** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT**

 

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

 

**Forthe Fiscal Year Ended September 30, 2003**

 

**1-8931**

Commission File Number

 

**CUBIC CORPORATION**

Exact Name of Registