlog was in training systems, due to contracts wewon for ground combat training systems in the Far East and Middle East and asimulator contract with the US government. In transportation systems wereclassified backlog related to the final five years of the seventeen yearPRESTIGE contract to the funded category due to the completion of the initialsystem in 2004. We believe the system completion substantially reduces any riskthat the customer might cancel the last five years of the contract, which theywould have been entitled to do if they were not satisfied with our performance.Although transportation systems total backlog decreased somewhat in 2004, wecontinue to pursue several large transportation system opportunities which weanticipate being awarded to us, thereby increasing backlog in fiscal 2005.

 

Not reflected in the backlog amounts below, because they are IDIQcontracts, are two significant defense contracts with the US government thatwere awarded during 2003. One is a 10-year contract with a ceiling value of$525 million to develop and deliver the next-generation of rangeless air-to-airand air-to-ground combat training systems. We have received some small ordersunder this contract and expect that the customer will order most of the systemsspecified by this contract from us over the next nine years.

 

The second major IDIQ contract awarded during 2003 is one where Cubic and fourother companies are performing research-and-development services for the USgovernment aimed at reducing threats to national defense and homeland securityfrom weapons of mass destruction. The five companies will share a total of upto $1.26 billion in task orders and to-date we have received some small orders.The initial term of this contract is five years, with an option for a five-yearextension.

 

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| **September  30,**             | ** ** | **2004**          | ** ** | **2003** | ** ** |
|--------------------------------|------------|-------------------|------------|----------|------------|
| ** **                     | ** ** | **(in millions)** | ** ** |
| **Total  backlog**             |       |              |       |     |       |
| Transportation systems         |       | $                 | 733.9      |     | $          | 761.9 |   |
| Defense                        |       |              |       |     |       |
| Communications and electronics |       | 61.5              |       | 68.8     |       |
| Training systems               |       | 317.6             |       | 267.3    |       |
| Government services            |       | 377.0             |       | 406.9    |       |
| Total defense                  |       | 756.1             |       | 743.0    |       |
| Total                          |       | $                 | 1,490.0    |     | $          | 1,504.9 |   |
|                           |       |              |       |     |       |
| **Funded  backlog**            |       |              |       |     |       |
| Transportation systems         |       | $                 | 733.9      |     | $          | 620.2 |   |
| Defense                        |       |              |       |     |       |
| Communications and electronics |       | 61.5              |       | 68.8     |       |
| Training systems               |       | 317.6             |       | 267.3    |       |
| Government services            |       | 72.7              |       | 52.0     |       |
| Total defense                  |       | 451.8             |       | 388.1    |       |
| Total                          |       | $                 | 1,185.7    |     | $          | 1,008.3 |   |

 

The difference between total backlog and funded backlog representsoptions under multiyear service contracts. Funding for these contracts comesfrom annual operating budgets of the US government and the options are normallyexercised annually. Options for the purchase of additional systems or equipmentare not included in backlog until exercised, nor are IDIQ contracts until anorder is received.

 

**BusinessAcquisition**

In late September2003, we acquired all the shares of Orlando, Florida-based ECC InternationalCorporation (ECC) for $43.9 million. Most of the purchase price was paid infiscal 2003; however, approximately $5 million was not paid until October 2003and is included in our cash flows for fiscal 2004. In August 2004, we acquireda small automated parking systems company in Montreal, Canada, calledTraf-Park, for $2.4 million in cash. This is a strategic acquisition which webelieve will augment our product offerings to large regional transit customers.

 

**New Accounting Standards**

Revised FASB InterpretationNo. 46 (FIN 46-R), “*Consolidation ofVariable Interest Entities*,” was issued in December 2003 and becameeffective in the quarter ended March 31, 2004. To date, we have not invested inany variable interest entities for which we are the primary beneficiary and,therefore, we have concluded that the adoption of FIN 46-R had no impact on ourfinancial position or results of operations.

 

**Liquidity and Capital Resources**

Growth in unbilled accounts receivable resulted in negative cash flowsfrom operations in both 2004 and 2003 of $28 million and $26 million,respectively, compared to positive cash flows from operations of $17 million in2002. Operating cash flows from the defense segment were positive in all threeyears, while transportation systems operating cash flows have been negative thepast two years. Defense operating cash flows in 2004 were only slightlypositive despite the growth in operating income, due to an increase in workingcapital in support of the 24% sales increase. Although the sales growth causedaccounts receivable to grow by $28 million in 2004, the level of workingcapital utilized in our defense business compares favorably to benchmark datafrom similar defense companies and we consider the level of receivables indefense to be within the normal range.

 

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Conversely, growth in unbilled accounts receivable over the past twoyears in the transportation business has resulted in the negative cash flowsfrom operations. In fiscal 2003, $55 million of the $94 million increase inaccounts receivable was from the PRESTIGE project. However, not including thereceivable related to the claim settlement, accounts receivable from thePRESTIGE project decreased nearly $6 million in 2004. In addition to the $18million received subsequent to September 30, 2004 from the claim settlement, weexpect cash flows from this contract to be positive for the remaining life ofthe contract. Other than the PRESTIGE project, four contracts in North Americaaccount for the majority of the increase in accounts receivable and thenegative cash flows in 2003 and 2004. Milestone payments on all of thesecontracts have been delayed due to the difficulties we have had with the integration of new softwaretechnologies into these fare collection systems. We had previously expected tobe past these difficulties by this time and continue to anticipate completionof the remaining tasks and collection of the delayed milestone payments infiscal 2005. The collectibility of these amounts is not in question and theadditional costs associated with the delay have been taken into account in thecalculation of the percentage completion of these contracts.

 

We have classified certain unbilled accounts receivable balances asnoncurrent because we do not expect to receive payment within one year from thebalance sheet date. Of this balance, $30 million and $27 million at September30, 2004 and 2003, respectively, related to the PRESTIGE project.

 

In addition to the $85 million increase in accounts receivablereflected on the Consolidated Statement of Cash Flows for 2004, current andlong-term accounts receivable increased by another $11 million from September 30,2003 to September 30, 2004. This is principally due to an increase from foreigncurrency translation.

 

As described in the acquisitions section above, cash in the amount of$5 million was used in 2004 for the remaining amount due from the acquisitionof ECC in September 2003 and for a small acquisition made in August 2004.

 

Cash flows from other investing activities in 2004 included a $14million cash receipt from the sale of the split dollar life insurance policydescribed in Note 9 to the Consolidated Financial Statements. In 2003,investing activities included $12 million in proceeds from two sales of realestate which were no longer used in the business. In addition, a net amount of$3 million was used to purchase marketable securities, which were available forsale as of September 30, 2004, and $7 million was invested in property, plantand equipment.

 

During 2004, we obtained a mortgage on our newly refurbished facilityin the UK and used the proceeds to repay $6 million of short-term borrowingsmade in fiscal 2003 in the UK.  Weborrowed $9 million in New Zealand in 2004 on a short-term basis to fundworking capital growth in our defense subsidiary in that country and borrowed$16 million in the US on a short-term basis to fund domestic working capitalrequirements. Other financing activities included scheduled debt payments of $2million and the payment of $4 million in dividends to shareholders (16 centsper share).

 

Accumulatedother comprehensive income improved by $10.8 million in 2004 primarily becauseof favorable foreign currency translation adjustments of $8.8 million, but alsodue to a reduction in the minimum liability for our pension plan of $2.6million. This leaves a positive balance of $10.1 million in accumulated othercomprehensive income as of September 30, 2004 compared to a negative balance of$0.7 million at September 30, 2003.

 

Ourpension plan under-funded balance improved slightly from the September 30, 2003balance of $36 million to a September 30, 2004 balance of $34 million. The planassets generated a healthy return again this year and, together with increasedemployer contributions, more than offset growth in the net benefit obligation.Pension expense increased from $9.1 million in 2003 to $9.7 million in 2004,and is expected to remain at approximately the same level in 2005. Wecontributed $10.5 million to the plans in 2004 and expect to make contributionsof about $9 million during fiscal 2005.

 

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Ournet deferred tax asset was $18 million at September 30, 2004 compared to $19million at September 30, 2003. Of these amounts, $4 million and $5 million atSeptember 30, 2004 and 2003, respectively, resulted from the tax effect ofrecording an additional minimum pension liability. We expect to generatesufficient taxable income in the future such that the net deferred tax assetwill be realized.

 

Our financial condition remains strong with working capital of $235million and a current ratio of 2.3 at September 30, 2004. We expect that cashon hand and our ability to access the debt markets will be adequate to meet ourworking capital requirements for the foreseeable future. In addition to theshort-term borrowing arrangements we have in the UK and New Zealand, we have a committed short-term creditfacility for working capital needs from a group of financial institutions inthe US, aggregating $60 million. As of September 30, 2004, $16 million of thisamount was used, leaving $44 million available. The short-term creditfacility in the US expires in February 2005. We are discussing our ongoing financing needs with the financialinstitutions and expect that this line of credit will be renewed or replacedbefore it expires.

 

Thefollowing is a schedule of our contractual obligations outstanding as ofSeptember 30, 2004:

 
| ** **            | ** ** | **Total**         | ** ** | **Less than 1  Year** | ** ** | **1 - 3 years** | ** ** | **4 - 5 years** | ** ** | **After 5 years** | ** ** |
|-----------------------|------------|-------------------|------------|-----------------------|------------|-----------------|------------|-----------------|------------|-------------------|------------|
| ** **            | ** ** | **(in millions)** | ** ** |
| Long-term debt        |       | $                 | 56.1       |                  | $          | 6.1             |       | $               | 12.1       |              | $          | 12.1 |   | $ | 25.8 |   |
| Interest payments     |       | 15.7              |       | 3.2                   |       | 4.3             |       | 3.8             |       | 4.4               |       |
| Operating leases      |       | 18.3              |       | 5.7                   |       | 6.5             |       | 3.8             |       | 2.3               |       |
| Deferred compensation |       | 6.9               |       | 0.6                   |       | 0.6             |       | 0.6             |       | 5.1               |       |
|                       |            |                   |            |                       |            |                 |            |                 |            |                   |            |  |  |  |  |  |

 

**Critical Accounting Policies, Estimates and Judgments**

Our financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to revenue recognition, income taxes, valuation of goodwill and pension costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known.

 

Besides the estimates identified above that are considered critical, we make many other accounting estimates in preparing our financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenues and expenses, as well as disclosures of contingent assets and liabilities. These estimates and judgments are also based on historical experience and other factors that are believed to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional information becomes known, even for estimates and judgments that are not deemed critical.

 

This discussion of critical accounting policies, estimates and judgments should be read in conjunction with other disclosures included in this discussion, and the Notes to the Consolidated Financial Statements related to estimates, contingencies and new accounting standards. Significant accounting policies are identified in Note 1 to the Consolidated Financial Statements. We have discussed each of the “critical” accounting policies and the related estimates with the audit committee of the Board of Directors.

 

*Revenue Recognition*

Mostof our business is derived from long-term development, production and systemintegration contracts which we account for consistent with the AmericanInstitute of Certified Public Accountants’ (AICPA) audit and accounting guide, *Audits of Federal Government Contractors*, and the AICPA’sStatement of Position No. 81-1, *Accounting for Performanceof Construction-Type and Certain Production-Type Contracts*. Weconsider the nature of these contracts, and the types of products and servicesprovided when we determine the proper 

 

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* *

accountingfor a particular contract. Generally we record long-term fixed price contractson a percentage of completion basis using the cost-to-cost method to measureprogress toward completion. Most of our long-term fixed-price contracts requireus to deliver minimal quantities over a long period of time or to perform asubstantial level of development effort in relation to the total value of thecontract. Under the cost-to-cost method of accounting, we recognize revenuebased on a ratio of the costs incurred to the estimated total costs atcompletion. Amounts representing contract change orders, claims or other itemsare included in the contract value only when they can be reliably estimated andrealization is considered probable. Provisions are made on a current basis to fullyrecognize any anticipated losses on contracts.

 

Werecord sales under cost-reimbursement-type contracts as we incur the costs.Incentives or penalties and awards applicable to performance on contracts areconsidered in estimating sales and profits, and are recorded when there issufficient information to assess anticipated contract performance. Incentiveprovisions that increase or decrease earnings based solely on a singlesignificant event are not recognized until the event occurs. We have accountingpolicies in place to address these and other complex issues in accounting forlong-term contracts.

 

Salesof products are recorded when a firm sales agreement is in place, delivery hasoccurred and collectibility of the fixed or determinable sales price isreasonably assured. Sales of services are recorded when performed in accordancewith contracts or service agreements.  Salesand profits on contracts that specify multiple deliverables are allocated toseparate units of accounting when there is objective evidence that eachaccounting unit has value to the customer on a stand-alone basis.

 

*Income Taxes*

Significant judgment is required in determining our income tax provisions and in evaluating our tax return positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and that we may not prevail. We adjust these reserves in light of changing facts and circumstances, such as the progress of a tax audit.

 

Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial statements and are referred to as timing differences. In addition, some expenses are not deductible on our tax return and are referred to as permanent differences. Timing differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the benefit in our income statement. We establish valuation allowances for our deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. Deferred tax liabilities generally represent deductions we have taken on our tax return but have not yet recognized as expense in our financial statements. We have not recognized any United States tax expense on undistributed earnings of our foreign subsidiaries since we intend to reinvest the earnings outside the United States for the foreseeable future. These undistributed earnings totaled approximately $59.0 million at September 30, 2004.

 

*Valuation of Goodwill*

We evaluate our recorded goodwill balances for potential impairmentannually by comparing the fair value of each reporting unit to its carryingvalue, including recorded goodwill. We have not yet had a case where thecarrying value exceeded the fair value; however, if it did, impairment would bemeasured by comparing the derived fair value of goodwill to its carrying value,and any impairment determined would be recorded in the current period. To datethere has been no impairment of our recorded goodwill. Goodwill balances byreporting unit are as follows:

 

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| **September  30,**           | ** ** | **2004**          | ** ** | **2003** | ** ** |
|------------------------------|------------|-------------------|------------|----------|------------|
| ** **                   | ** ** | **(in millions)** | ** ** |
|                         |       |              |       |     |       |
| Defense systems and products |       | $                 | 17.5       |     | $          | 16.5 |   |
| Defense services             |       | 9.7               |       | 9.7      |       |
| Transportation systems       |       | 8.0               |       | 7.1      |       |
| Total goodwill               |       | $                 | 35.2       |     | $          | 33.3 |   |

 

Determining the fair value of a reporting unit for purposes of thegoodwill impairment test is judgmental in nature and often involves the use ofsignificant estimates and assumptions. These estimates and assumptions couldhave a significant impact on whether or not an impairment charge is recognizedand also the magnitude of any such charge. We currently perform internalvaluation analysis and consider other market information that is publiclyavailable. Estimates of fair value are primarily determined using discountedcash flows and comparisons with recent transactions. These approaches usesignificant estimates and assumptions including projected future cash flows,discount rate reflecting the inherent risk in future cash flows, perpetualgrowth rate and determination of appropriate market comparables.

 

*Pension Costs*

The measurement of our pension obligations and costs is dependent on a variety of assumptions used by our actuaries. These assumptions include estimates of the present value of projected future pension payments to plan participants, taking into consideration the likelihood of potential future events such as salary increases and demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

 

The assumptions used in developing the required estimates include the following key factors:

•                  Discount rates

•                  Inflation

•                  Salary growth

•                  Expected return on plan assets

•                  Retirement rates

•                  Mortality rates

 

We base the discount rate assumption on investment yields available at year-end on high quality corporate long-term bonds. Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our long-term actual experience in relation to the inflation assumption. The expected return on plan assets reflects asset allocations, our historical experience, our investment strategy and the views of investment managers and large pension sponsors. Retirement and mortality rates are based primarily on actual plan experience. The effects of actual results differing from our assumptions are accumulated and amortized over future periods, and therefore, generally affect our recognized expense in such future periods.

 

**Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

**Interest Rate Risk**

 

We invest in money market instruments and short-term marketable debtand equity securities that are tied to floating interest rates being offered atthe time the investment is made. We maintain short-term borrowing arrangementsin the US, UK, and New Zealand, which are also tied to floating interest rates(the US prime rate and the UK and New Zealand base rates). We also have seniorunsecured notes payable to insurance companies that are due in annualinstallments. These notes have fixed coupon interest rates. See Note 5 to theConsolidated Financial Statements for more information.

 

Interest income earned on our short-term investments is affected bychanges in the general level of US and UK interest rates. These income streamsare generally not hedged.  Interest expenseincurred under

 

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the short-term borrowing arrangements is affected by changes in thegeneral level of interest rates in the US, UK, and New Zealand.  The expense related to these cost streams isusually not hedged since it is either revolving, payable within three monthsand/or immediately callable by the lender at any time. Interest expenseincurred under the long-term notes payable is not affected by changes in anyinterest rate because it is fixed.  However, we have in the past, and may in thefuture, use an interest rate swap to essentially convert this fixed rate into afloating rate for some or all of the long-term debt outstanding.  The purpose of a swap is to tie the interestexpense risk related to these borrowings to the interest income risk on ourshort-term investments, thereby mitigating our net interest rate risk. Webelieve that we are not significantly exposed to interest rate risk at thispoint in time.  There was no interestrate swap outstanding at September 30, 2004.

 

**Foreign Currency Exchange Risk**

 

In the ordinary course of business, we enter into firm sale andpurchase commitments denominated in many foreign currencies.  We have a policy to hedge those commitmentsgreater than $20,000 by using foreign currency exchange forward and optioncontracts that are denominated in currencies other than the functional currencyof the subsidiary responsible for the commitment, typically the British pound,Canadian dollar, euro, New Zealand dollar and Australian dollar.  These contracts are designed to be effectivehedges regardless of the direction or magnitude of any foreign currencyexchange rate change, because they result in an equal and opposite income orcost stream that offsets the change in the value of the underlyingcommitment.  See Note 1 to theConsolidated Financial Statements for more information on our foreign currencytranslation and transaction accounting policies.  We also use balance sheet hedges to mitigateforeign exchange risk.  This strategyinvolves incurring British pound denominated debt (See Interest Rate Riskabove) and having the option of paying off the debt using US dollar or Britishpound funds. We do not believe that we are significantly exposed to foreigncurrency exchange rate risk at this point in time.

 

Investments in our foreign subsidiaries in the UK, Australia, NewZealand, and Canada are not hedged because we consider them to be investedindefinitely.  In addition, we generallyhave control over the timing and amount of earnings repatriation and expect touse this control to mitigate foreign currency exchange risk.

 

31

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**Item 8.  FINANCIAL STATEMENTSAND SUPPLEMENTAL DATA.**

 

CUBICCORPORATION

 

CONSOLIDATEDBALANCE SHEETS

 
| ** **                                | ** ** | **September 30,**  | ** ** |
|-------------------------------------------|------------|--------------------|------------|
| ** **                                | ** ** | **2004**           | ** ** | **2003** | ** ** |
|                                      |       | **(in thousands)** |       |
| ASSETS                                    |       | ** **         |       |   |   |
|                                      |       |               |       |   |   |
| CURRENT ASSETS                            |       |               |       |   |   |
| Cash and cash equivalents                 |       | $                  | 10,622     |   | $ | 22,370 |   |
| Marketable securities, available-for-sale |       | 6,200              |       | 2,994 |   |
| Accounts receivable:                      |       |               |       |   |   |
| Trade and other receivables               |       | 29,771             |       | 11,476 |   |
| Long-term contracts                       |       | 314,286            |       | 240,598 |   |
| Allowance for doubtful accounts           |       | (860               | )          | (1,053 | ) |
|                                      |       | 343,197            |       | 251,021 |   |
|                                      |       |               |       |   |   |
| Inventories                               |       | 23,967             |       | 24,922 |   |
| Deferred income taxes                     |       | 15,816             |       | 16,212 |   |
| Prepaid expenses and other current assets |       | 13,494             |       | 10,751 |   |
| TOTAL CURRENT ASSETS                      |       | 413,296            |       | 328,270 |   |
|                                      |       |               |       |   |   |
| LONG-TERM CONTRACT RECEIVABLES            |       | 33,000             |       | 29,200 |   |
|                                      |       |               |       |   |   |
| PROPERTY, PLANT AND EQUIPMENT             |       |               |       |   |   |
| Land and land improvements                |       | 15,039             |       | 15,016 |   |
| Buildings and improvements                |       | 39,660             |       | 38,283 |   |
| Machinery and other equipment             |       | 81,029             |       | 80,935 |   |
| Leasehold improvements                    |       | 3,155              |       | 2,799 |   |
| Accumulated depreciation and amortization |       | (86,524            | )          | (84,761 | ) |
|                                      |       | 52,359             |       | 52,272 |   |
|                                      |       |               |       |   |   |
| OTHER ASSETS                              |       |               |       |   |   |
| Deferred income taxes                     |       | 2,108              |       | 2,781 |   |
| Goodwill                                  |       | 35,173             |       | 33,311 |   |
| Miscellaneous other assets                |       | 6,988              |       | 14,392 |   |
|                                      |       | 44,269             |       | 50,484 |   |
|                                      |       |               |       |   |   |
| TOTAL ASSETS                              |       | $                  | 542,924    |   | $ | 460,226 |   |
|                                           |            |                    |            |  |  |  |  |  |  |

 

See accompanying notes.

 

32

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CUBICCORPORATION

 

CONSOLIDATEDBALANCE SHEETS—continued

 
| ** **                                                         | ** ** | **September 30,**  | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                         | ** ** | **2004**           | ** ** | **2003** | ** ** |
|                                                               |       | **(in thousands)** |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                          |       | ** **         |       |   |   |
|                                                               |       |               |       |   |   |
| CURRENT LIABILITIES                                                |       |               |       |   |   |
| Short-term borrowings                                              |       | $                  | 25,048     |   | $ | 6,254 |   |
| Trade accounts payable                                             |       | 28,317             |       | 25,222 |   |
| Customer advances                                                  |       | 51,182             |       | 40,422 |   |
| Accrued compensation                                               |       | 28,651             |       | 26,013 |   |
| Accrued pension liability                                          |       | 8,618              |       | 10,494 |   |
| Other current liabilities                                          |       | 25,007             |       | 23,581 |   |
| Income taxes payable                                               |       | 5,908              |       | 6,064 |   |
| Current maturities of long-term debt                               |       | 6,057              |       | 1,429 |   |
| TOTAL CURRENT LIABILITIES                                          |       | 178,788            |       | 139,479 |   |
|                                                               |       |               |       |   |   |
| LONG-TERM DEBT                                                     |       | 50,037             |       | 47,142 |   |
|                                                               |       |               |       |   |   |
| OTHER LIABILITIES                                                  |       |               |       |   |   |
| Accrued pension liability                                          |       | 9,009              |       | 12,175 |   |
| Deferred compensation                                              |       | 6,323              |       | 6,138 |   |
|                                                               |       |               |       |   |   |
| COMMITMENTS AND CONTINGENCIES                                      |       |               |       |   |   |
|                                                               |       |               |       |   |   |
| SHAREHOLDERS’ EQUITY                                          |       |               |       |   |   |
| Common stock, no par value:                                        |       |               |       |   |   |
| Authorized—50,000,000 shares                                  |       |               |       |   |   |
| Issued—35,664,729 shares,  outstanding—26,719,845 shares |       | 234                |       | 234 |   |
| Additional paid-in capital                                         |       | 12,123             |       | 12,123 |   |
| Retained earnings                                                  |       | 312,381            |       | 279,746 |   |
| Accumulated other comprehensive income  (loss)                     |       | 10,095             |       | (745 | ) |
| Treasury stock at cost—8,944,884 shares                       |       | (36,066            | )          | (36,066 | ) |
|                                                               |       | 298,767            |       | 255,292 |   |
|                                                               |       |               |       |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                    |       | $                  | 542,924    |   | $ | 460,226 |   |
|                                                                    |            |                    |            |  |  |  |  |  |  |

 

See accompanying notes.

 

33

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CUBICCORPORATION

 

CONSOLIDATEDSTATEMENTS OF INCOME

 
| ** **                                     | ** ** | **Years Ended September 30,**                     | ** ** |
|------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                          | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                           |       | **(amounts in thousands, except per share data)** |       |
|                                           |       | ** **                                        |       |   |   |   |   |
| Net sales                                      |       | $                                                 | 722,012    |   | $ | 634,061 |   | $ | 559,604 |   |
|                                           |       |                                              |       |   |   |   |   |
| Costs and expenses:                            |       |                                              |       |   |   |   |   |
| Cost of sales                                  |       | 549,170                                           |       | 493,377 |   | 426,012 |   |
| Selling, general and administrative  expenses  |       | 107,139                                           |       | 87,888 |   | 85,459 |   |
| Research and development                       |       | 5,494                                             |       | 4,819 |   | 8,381 |   |
| Provision for litigation                       |       | 6,000                                             |       | — |   | — |   |
|                                           |       | 667,803                                           |       | 586,084 |   | 519,852 |   |
|                                           |       |                                              |       |   |   |   |   |
| Operating income                               |       | 54,209                                            |       | 47,977 |   | 39,752 |   |
|                                           |       |                                              |       |   |   |   |   |
| Other income (expenses):                       |       |                                              |       |   |   |   |   |
| Gain on sale of assets                         |       | 4,510                                             |       | 8,448 |   | — |   |
| Interest and dividends                         |       | 431                                               |       | 1,161 |   | 2,266 |   |
| Interest expense                               |       | (4,658                                            | )          | (3,659 | ) | (3,538 | ) |
| Other income                                   |       | 1,813                                             |       | 1,106 |   | 2,441 |   |
|                                           |       |                                              |       |   |   |   |   |
| Income before income taxes                     |       | 56,305                                            |       | 55,033 |   | 40,921 |   |
|                                           |       |                                              |       |   |   |   |   |
| Income taxes                                   |       | 19,394                                            |       | 18,514 |   | 11,484 |   |
|                                           |       |                                              |       |   |   |   |   |
| Net income                                     |       | $                                                 | 36,911     |   | $ | 36,519 |   | $ | 29,437 |   |
|                                           |       |                                              |       |   |   |   |   |
| Basic and diluted net income per common  share |       | $                                                 | 1.38       |   | $ | 1.37 |   | $ | 1.10 |   |
|                                           |       |                                              |       |   |   |   |   |
| Average number of common shares outstanding    |       | 26,720                                            |       | 26,720 |   | 26,720 |   |
|                                                |            |                                                   |            |  |  |  |  |  |  |  |  |

 

See accompanying notes.

 

34

----

 

CUBICCORPORATION

 

CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 
| ** **                                                  | ** ** | ** **        | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-------------------|------------|--------------|------------|-------------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                                                  | ** ** | ** **        | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | **Additional** | ** ** | ** ** | ** ** |
| **(in  thousands except**                                   | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | **Paid-in**    | ** ** | **Common** | ** ** |
| **per  share amounts)**                                     | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Income (Loss)** | ** ** | **Earnings** | ** ** | **Capital**    | ** ** | **Stock**  | ** ** |
| October 1, 2001                                             |       |              |       | (36,063      | )          | (6,494            | )          | 221,095      |       | 12,123         |       | 234        |       |
|                                                        |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Comprehensive income:                                       |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Net income                                                  |       | $                 | 29,437     |         | —     |              | —     |         | 29,437     |           | —     |       | —     |   |
| Unrealized holding losses on marketable  securities         |       | (115              | )          | —       |       | (115              | )          | —       |       | —         |       | —     |       |
| Additional minimum pension liability                        |       | (8,921            | )          | —       |       | (8,921            | )          | —       |       | —         |       | —     |       |
| Foreign currency translation adjustment                     |       | 5,434             |       | —       |       | 5,434             |       | —       |       | —         |       | —     |       |
| Comprehensive income                                        |       | $                 | 25,835     |         |       |              |       |         |       |           |       |       |       |   |
|                                                        |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Cash dividends paid — $.133 per share of  common stock |       |              |       | —       |       | —            |       | (3,564       | )          | —         |       | —     |       |
| Treasury stock purchases                                    |       |              |       | (3           | )          | —            |       | —       |       | —         |       | —     |       |
|                                                        |       |              |       |         |       |              |       |         |       |           |       |       |       |
| September 30, 2002                                          |       |              |       | (36,066      | )          | (10,096           | )          | 246,968      |       | 12,123         |       | 234        |       |
|                                                        |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Comprehensive income:                                       |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Net income                                                  |       | $                 | 36,519     |         | —     |              | —     |         | 36,519     |           | —     |       | —     |   |
| Unrealized holding gains on marketable  securities          |       | 57                |       | —       |       | 57                |       | —       |       | —         |       | —     |       |
| Reduction of minimum pension liability                      |       | 1,581             |       | —       |       | 1,581             |       | —       |       | —         |       | —     |       |
| Foreign currency translation adjustment                     |       | 6,918             |       | —       |       | 6,918             |       | —       |       | —         |       | —     |       |
| Net unrealized gains from cash flow hedges                  |       | 795               |       | —       |       | 795               |       | —       |       | —         |       | —     |       |
| Comprehensive income                                        |       | $                 | 45,870     |         |       |              |       |         |       |           |       |       |       |   |
| Cash dividends paid — $.14 per share of  common stock  |       |              |       | —       |       | —            |       | (3,741       | )          | —         |       | —     |       |
| September 30, 2003                                          |       |              |       | (36,066      | )          | (745              | )          | 279,746      |       | 12,123         |       | 234        |       |
|                                                        |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Comprehensive income:                                       |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Net income                                                  |       | $                 | 36,911     |         | —     |              | —     |         | 36,911     |           | —     |       | —     |   |
| Realized gains on marketable securities                     |       | (160              | )          | —       |       | (160              | )          | —       |       | —         |       | —     |       |
| Reduction of minimum pension liability                      |       | 2,568             |       | —       |       | 2,568             |       | —       |       | —         |       | —     |       |
| Foreign currency translation adjustment                     |       | 8,788             |       | —       |       | 8,788             |       | —       |       | —         |       | —     |       |
| Net unrealized losses from cash flow hedges                 |       | (356              | )          | —       |       | (356              | )          | —       |       | —         |       | —     |       |
| Comprehensive income                                        |       | $                 | 47,751     |         |       |              |       |         |       |           |       |       |       |   |
|                                                        |       |              |       |         |       |              |       |         |       |           |       |       |       |
| Cash dividends paid — $.16 per share of  common stock  |       |              |       | —       |       | —            |       | (4,276       | )          | —         |       | —     |       |
| September 30, 2004                                          |       |              |       | $            | (36,066    | )                 | $          | 10,095       |       | $              | 312,381    |       | $          | 12,123 |   | $ | 234 |   |
|                                                             |            |                   |            |              |            |                   |            |              |            |                |            |            |            |  |  |  |  |  |  |

 

See accompanying notes.

 

35

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CUBICCORPORATION

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                                   | ** ** | **Years Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                   | ** ** | **2004**                      | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                         |       | **(in thousands)**            |       |
| Operating Activities:                                                                        |       | ** **                    |       |   |   |   |   |
| Net income                                                                                   |       | $                             | 36,911     |   | $ | 36,519 |   | $ | 29,437 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                          |       |   |   |   |   |
| Depreciation and amortization                                                                |       | 7,466                         |       | 6,483 |   | 6,542 |   |
| Deferred income taxes                                                                        |       | 52                            |       | 5,405 |   | 2,327 |   |
| Gain on sale of assets                                                                       |       | (4,510                        | )          | (8,448 | ) | — |   |
| Changes in operating assets and  liabilities, net of effects from acquisitions:              |       |                          |       |   |   |   |   |
| Accounts receivable                                                                          |       | (84,727                       | )          | (93,687 | ) | (19,451 | ) |
| Inventories                                                                                  |       | 2,638                         |       | 6,256 |   | 134 |   |
| Prepaid expenses                                                                             |       | (3,327                        | )          | (4,934 | ) | 1,844 |   |
| Accounts payable and other current  liabilities                                              |       | 8,948                         |       | 14,730 |   | 4,228 |   |
| Customer advances                                                                            |       | 9,047                         |       | 9,236 |   | (816 | ) |
| Income taxes                                                                                 |       | (129                          | )          | 3,438 |   | (7,860 | ) |
| Other items - net                                                                            |       | (556                          | )          | (1,115 | ) | 1,093 |   |
| NET CASH PROVIDED BY (USED IN) OPERATING  ACTIVITIES                                         |       | (28,187                       | )          | (26,117 | ) | 17,478 |   |
|                                                                                         |       |                          |       |   |   |   |   |
| Investing Activities:                                                                        |       |                          |       |   |   |   |   |
| Acquisition of businesses, net of cash  acquired                                             |       | (7,141                        | )          | (33,949 | ) | — |   |
| Proceeds from sale of assets                                                                 |       | 13,610                        |       | 12,038 |   | — |   |
| Proceeds from sale of marketable securities                                                  |       | 35,094                        |       | 5,900 |   | 6,975 |   |
| Purchases of marketable securities                                                           |       | (38,300                       | )          | (8,488 | ) | (6,975 | ) |
| Purchases of property, plant and equipment                                                   |       | (6,949                        | )          | (8,184 | ) | (13,004 | ) |
| Other items - net                                                                            |       | (784                          | )          | — |   | — |   |
| NET CASH USED IN INVESTING ACTIVITIES                                                        |       | (4,470                        | )          | (32,683 | ) | (13,004 | ) |
|                                                                                         |       |                          |       |   |   |   |   |
| Financing Activities:                                                                        |       |                          |       |   |   |   |   |
| Change in short-term borrowings                                                              |       | 17,876                        |       | 6,254 |   | — |   |
| Proceeds from issuance of long-term debt                                                     |       | 9,026                         |       | — |   | — |   |
| Principal payments on long-term debt                                                         |       | (1,902                        | )          | (1,429 | ) | — |   |
| Purchases of treasury stock                                                                  |       | —                        |       | — |   | (3 | ) |
| Dividends paid to shareholders                                                               |       | (4,276                        | )          | (3,741 | ) | (3,564 | ) |
| NET CASH PROVIDED BY (USED IN) FINANCING  ACTIVITIES                                         |       | 20,724                        |       | 1,084 |   | (3,567 | ) |
|                                                                                         |       |                          |       |   |   |   |   |
| Effect of exchange rates on cash                                                             |       | 185                           |       | 1,430 |   | 912 |   |
|                                                                                         |       |                          |       |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                        |       | (11,748                       | )          | (56,286 | ) | 1,819 |   |
|                                                                                         |       |                          |       |   |   |   |   |
| Cash and cash equivalents at the beginning  of the year                                      |       | 22,370                        |       | 78,656 |   | 76,837 |   |
|                                                                                         |       |                          |       |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE  YEAR                                            |       | $                             | 10,622     |   | $ | 22,370 |   | $ | 78,656 |   |

 

See accompanying notes.

 

36

----

 

CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2004

 

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of the Business:  Cubic Corporation (“Cubic” or “the Company”)designs, develops and manufactures products which are mainly electronic innature, provides government services and services related to productspreviously produced by Cubic and others. The Company’s principal lines ofbusiness are defense electronics and transportation fare collection systems.Principal customers for defense products and services are the United States andforeign governments. Transportation fare collection systems are sold primarilyto large local government agencies in the United States and worldwide.

 

Principles of Consolidation:  The consolidated financial statements includethe accounts of Cubic Corporation and its majority-owned subsidiaries. Allsignificant intercompany balances and transactions have been eliminated inconsolidation. The consolidation of foreign subsidiaries requires translationof their assets and liabilities into US dollars at year-end exchange rates.Statements of income and cash flows are translated at the average exchangerates for each year.

 

Cash Equivalents:  The Company considers highly liquidinvestments with maturity of three months or less when purchased to be cashequivalents.

 

Concentration of Credit Risk:  The Company has established guidelinespursuant to which its cash and cash equivalents are diversified among variousmoney market instruments and investment funds. These guidelines emphasize thepreservation of capital by requiring minimum credit ratings assigned byestablished credit organizations. Diversification is achieved by specifying maximum investments in eachfund type and issuer. The majority of these investments are not on deposit infederally insured accounts.

 

Fair Value of Financial Instruments:  Financial instruments, includingcash equivalents, accounts receivable, accounts payable and accruedliabilities, are carried at cost, which management believes approximates thefair value because of the short-term maturity of these instruments.  Receivables consist primarily of amounts duefrom US and foreign governments for defense products and local governmentagencies for transportation systems.  Dueto the nature of its customers, the Company generally does not requirecollateral.  The Company has limitedexposure to credit risk as the Company has historically collected substantiallyall of its receivables from government agencies.  The Company maintains no allowance fordoubtful accounts for these customers and would only do so if it was warrantedby changed circumstances.

 

Marketable Securities, Available-for-Sale:  Marketable securities include highly liquid, investment grade,institutional money market debt and preferred stock instruments and arestated at fair market value. The net excess of fair market value over cost isincluded in Accumulated Other Comprehensive Income (Loss) on the ConsolidatedBalance Sheets.

 

Inventories: Inventories are stated at the lower of cost or market. Cost isdetermined using primarily the first-in, first-out (FIFO) method, whichapproximates current replacement cost. Work in process is stated at the actual productionand engineering costs incurred to date, including applicable overhead, and isreduced by charging any amounts in excess of estimated realizable value to costof sales. Although costs incurred for certain government contracts includegeneral and administrative costs as allowed by government cost accountingstandards, the amounts remaining in inventory at September 30, 2004 and 2003were immaterial.

 

37

----

 

Property, Plant and Equipment:  Property, plant and equipment are carried atcost. Depreciation is provided in amounts sufficient to amortize the cost ofthe depreciable assets over their estimated useful lives. Generally,straight-line methods are used for real property over estimated useful livesranging from 15 to 39 years or the term of the underlying lease for leaseholdimprovements.  Accelerated methods areused for machinery and equipment over estimated useful lives ranging from fiveto seven years.  Provisions fordepreciation of plant and equipment amounted to $6,979,000, $6,483,000, and$6,542,000 in 2004, 2003 and 2002, respectively.

 

Goodwill:  Goodwill is evaluated for potential impairment annually by comparing thefair value of a reporting unit to its carrying value, including recordedgoodwill. If the carrying value exceeds the fair value, impairment is measuredby comparing the derived fair value of goodwill to its carrying value, and anyimpairment determined would be recorded in the current period. To date therehas been no impairment of the Company’s recorded goodwill.  The changes in the carrying amount ofgoodwill for the two years ended September 30, 2004 are as follows:

 
| ** **                             | ** ** | **Transportation  Segment** | ** ** | **Defense  Segment** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|----------------------|------------|-----------|------------|
|                                   |       | **(in thousands)**          |       |
| Balances October 1, 2002               |       | $                           | 6,940      |                 | $          | 12,710    |       | $ | 19,650 |   |
| Goodwill acquired during the year      |       | —                      |       | 12,852               |       | 12,852    |       |
| Foreign currency exchange rate changes |       | 204                         |       | 605                  |       | 809       |       |
| Balances September 30, 2003            |       | 7,144                       |       | 26,167               |       | 33,311    |       |
| Goodwill acquired during the year      |       | 176                         |       | —               |       | 176       |       |
| Adjustments to purchase price          |       | —                      |       | 657                  |       | 657       |       |
| Foreign currency exchange rate changes |       | 631                         |       | 398                  |       | 1,029     |       |
| Balances September 30, 2004            |       | $                           | 7,951      |                 | $          | 27,222    |       | $ | 35,173 |   |

 

Impairment of Long-Lived Assets:  The carrying values of long-lived assetsother than goodwill are generally evaluated for impairment only if events orchanges in the facts and circumstances indicate that carrying values may not berecoverable. Any impairment determined would be recorded in the current periodand would be measured by comparing the fair value of the related asset to itscarrying value. Fair value is generally determined by identifying estimatedundiscounted cash flows to be generated by those assets.

 

Comprehensive Income:  Comprehensive income and its components arepresented in the statement of changes in shareholders’ equity.  Accumulated comprehensive income (loss)consisted of the following:

 
| **September  30,**                                 | ** ** | **2004**           | ** ** | **2003** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|----------|------------|
|                                               |       | **(in thousands)** |       |
| Minimum pension liability                          |       | $                  | (7,042     | )        | $          | (9,610 | ) |
| Foreign currency translation                       |       | 16,698             |       | 7,910    |       |
| Unrealized holding gains on marketable  securities |       | —             |       | 160      |       |
| Net unrealized gains from cash flow hedges         |       | 439                |       | 795      |       |
|                                               |       | $                  | 10,095     |     | $          | (745 | ) |

 

38

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The minimum pension liability is shown net of tax benefits of$3,792,000 and $5,174,000 at September 30, 2004 and 2003, respectively.  Deferred income taxes are not recognized fortranslation-related temporary differences of foreign subsidiaries whoseundistributed earnings are considered to be permanently invested.

 

The net unrealized gain from cash flow hedges is shown net of taxliabilities of $236,000 and $327,000 in 2004 and 2003, respectively.  The unrealized holding gains on marketablesecurities are shown net of tax liabilities of $85,000 as of September 30,2003.

 

Revenue Recognition:  Sales and profits under the Company’slong-term fixed-price contracts, which generally require a significant amountof development effort in relation to total contract value, are recognized usingthe cost-to-cost percentage of completion method of accounting. Sales andprofits are recorded based on the ratio of costs incurred to estimated totalcosts at completion. In the early stages of contract performance, profit is notrecognized until progress is demonstrated or contract milestones are reached.

 

Sales under cost-reimbursement type contracts are recorded as costs areincurred. Applicable estimated profits are included in earnings based on theratio of costs incurred to the estimated total costs at completion. Sales ofproducts are recorded when a firm sales agreement is in place, delivery hasoccurred and collectibility of the fixed or determinable sales price isreasonably assured. Sales of services are recorded when performed in accordancewith contracts or service agreements.

 

Amounts representing contract change orders, claims or other items areincluded in the contract value only when they can be reliably estimated andrealization is considered probable. Incentives or penalties and awardsapplicable to performance on contracts are considered in estimating sales andprofits, and are recorded when there is sufficient information to assessanticipated contract performance. Incentive provisions that increase ordecrease earnings based solely on a single significant event are not recognizeduntil the event occurs.

 

Sales and profits on contracts that specify multiple deliverables areallocated to separate units of accounting when there is objective evidence thateach accounting unit has value to the customer on a stand-alone basis.

 

Provisions are made on a current basis to fully recognize anyanticipated losses on contracts.  Cashreceived prior to revenue recognition is classified as customer advances on thebalance sheet.

 

Earnings Per Share:  Per share amounts are based upon the weightedaverage number of shares of common stock outstanding, after retroactiveadjustments to reflect a 3-for-1 stock split which occurred in April 2002.

 

Derivative Financial Instruments:   The Company’s use of derivativefinancial instruments is limited to foreign exchange forward and optioncontracts used to hedge significant contract sales and purchase commitmentsthat are denominated in currencies other than the functional currency of thesubsidiary responsible for the commitment and to hedge net advances to foreignsubsidiaries.  The purpose of the Company’sforeign currency hedging activities is to fix the dollar value of specificcommitments and payments to foreign vendors, and the value of foreign currencydenominated receipts from customers. At September 30, 2004, the Company hadforeign exchange contracts with a notional value of $86.2 million outstanding.

 

39

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The Company accountsfor derivatives pursuant to SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended. Thisstandard requires that all derivative instruments be recognized in thefinancial statements and measured at fair value regardless of the purpose orintent for holding them. The classification of gains and losses resulting fromchanges in the fair values of derivatives is dependent on the intended use ofthe derivative and its resulting designation. The change in fair value of theineffective portion of a hedge, and changes in fair values of derivatives thatare not considered highly effective hedges are immediately recognized inearnings. If the derivative is designated as a fair value hedge, the changes inthe estimated fair value of the derivative and the underlying hedged item arerecognized in earnings. If the derivative is designated as a cash flow hedge,the effective portions of changes in the fair value of the derivative arerecorded in other comprehensive income and are

subsequentlyrecognized in earnings when the hedged item affects earnings. Ineffectivenessbetween the change in fair value of the derivatives and the change in fairvalue of hedged items was immaterial for the years ended September 30, 2004,2003 and 2002. At September 30, 2004 net gains of $675,000 ($439,000 net oftaxes) were recorded in accumulated other comprehensive income associated withcash flow hedging transactions.

 

AccountingStandards: Revised FASB Interpretation No. 46 (FIN 46-R), “*Consolidation of Variable Interest Entities*,”was issued in December 2003 and became effective in the quarter ended March 31,2004. To date, the Company has not invested in any variable interest entitiesfor which the Company is the primary beneficiary and, therefore, management hasconcluded that the adoption of FIN 46-R had no impact on its financial positionor results of operations.

 

Use of Estimates:  The preparation of financial statements inconformity with US generally accepted accounting principles requires managementto make estimates and assumptions that affect the amounts reported in thefinancial statements and accompanying notes. Significant estimates include theestimated total costs at completion of the Company’s long-term contracts, andthe estimated rates of return and discount rates related to the Company’sdefined benefit pension plans. Actual results could differ from thoseestimates.

 

Risks and Uncertainties:  The Company is subject to the normal risksand uncertainties of performing large, multiyear, often fixed-price contracts.In addition, the Company is subject to audit of incurred costs related to manyof its US Government contracts. These audits could produce different resultsthan the Company has estimated; however, the Company’s experience has been thatits costs are acceptable to the government.

 

Reclassifications:  Certain prior year amounts have beenreclassified to conform to the current year classifications.

 

40

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NOTE 2—INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

 

The Company owns 37.5% of the common stock of Transaction Systems Limited(TranSys), an unconsolidated joint venture company in the United Kingdom. Thisjoint venture company was formed to bid on a contract called “PRESTIGE”(Procurement of Revenue Services, Ticketing, Information, Gates andElectronics), the purpose of which is to outsource most of the functions of theLondon Transport (LT) fare collection system for a period of seventeen years. InAugust 1998, TranSys was awarded the contract and began operations. Cubic andthe other parties to the joint venture participate in the PRESTIGE contractsolely through subcontracts from TranSys. All of the work to be performed by TranSysis subcontracted to the joint venture partners and the joint venture providesfor the pass-through of virtually all revenues from London Transport to thejoint venture partners. As a result, TranSys has operated on a break-even basisand is expected to continue to do so. If TranSys were to eventually generate a netincome or loss, the joint venture partners would share in this income or lossin accordance with their percentage ownership in the joint venture. The Company’sinvestment in the joint venture is immaterial.

 

LT elected to finance the project through privatefinancing rather than incurring public debt. Financing for the project wasprovided by a syndicate of banks which participated in creating the project’sfinancial structure. During the first four years of the project, through August2002, the banks provided financing to TranSys totaling 200 million BritishPounds (approximately $362 million). Debt servicing began in 2003 and willcontinue until the debt is fully paid in 2013. This debt is guaranteed by LTand is nonrecourse to the joint venture partners.

 

The Company has also provided certain performanceguarantees to various parties related to the PRESTIGE contract and the TranSysjoint venture, including LT, the banks and the joint venture partners. Thejoint venture partners have also provided similar performance guarantees to thesame parties and to Cubic.

 

Summarized unaudited financial information for thisunconsolidated joint venture is as follows:

 
| **September 30,**                                 | ** ** | **2004**          | ** ** | **2003** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|----------|------------|
| ** **                                        | ** ** | **(in millions)** | ** ** |
| **Balance  Sheets:**                              |       |              |       |     |       |
| Cash                                              |       | $                 | 37.5       |     | $          | 14.9 |   |
| Other current  assets                             |       | 63.6              |       | 54.7     |       |
| Noncurrent  unbilled contract accounts receivable |       | 274.6             |       | 270.7    |       |
| Total Assets                                      |       | $                 | 375.7      |     | $          | 340.3 |   |
|                                              |       |              |       |     |       |
| Current  liabilities                              |       | $                 | 31.3       |     | $          | 22.4 |   |
| Long-term debt                                    |       | 344.4             |       | 317.9    |       |
| Equity                                            |       |              |       | —   |       |
| Total  Liabilities and Equity                     |       | $                 | 375.7      |     | $          | 340.3 |   |

 
| **Years ended September 30,** | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in millions)** | ** ** |
| **Statement  of Operations:** |       |              |       |     |       |     |       |
| Sales                         |       | $                 | 136.0      |     | $          | 109.6    |       | $ | 130.0 |   |
| Operating profit              |       | $                 | —     |     | $          | —   |       | $ | — |   |
| Net income                    |       | $                 | —     |     | $          | —   |       | $ | — |   |

 

41

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NOTE 3—ACCOUNTS RECEIVABLE

 

In 2004, trade and other receivables include the amount due under anagreement in which a former subcontractor agreed to pay the Company £10 million(approximately $18 million) for unspecified damages.  Refer also to Note 10 – Legal Mattersregarding this matter.

 

The components of accounts receivable under long-term contracts are asfollows:

 
| **September 30,**                                                            | ** ** | **2004**           | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(in thousands)** | ** ** |
| U.S. Government  Contracts:                                                  |       |               |       |     |       |
| Amounts billed                                                               |       | $                  | 50,497     |     | $          | 31,217 |   |
| Recoverable  costs and accrued profits on progress completed—not billed |       | 56,104             |       | 66,892   |       |
|                                                                         |       | 106,601            |       | 98,109   |       |
| Commercial  Customers:                                                       |       |               |       |     |       |
| Amounts billed                                                               |       | 34,559             |       | 36,568   |       |
| Recoverable  costs and accrued profits on progress completed—not billed |       | 206,126            |       | 135,121  |       |
|                                                                         |       | 240,685            |       | 171,689  |       |
|                                                                         |       | 347,286            |       | 269,798  |       |
| Less estimated  amounts not currently due—commercial customers          |       | (33,000            | )          | (29,200  | )          |
|                                                                         |       | $                  | 314,286    |     | $          | 240,598 |   |

 

A portion of recoverablecosts and accrued profits on progress completed is billable under progresspayment provisions of the related contracts. The remainder of these amounts isbillable upon delivery of products or furnishing of services, with animmaterial amount subject to retainage provisions of the contracts. Asidentified above, a portion of the amount not billed under commercial contractsis not expected to be collected within one year from September 30, 2004, andtherefore, has been classified as a noncurrent asset.  This amount relates primarily to the contractwith TranSys for the PRESTIGE system in London. The customer has been paying the Company in accordance with the terms ofthe contract and it is expected that all amounts due under the contract willultimately be collected.  It isanticipated that substantially all of the unbilled portion of receivablesidentified as current assets will be billed and collected under progressbilling provisions of the contracts or upon completion of performance testsand/or acceptance by the customers during fiscal 2005.

 

NOTE 4—INVENTORIES

 

Inventories are classified as follows:

 

| **September 30,**              | ** ** | **2004**           | ** ** | **2003** | ** ** |
|--------------------------------|------------|--------------------|------------|----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
|                           |       |               |       |     |       |
| Finished  products             |       | $                  | 510        |     | $          | 593 |   |
| Work in process                |       | 16,491             |       | 12,300   |       |
| Materials and  purchased parts |       | 6,966              |       | 12,029   |       |
|                           |       | $                  | 23,967     |     | $          | 24,922 |   |

 

42

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NOTE 5—FINANCING ARRANGEMENTS

 

Long-term debt consists of the following:

 
| **September 30,**                                                                                                                                                                                   | ** ** | **2004**           | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                                                                                                                                                                          | ** ** | **(in thousands)** | ** ** |
| Unsecured notes  payable to a group of insurance companies, with annual principal payments of  $4,000,000 commencing November 2004. Interest at 6.31% is payable  semiannually in November and May. |       | $                  | 40,000     |     | $          | 40,000 |   |
|                                                                                                                                                                                                |       |               |       |     |       |
| Unsecured note  payable to an insurance company, with annual principal payments of $1,429,000  due in November. Interest at 6.11% is payable semiannually in November and  May.                     |       | 7,143              |       | 8,571    |       |
|                                                                                                                                                                                                |       |               |       |     |       |
| Mortgage note  from a UK financial institution, with quarterly installments of principal and  interest at 6.5%                                                                                      |       | 8,951              |       | —   |       |
|                                                                                                                                                                                                |       |               |       |     |       |
|                                                                                                                                                                                                |       | 56,094             |       | 48,571   |       |
| Less current  portion                                                                                                                                                                               |       | (6,057             | )          | (1,429   | )          |
|                                                                                                                                                                                                |       |               |       |     |       |
|                                                                                                                                                                                                |       | $                  | 50,037     |     | $          | 47,142 |   |

 

The terms of the notes payable and other financial instruments includeprovisions that require and/or limit, among other financial ratios andmeasurements, the permitted levels of working capital, debt and tangible networth and coverage of fixed charges. The Company has also provided certainperformance guarantees to various parties related to the PRESTIGE contract andthe TranSys joint venture. As consideration for the performance guarantee, theCompany has agreed to certain financial covenants including limits on workingcapital, debt, tangible net worth and cash flow coverage. At September 30, 2004,the most restrictive covenant under these agreements leaves consolidatedretained earnings of $108.5 million available for the payment of dividends toshareholders, purchases of the Company’s common stock and other charges toshareholders’ equity. To date, there have been no covenant violations and theCompany believes it will be able to meet the covenant financial performanceobligations described above.

 

The Company maintains a short-term borrowing arrangement totaling 10million British pounds (equivalent to approximately $18.1 million) with a UK financialinstitution to help meet the short-term working capital requirements of itssubsidiary, Cubic Transportation Systems Ltd. Any outstanding balances areguaranteed by Cubic Corporation, are repayable on demand, and bear interest atthe bank’s base rate, as defined, plus one percent. At September 30, 2004, noamounts were outstanding under this borrowing arrangement.

 

The Company maintains a short-term borrowing arrangement totaling 20.1million New Zealand dollars (equivalent to approximately $13.6 million) with aNew Zealand financial institution to help meet the short-term working capitalrequirements of its subsidiary, Oscmar International Ltd.  Any outstanding balances are guaranteed byCubic Corporation, are repayable on demand and bear interest at the bank’s baserate plus one percent. At September 30, 2004 there was $9.0 million outstandingunder this borrowing arrangement, bearing interest at 7.8%. 

 

43

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The Company has a $60 million revolving line of credit arrangement witha group of US banks.  This line of creditexpires in February 2005. As of September 30, 2004, the Company had $16 millionoutstanding under its committed line of credit in the US at an interest rate of2.6%.

 

Maturities of long-term debt for each of the five years in the periodending September 30, 2009, are $6.1 million per year.

 

Interest paid amounted to $4.6 million, $3.7 million, and $3.5 million in2004, 2003, and 2002, respectively.

 

As of September 30, 2004 the Company had letters of credit and bankguarantees outstanding totaling $52.4 million, which guarantee either theCompany’s performance or customer advances under certain contracts. Inaddition, the Company had financial letters of credit outstanding totaling $3.1million as of September 30, 2004, which guarantee the Company’s payment ofcertain self-insured liabilities. The Company has never had a drawing on aletter of credit instrument, nor are any anticipated; therefore, the fair valueof these instruments is estimated to be zero.

 

The Company’s self-insurance arrangements are limited to certainworkers’ compensation plans, automobile liability, and product liability claimsprimarily related to a business the Company sold in 1993. Under thesearrangements, the Company self-insures only up to the amount of a specifieddeductible for each claim. Self-insurance liabilities included in other current liabilities on thebalance sheet amounted to $2.9 million and $4.6 million as of September 30,2004 and 2003, respectively.

 

NOTE 6—COMMITMENTS

 

The Company leases certain office, manufacturing and warehouse space,and miscellaneous computer and other office equipment under noncancelableoperating leases expiring in various years through 2012.  These leases, some of which may be renewedfor periods up to 10 years, generally require the lessee to pay allmaintenance, insurance and property taxes. Several leases are subject toperiodic adjustment based on price indices or cost increases. Rental expense,net of sublease income, for all operating leases amounted to $5.4 million, $3.5million, and $3.8 million in 2004, 2003, and 2002, respectively.

 

Future minimum payments, net of minimum sublease income, undernoncancelable operating leases with initial terms of one year or more consistof the following at September 30, 2004 (in thousands):

 

| 2005       |   | $     | 5,732  |   |
|------------|--------|-------|--------|--------|
| 2006       |   | 3,943 |   |
| 2007       |   | 2,536 |   |
| 2008       |   | 2,201 |   |
| 2009       |   | 1,565 |   |
| Thereafter |   | 2,274 |   |
|       |   | $     | 18,251 |   |

 

44

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NOTE 7—INCOME TAXES

 

Significant components of the provision for income taxes are asfollows:

 
| **Years ended September 30,** | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in thousands)** | ** ** |
|                          |       |               |       |     |       |     |       |
| Current:                      |       |               |       |     |       |     |       |
| Federal                       |       | $                  | 11,069     |     | $          | 4,805    |       | $ | 3,108 |   |
| State                         |       | 2,516              |       | 2,587    |       | 1,735    |       |
| Foreign                       |       | 5,757              |       | 5,717    |       | 4,314    |       |
| Total current                 |       | 19,342             |       | 13,109   |       | 9,157    |       |
|                          |       |               |       |     |       |     |       |
| Deferred  (credit):           |       |               |       |     |       |     |       |
| Federal                       |       | (298               | )          | 5,323    |       | 3,124    |       |
| State                         |       | 152                |       | 820      |       | 437      |       |
| Foreign                       |       | 198                |       | (738     | )          | (1,234   | )          |
| Total deferred                |       | 52                 |       | 5,405    |       | 2,327    |       |
| Total income tax  expense     |       | $                  | 19,394     |     | $          | 18,514   |       | $ | 11,484 |   |

 

Deferred tax assets and liabilities are determined based on differencesbetween financial reporting and tax bases of assets and liabilities, and aremeasured using the enacted tax rates and laws that will be in effect when thedifferences are expected to reverse. Significant components of the Company’sdeferred tax assets and liabilities are as follows:

 

45

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| **September 30,**                                       | ** ** | **2004**           | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| Deferred tax  assets:                                   |       |               |       |     |       |
| Accrued employee  benefits                              |       | $                  | 3,895      |     | $          | 3,397 |   |
| Additional  minimum pension liability                   |       | 3,792              |       | 5,174    |       |
| Long-term  contracts and inventory valuation reductions |       | 2,276              |       | 5,449    |       |
| Allowances for  loss contingencies                      |       | 6,988              |       | 2,909    |       |
| Deferred  compensation                                  |       | 2,612              |       | 2,744    |       |
| Net operating  loss carryforwards                       |       | 3,972              |       | 3,972    |       |
| Other                                                   |       | 3,952              |       | 3,279    |       |
| Total deferred  tax assets                              |       | 27,487             |       | 26,924   |       |
| Valuation  allowance for deferred tax assets            |       | (3,972             | )          | (3,972   | )          |
| Deferred tax  assets                                    |       | 23,515             |       | 22,952   |       |
| Deferred tax  liabilities:                              |       |               |       |     |       |
| Tax over book  depreciation                             |       | 1,304              |       | 137      |       |
| Amortization of  goodwill and intangibles               |       | 2,107              |       | 1,769    |       |
| Prepaid expenses                                        |       | 1,224              |       | 894      |       |
| State taxes                                             |       | 266                |       | 295      |       |
| Other                                                   |       | 690                |       | 864      |       |
| Deferred tax  liabilities                               |       | 5,591              |       | 3,959    |       |
| Net deferred tax  asset                                 |       | $                  | 17,924     |     | $          | 18,993 |   |

 

In September 2003, the Company acquired ECC International Corp. (ECC),which had a net operating loss carryforward (NOL) of approximately $10 million.The NOLs begin to expire in 2019 unless previously utilized.  The associated deferred tax asset amounted toapproximately $4 million at September 30, 2004, against which the Company hasestablished a valuation allowance of $4 million. In the future, if the Company isable to determine that a tax benefit from the NOL will be realized, thevaluation allowance will be reduced accordingly and credited against thegoodwill balance recorded at acquisition.

 

46

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The reconciliation of income tax computed at the US federal statutorytax rate to income tax expense is as follows:

 
| **Years ended September 30,**                     | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                        | ** ** | **(in thousands)** | ** ** |
|                                              |       |               |       |     |       |     |       |
| Tax at federal  statutory rate                    |       | $                  | 19,707     |     | $          | 19,262   |       | $ | 14,322 |   |
| State income  taxes, net of federal tax benefit   |       | 1,734              |       | 2,215    |       | 1,412    |       |
| Tax exempt  interest and dividend income          |       | (156               | )          | (46      | )          | (91      | )          |
| Income exclusion  on export sales                 |       | (946               | )          | (945     | )          | (536     | )          |
| Nondeductible  expenses                           |       | 288                |       | 359      |       | 282      |       |
| Reversal of  deferred tax asset valuation reserve |       | —             |       | —   |       | (2,460   | )          |
| Tax effect from  foreign subsidiaries             |       | (668               | )          | (349     | )          | (475     | )          |
| Tax credits and  other                            |       | (565               | )          | (1,982   | )          | (970     | )          |
|                                              |       | $                  | 19,394     |     | $          | 18,514   |       | $ | 11,484 |   |

 

The Company made income tax payments, net of refunds, totaling $18.7million, $9.9 million, and $15.6 million in 2004, 2003, and 2002, respectively.

 

Income before income taxes includes the following components:

 
| **Years ended September 30,** | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                    | ** ** | **(in thousands)** | ** ** |
|                          |       |               |       |     |       |     |       |
| United States                 |       | $                  | 37,383     |     | $          | 40,318   |       | $ | 24,100 |   |
| Foreign                       |       | 18,922             |       | 14,715   |       | 16,821   |       |
| Total                         |       | $                  | 56,305     |     | $          | 55,033   |       | $ | 40,921 |   |

 

Undistributed earnings of the Company’s foreign subsidiaries amountedto approximately $59.0 million at September 30, 2004. Those earnings areconsidered to be indefinitely reinvested, and accordingly, no provision for USfederal and state income taxes has been provided thereon. Upon distribution ofthose earnings in the form of dividends or otherwise, the Company would besubject to both US income taxes and withholding taxes payable to the foreigncountries, but would also be able to offset unrecognized foreign tax creditcarryforwards. Determination of the amount of unrecognized deferred US incometax liability is not practicable because of the complexities associated withits hypothetical calculation; however, the Company does not believe the amountwould be material.

 

In light of recent US tax legislation, the Company is currentlyevaluating the amount of capital it may require in Europe in the future andwhether it might be able to take advantage of the provisions of the legislationby reinvesting some amount of capital in the United States. This decision willdepend, in part, on the outcome of contract proposals the Company has submittedin Europe that is not yet known. If it decides to reinvest a portion of thiscapital in the US, the Company does not believe the related tax liability wouldbe material.

 

47

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The Company is subject to ongoing audits from various taxingauthorities in the jurisdictions in which it does business.  It does not have a history of significantadjustments to its tax accruals for these audits.   The Company believesthat its accruals for tax liabilities are adequate for the open years.

 

NOTE 8—PENSION, PROFIT SHARING AND OTHER RETIREMENT PLANS

 

The Company has profit sharing and other defined contributionretirement plans that provide benefits for most employees in the US. Anemployee is eligible to participate in these plans after six months to one yearof service, and may make additional contributions to the plans from their dateof hire. These plans provide for full vesting of benefits over five years. Asubstantial portion of Company contributions to these plans is discretionarywith the Board of Directors. Company contributions to the plans aggregated $9.9million, $9.4 million and $8.7 million in 2004, 2003 and 2002, respectively.

 

Approximately one-half of the Company’s nonunion employees in the USare covered by a noncontributory defined benefit pension plan. Approximatelyone-half of the Company’s European employees are covered by a contributorydefined benefit pension plan. The Company’s funding policy provides thatcontributions will be at least equal to the minimum amounts mandated bystatutory requirements. The following table sets forth changes in the benefitobligation and plan assets for these plans and the net amount recognized in theConsolidated Balance Sheets:

 
| **September 30,**                                       | ** ** | **2004**           | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| **Change  in benefit obligations:**                     |       |               |       |     |       |
| Net benefit  obligation at the beginning of the year    |       | $                  | 112,140    |     | $          | 92,085 |   |
| Service cost                                            |       | 6,610              |       | 5,741    |       |
| Interest cost                                           |       | 6,940              |       | 6,073    |       |
| Plan amendments                                         |       | 165                |       | 52       |       |
| Actuarial loss                                          |       | 3,892              |       | 7,615    |       |
| Participant  contributions                              |       | 927                |       | 858      |       |
| Gross benefits  paid                                    |       | (2,797             | )          | (1,881   | )          |
| Foreign currency  exchange rate changes                 |       | 2,851              |       | 1,597    |       |
| Net benefit  obligation at the end of the year          |       | 130,728            |       | 112,140  |       |
|                                                    |       |               |       |     |       |
| **Change  in plan assets:**                             |       |               |       |     |       |
| Fair value of  plan assets at the beginning of the year |       | 76,141             |       | 57,793   |       |
| Actual return on  plan assets                           |       | 10,332             |       | 11,871   |       |
| Employer contributions                                  |       | 10,494             |       | 6,585    |       |
| Participant  contributions                              |       | 927                |       | 858      |       |
| Gross benefits  paid                                    |       | (2,797             | )          | (1,881   | )          |
| Administrative  expenses                                |       | (495               | )          | (121     | )          |
| Foreign currency  exchange rate changes                 |       | 1,871              |       | 1,036    |       |
| Fair value of  plan assets at the end of the year       |       | 96,473             |       | 76,141   |       |
|                                                         |            |                    |            |          |            |  |  |

 

48

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| **September 30,**                                                                                    | ** ** | **2004**           | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|
| ** **                                                                                           | ** ** | **(in thousands)** | ** ** |
| **Net  amount recognized:**                                                                          |       |               |       |       |       |
| Funded status                                                                                        |       | (34,255            | )          | (35,999    | )          |
| Unrecognized net  actuarial loss                                                                     |       | 27,463             |       | 28,145     |       |
| Unrecognized  prior service cost                                                                     |       | 190                |       | 47         |       |
| Net amount  recognized                                                                               |       | $                  | (6,602     | )          | $          | (7,807 | ) |
|                                                                                                 |       |               |       |       |       |
| **Amounts  recognized in the Consolidated Balance Sheets:**                                          |       |               |       |       |       |
| Accrued benefit  cost                                                                                |       | $                  | (6,602     | )          | $          | (7,807 | ) |
| Additional  minimum liability                                                                        |       | (11,025            | )          | (14,831    | )          |
| Deferred tax  asset                                                                                  |       | 3,792              |       | 5,174      |       |
| Intangible asset                                                                                     |       | 191                |       | 47         |       |
| Accumulated  other comprehensive loss                                                                |       | 7,042              |       | 9,610      |       |
| Net amount  recognized                                                                               |       | $                  | (6,602     | )          | $          | (7,807 | ) |
|                                                                                                 |       |               |       |       |       |
| **Information  for pension plans with an accumulated benefit obligation in excess of plan  assets:** | ** ** | ** **         | ** ** | ** ** | ** ** |
| Projected  benefit obligation                                                                        |       | $                  | 130,728    |       | $          | 112,140 |   |
| Accumulated  benefit obligation                                                                      |       | 113,883            |       | 98,169     |       |
| Fair value of  plan assets                                                                           |       | 96,473             |       | 76,141     |       |

 

**Componentsof net periodic benefit cost:**

 
| **Years ended September 30,**   | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                      | ** ** | **(in thousands)** | ** ** |
|                            |       |               |       |     |       |     |       |
| Service cost                    |       | $                  | 7,129      |     | $          | 5,741    |       | $ | 5,024 |   |
| Interest cost                   |       | 7,512              |       | 6,073    |       | 5,496    |       |
| Expected return  on plan assets |       | (7,110             | )          | (4,989   | )          | (5,097   | )          |
| Amortization of:                |       |               |       |     |       |     |       |
| Prior service  cost             |       | 23                 |       | 4        |       | (2       | )          |
| Actuarial (gain)  loss          |       | 2,098              |       | 2,238    |       | 400      |       |
| Administrative  expenses        |       | 94                 |       | 82       |       | 185      |       |
| Net pension cost                |       | $                  | 9,746      |     | $          | 9,149    |       | $ | 6,006 |   |

 

49

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**Additionalinformation**

** **

**Assumptions**

 
| **Years ended September 30,**                                                                                    | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                                                                                       | ** ** | **(in thousands)** | ** ** |
| **Weighted-average  assumptions used to determine benefit obligation at September 30:**                          |       |               |       |     |       |     |       |
| Discount rate                                                                                                    |       | 6.0                | %          | 6.0      | %          | 6.4      | %          |
| Rate of  compensation increase                                                                                   |       | 4.1                | %          | 4.0      | %          | 4.6      | %          |
| **Weighted-average  assumptions used to determine net periodic benefit cost for the years ended  September 30:** |       |               |       |     |       |     |       |
| Discount rate                                                                                                    |       | 6.0                | %          | 6.4      | %          | 7.2      | %          |
| Expected return  on plan assets                                                                                  |       | 8.2                | %          | 8.3      | %          | 8.3      | %          |
| Rate of  compensation increase                                                                                   |       | 4.0                | %          | 4.6      | %          | 4.9      | %          |

 

The Company’s pension plans weighted average asset allocations by assetcategory as of September 30 were as follows:

 

| ** **         | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Equity  securities |       | 77       | %          | 83       | %          |
| Debt securities    |       | 17       | %          | 12       | %          |
| Real estate        |       | 4        | %          | 3        | %          |
| Other              |       | 2        | %          | 2        | %          |
| Total              |       | 100      | %          | 100      | %          |

 

TheCompany has the responsibility to formulate the investment policies andstrategies for the plans’ assets. The overall policies and strategies include:maintain the highest possible return commensurate with the level of assumedrisk, preserve the benefit security for the plans’ participants, and minimizethe necessity of Company contributions by maintaining a ratio of plan assets toliabilities in excess of 1.0.

 

The Company does not involve itself with the day-to-day operations andselection process of individual securities and investments, and, accordingly,has retained the professional services of investment management organizationsto fulfill those tasks. The investment management organizations have investmentdiscretion over the assets placed under their management. The Company provideseach investment manager with specific investment guidelines relevant to itsasset class. The table below presents the ranges for each major category of theplans’ assets at September 30, 2004:

 

50

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| **Asset Category**                          | ** ** | **Allocation   Range** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
|                                        |       |                   |       |
| Equity  securities                          |       | 50% to 85%   |       |
| Debt securities                             |       | 10% to 60%   |       |
| Other, primarily  cash and cash equivalents |       | 0% to 15%    |       |

 

The pension plans held no positions in Cubic Corporation common stockas of September 30, 2004 and 2003.

 

The Company expects to contribute $8.6 million to its pension plans in2005.

 

**Estimated future benefit payments**

The following pension benefit payments, which reflect expected futureservice, as appropriate, are expected to be paid:

 
| 2005      |   | $      | 4,380  |   |
|-----------|--------|--------|--------|--------|
| 2006      |   | 4,753  |   |
| 2007      |   | 5,225  |   |
| 2008      |   | 5,714  |   |
| 2009      |   | 6,253  |   |
| 2010-2014 |   | 41,974 |   |

 

NOTE 9—RELATED PARTY TRANSACTION

 

In 1992, the Company anda trust established by Walter J. Zable, CEO of the Company, and Mrs. Zableagreed that the Company would make advances of premiums payable on a split-dollarlife insurance policy purchased by the trust on the life of Mrs. Zable. InDecember 2003, the agreement was terminated and the Company became the soleowner and beneficiary of the policy. The Company agreed to reimburse the trustfor premiums it paid on the policy if the policy should be sold by the Companyfor more than the cash value of the policy and to share with the trust any gainon the sale in proportion to premiums paid by each party. During the quarterended June 30, 2004, the Company sold the policy to two unrelated parties forapproximately $14.8 million, net of broker commissions. Of this amount $1.2million was paid to the Zable family trust as reimbursement for premiums paidand its proportional share of the gain on the sale. The remainder of theproceeds, totaling $13.6 million was retained by the Company, generating a gainon the sale of $4.5 million, before applicable income taxes. Due to a differenttax basis in the policy than book basis, applicable income taxes are estimatedto be $2.2 million, yielding a net gain after taxes of $2.3 million.

 

51

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NOTE 10—LEGAL MATTERS

 

In October 2003, a formersubcontractor of ECC sued ECC in the United States District Court in Orlando,Florida seeking $15 million in compensatory and $10 million in punitivedamages. The suit claimed that ECC breached a non-competition covenant,misappropriated trade secrets and wrongfully terminated its subcontract. InFebruary 2004, the Company settled this dispute for $500 thousand, $250thousand of which was paid immediately, with the remainder due in 2005. Due tothe fact that this liability existed as of the date of the acquisition of ECC,the settlement was treated as an adjustment to the purchase price and accordinglywas added to goodwill, net of the tax effect.

 

During the quarter endedMarch 31, 2003, a former subcontractor to the Company on the PRESTIGE projectin London filed a claim against the Company under arbitration provisions of thesubcontract, alleging wrongful termination. In July 2003 the Company filed itsdefense and a counterclaim with the arbitrator. In October 2004, a settlementagreement was reached in which the former subcontractor paid the Company £10million (approximately $18 million) for unspecified damages, with each partybeing responsible for its own legal costs. Although this payment was notreceived until October 2004, after the end of the fiscal year, accountingprinciples related to long-term contract accounting require that this type ofsubsequent event be accounted for in the previous period if the event is knownprior to the issuance of the financial statements. Therefore, a receivable fromthe former subcontractor was recorded as of September 30, 2004 which isincluded in trade and other receivables on the consolidated balance sheet, witha corresponding reduction of cost of sales for this project, thereby increasingthe overall profit margin. The result of recording this settlement was toincrease operating income in the fourth quarter by approximately $9.9 million,based on the percentage completion of the project as of September 30, 2004.

 

In 1991, the government of Iran commenced an arbitration proceedingagainst the Company seeking $12.9 million for reimbursement of payments madefor equipment that was to comprise an Air Combat Maneuvering Range pursuant toa sales contract and an installation contract executed in 1977, and anadditional $15 million for unspecified damages. The Company contested theaction and brought a counterclaim for compensatory damages of $10.4million.  In May 1997, the arbitraltribunal awarded the government of Iran a decision in the amount of $2.8million, plus simple interest at the rate of 12% per annum from September 21,1991 through May 5, 1997. In December 1998, the United States District Courtgranted a motion by the government of Iran confirming the arbitral award butdenied Iran’s request for additional costs and interest. Both parties haveappealed. On October 8, 2004, the 9th Circuit Court of Appealsissued a decision in the case of two interveners who are attempting to claim anattachment on the amount that was awarded to Iran in the original arbitration.The Court denied one of the intervener’s liens but confirmed the second one’slien. Under current United States law and policy, any payment to theRevolutionary Government of Iran must first be licensed by the US government.The issuance of such a license has not been requested, and the Company isunaware of the likelihood of the US government granting such a license.However, in its decision on the interveners’ case, the Court expressed theopinion that a license would not be necessary for the Company to pay theintervener. The Company is continuing to pursue its appeal and believes that alicense from the US government would be required to make any payment to or onbehalf of Iran. However, in light of the Court’s decision in this related case,the Company has established a reserve of $6 million for its estimated potentialliability, including accrued interest at 5%, in the quarter ended September 30,2004.

 

52

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NOTE 11—BUSINESS SEGMENT INFORMATION

 

Description of the types of products and services fromwhich each reportable segment derives its revenues:

TheCompany has two primary business segments: transportation systems and defense.The transportation systems segment designs, produces, installs and serviceselectronic revenue collection systems for mass transit projects, includingrailways and buses. The defense segment performs work under US and foreigngovernment contracts relating to electronic defense systems and equipment,computer simulation training, development of training doctrine, and fieldoperations and maintenance. Products include customized range instrumentationand training systems, simulators, communications and surveillance systems,avionics systems, power amplifiers and receivers.

 

Measurement of segment profit or loss and segmentassets:

The Companyevaluates performance and allocates resources based on total segment operatingprofit or loss. The accounting policies of the reportable segments are the sameas those described in the summary of significant accounting policies.Intersegment sales and transfers are immaterial.

 

Factors management used to identify the Company’sreportable segments:

TheCompany’s reportable segments are business units that offer different productsand services. The reportable segments are each managed separately because theydevelop and manufacture distinct products with different customer bases.

 

Business segment financial data is as follows:

 
| **Years ended September 30,**             | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                                | ** ** | **(in millions)** | ** ** |
| **Sales:**                                |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | 253.5      |     | $          | 253.4    |       | $ | 230.7 |   |
| Defense                                   |       | 452.9             |       | 365.1    |       | 314.4    |       |
| Other                                     |       | 15.6              |       | 15.6     |       | 14.5     |       |
| Total sales                               |       | 722.0             |       | 634.1    |       | 559.6    |       |
|                                      |       |              |       |     |       |     |       |
| **Operating  income:**                    |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | 28.2       |     | $          | 24.4     |       | $ | 23.3 |   |
| Defense                                   |       | 34.5              |       | 24.6     |       | 17.9     |       |
| Provision for  litigation                 |       | (6.0              | )          | —   |       | —   |       |
| Unallocated corporate  expenses and other |       | (2.5              | )          | (1.0     | )          | (1.4     | )          |
| Total operating  income                   |       | $                 | 54.2       |     | $          | 48.0     |       | $ | 39.8 |   |
|                                      |       |              |       |     |       |     |       |
| **Assets:**                               |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | 241.1      |     | $          | 186.7    |       | $ | 118.0 |   |
| Defense                                   |       | 245.0             |       | 220.5    |       | 144.8    |       |
| Corporate and  other                      |       | 56.9              |       | 53.0     |       | 111.7    |       |
| Total assets                              |       | $                 | 543.0      |     | $          | 460.2    |       | $ | 374.5 |   |

 

53

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| **Years ended September 30,**             | ** ** | **2004**          | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|-------------------|------------|----------|------------|----------|------------|
| ** **                                | ** ** | **(in millions)** | ** ** |
| **Depreciation  and amortization:**       |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | 2.5        |     | $          | 2.3      |       | $ | 2.4 |   |
| Defense                                   |       | 4.6               |       | 3.6      |       | 3.5      |       |
| Corporate and  other                      |       | 0.4               |       | 0.6      |       | 0.6      |       |
| Total  depreciation and amortization      |       | $                 | 7.5        |     | $          | 6.5      |       | $ | 6.5 |   |
|                                      |       |              |       |     |       |     |       |
| **Expenditures  for long-lived assets:**  |       |              |       |     |       |     |       |
| Transportation  systems                   |       | $                 | 2.6        |     | $          | 5.3      |       | $ | 10.9 |   |
| Defense                                   |       | 4.1               |       | 1.9      |       | 1.8      |       |
| Corporate and  other                      |       | 0.2               |       | 1.0      |       | 0.3      |       |
| Total  expenditures for long-lived assets |       | $                 | 6.9        |     | $          | 8.2      |       | $ | 13.0 |   |
|                                      |       |              |       |     |       |     |       |
| **Geographic  Information:**              |       |              |       |     |       |     |       |
| Sales (a):                                |       |              |       |     |       |     |       |
| United States                             |       | $                 | 494.5      |     | $          | 414.6    |       | $ | 327.3 |   |
| United Kingdom                            |       | 120.3             |       | 147.4    |       | 161.0    |       |
| Canada                                    |       | 30.7              |       | 18.2     |       | 14.6     |       |
| Far East                                  |       | 29.3              |       | 13.4     |       | 16.1     |       |
| Other                                     |       | 47.2              |       | 40.5     |       | 40.6     |       |
| Total sales                               |       | $                 | 722.0      |     | $          | 634.1    |       | $ | 559.6 |   |

 

----

(a) Sales are attributedto countries or regions based on the location of customers.

 
| Long-lived  assets, net:      |   |   |   |   |   |   |   |
|-------------------------------|--------|--------|--------|--------|--------|--------|--------|
| United States                 |   | $      | 41.4   |   | $      | 50.2   |   | $ | 40.8 |   |
| United Kingdom                |   | 13.9   |   | 13.3   |   | 12.7   |   |
| Other foreign  countries      |   | 2.6    |   | 1.3    |   | 0.9    |   |
| Total long-lived  assets, net |   | $      | 57.9   |   | $      | 64.8   |   | $ | 54.4 |   |

 

Defense segmentsales include $360.3 million, $281.9 million and $216.6 million in 2004, 2003and 2002, respectively, of sales to US Government agencies.  No other single customer accounts for 10% ormore of the Company’s revenue.

 

54

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NOTE 12—SUMMARY OFQUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

 

The following is a summary of the quarterly results ofoperations for the years ended September 30, 2004 and 2003.

 
| ** **            | ** ** | **Quarter Ended**                         | ** ** |
|-----------------------|------------|-------------------------------------------|------------|
| ** **            | ** ** | **December 31**                           | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| ** **            | ** ** | **(in thousands, except per share data)** | ** ** |
| Fiscal 2004           |       |                                      |       |   |   |   |   |   |   |
| Net sales             |       | $                                         | 171,032    |   | $ | 175,184 |   | $ | 190,829 |   | $ | 184,967 |   |
| Gross profit          |       | 35,985                                    |       | 40,319 |   | 43,126 |   | 53,412 |   |
| Net income            |       | 7,466                                     |       | 8,320 |   | 11,718 |   | 9,407 |   |
| Net income per  share |       | 0.28                                      |       | 0.31 |   | 0.44 |   | 0.35 |   |
|                  |       |                                      |       |   |   |   |   |   |   |
| Fiscal 2003           |       |                                      |       |   |   |   |   |   |   |
| Net sales             |       | $                                         | 148,356    |   | $ | 167,157 |   | $ | 157,950 |   | $ | 160,598 |   |
| Gross profit          |       | 31,985                                    |       | 33,454 |   | 35,977 |   | 39,268 |   |
| Net income            |       | 6,670                                     |       | 11,246 |   | 10,129 |   | 8,474 |   |
| Net income per  share |       | 0.25                                      |       | 0.42 |   | 0.38 |   | 0.32 |   |

 

55

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### **Reportof Ernst & Young LLP, Independent Registered Public Accounting Firm**

 

 

Board of Directors andShareholders

Cubic Corporation

 

We have audited theaccompanying consolidated balance sheets of Cubic Corporation as of September30, 2004 and 2003, and the related consolidated statements of income, changesin shareholders’ equity and cash flows for each of the three years in theperiod ended September 30, 2004. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance thatthe financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Cubic Corporation at September30, 2004 and 2003, and the consolidated results of its operations and its cash flowsfor each of the three years in the period ended September 30, 2004, inconformity with U.S. generally accepted accounting principles.

 

 
|   | /s/ Ernst & Young LLP |   |
|--------|---------------------------|--------|

 

 

San Diego, California

November 24, 2004

 

56

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**Item 9. DISAGREEMENTS ONACCOUNTING AND FINANCIAL DISCLOSURE**.

 

None.

 

**Item 9a. STATEMENT ONDISCLOSURE CONTROLS AND PROCEDURES**.

 

Under the supervision and with theparticipation of the Company’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, an evaluation was performed of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures at September 30, 2004. Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Chief Financial Officer,concluded that, as of the evaluation date, the Company’s disclosure controlsand procedures were effective in ensuring that all material informationrelating to the Company and its consolidated subsidiaries is made known to themby others within those entities, particularly during the period in which thisreport was prepared. There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of their evaluation.

 

**PART III**

 

**Item 10. DIRECTORS ANDEXECUTIVE OFFICERS OF THE REGISTRANT**.

 

Certain informationregarding directors and executive officers is incorporated herein by referencefrom our definitive Proxy Statement, which will be filed no later than 30 daysprior to the date of the Annual Meeting of Shareholders.

 

**Item 11. EXECUTIVECOMPENSATION**.

 

Information regardingexecutive compensation is incorporated herein by reference from our definitiveProxy Statement, which will be filed no later than 30 days prior to the date ofthe Annual Meeting of Shareholders.

 

**Item 12. SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT**.

 

Information regardingsecurity ownership of certain beneficial owners and management is incorporatedherein by reference from our definitive Proxy Statement, which will be filed nolater than 30 days prior to the date of the Annual Meeting of Shareholders.

 

**Item 13. CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**.

 

Information regardingcertain relationships and related transactions is included in Note 9 to theConsolidated Financial Statements for the year ended September 30, 2004 and isincorporated herein by reference from our definitive Proxy Statement, whichwill be filed no later than 30 days prior to the date of the Annual Meeting ofShareholders.

 

**Item 14. PRINCIPAL ACCOUNTANTFEES AND SERVICES.**

 

Information regardingprincipal accountant fees and services is incorporated herein by reference fromour definitive Proxy Statement, which will be filed no later than 30 days priorto the date of the Annual Meeting of Shareholders.

 

57

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On November 30, 2004, after it was determined that, in connection withcertain income tax compliance services, affiliates of Ernst & Young LLPheld employment tax related funds of a de minimis amount and****made payment of such funds to the applicable tax authorityin respect of expatriate and foreign employees of a subsidiary of the Companyin Malaysia, the Audit Committee of the Board of Directors of Cubic Corporationmet to consider the impact of these events on the independence of its externalauditor, Ernst & Young LLP. These actions by affiliates of Ernst &Young LLP have been discontinued. Custody of the assets of an audit client isnot permitted under the auditor independence rules in Regulation S-X of theSecurities and Exchange Commission. The Audit Committee and Ernst & YoungLLP have considered the impact that the holding and paying of these funds mayhave had on Ernst & Young LLP’s independence with respect to the Companyand have concluded that there has been no impairment of Ernst & Young LLP’sindependence. In making this determination, the Audit Committee considered thede minimis amount of funds involved, the ministerial nature of the actions, andthat the subsidiary involved was immaterial to the consolidated financialstatements of the Company.

 

58

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**PART IV**

 

Item 15.  **EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.**

 

(a)           Documents filed as part of thisReport:

 

(1)           Thefollowing consolidated financial statements of Cubic Corporation, as referencedin Item 8:

 

Consolidated Balance Sheets

September 30, 2004 and 2003

 

Consolidated Statements of Income

Years ended September 30, 2004, 2003 and 2002

 

Consolidated Statements of Changes in Shareholders’Equity

Years ended September 30, 2004, 2003 and 2002

 

Consolidated Statements of Cash Flows

Years ended September 30, 2004, 2003 and 2002

 

Notes to Consolidated Financial Statements

September 30, 2004

 

(2)           Thefollowing consolidated financial statement schedules of Cubic Corporation andsubsidiaries, as referenced in Item 15(d):

 

None are required under the applicable accountingrules and regulations of the Securities and Exchange Commission.

 

(b)           Reports on Form 8-Kduring the last quarter of 2004:

 

None

 

(c)           Exhibits:

 

3 (ii)        Bylaws

21.           Listof Subsidiaries

31.1         Section302 Certifications

32.1         Section906 Certifications

 

(d)           Financial StatementSchedules

 

None

 

59

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**SIGNATURES**

 

Pursuant to therequirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized:

 
| (Registrant) |     |         CUBIC  CORPORATION |
|--------------|----------|--------------------------------------------------------------------|
|         |     |                                                               |
|         |     |                                                               |
| *12/6/04*    | * * |   /s/ Walter J. Zable                                    |   |
| Date         |     |   WALTER J. ZABLE, President                             |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated:

 

 
| *12/6/04* |   |   /s/ Walter J. Zable                |   |      | *12/6/04* | * *                                       |   /s/ Raymond E. Peet         |   |
|-----------|--------|------------------------------------------------|--------|-----------|-----------|------------------------------------------------|-----------------------------------------|--------|
| Date      |   |   WALTER J. ZABLE, President,        |   | Date      |      |   RAYMOND E. PEET, Director          |
|      |   |   Chief Executive Officer and        |   |      |      |                                           |
|      |   |   Chairman of the Board of Directors |   | *12/6/04* |      |   /s/ Robert S. Sullivan             |                                    |
|      |   |                                           |   | Date      |      |   ROBERT S. SULLIVAN, Director       |
| *12/6/04* |   |   /s/ Walter C. Zable                |   |      |      |                                           |                                    |
| Date      |   |   WALTER C. ZABLE, Vice              |   | *12/6/04* |      |   /s/ Robert D. Weaver               |                                    |
|      |   |   President and Vice Chairman of the |   | Date      |      |   ROBERT D. WEAVER, Director         |
|      |   |   Board of Directors                 |   |      |      |                                           |
|      |   |                                           |   | *12/6/04* |      |   /s/ William W. Boyle               |                                    |
| *12/6/04* |   |   /s/ Richard C. Atkinson            |   |      | Date      |                                           |   WILLIAM W. BOYLE, Director, |
| Date      |   |   RICHARD C. ATKINSON,               |   |      |      |   Vice President and Chief Financial |
|      |   |   Director                           |   |      |      |   Officer                            |
|      |   |                                           |   |      |      |                                           |
|      |   |                                           |   | *12/6/04* |      |   /s/  Mark A. Harrison              |                                    |
| *12/6/04* |   | /s/ Raymond L. deKozan                         |   |      | Date      |                                           |   MARK A. HARRISON, Vice      |
| Date      |   | RAYMOND L. deKOZAN,                            |   |      |      |   President and Corporate Controller |
|      |   | Director                                       |   |      |      |   (Principal Accounting Officer)     |
|      |   |                                           |   |      |      |                                           |
| *12/6/04* |   |   /s/ Robert T. Monagan              |   |      |      |                                           |                                    |
| Date      |   |   ROBERT T. MONAGAN, Director   |   |      |      |                                           |
|           |        |                                                |        |           |           |                                                |                                         |        |  |  |  |  |

 

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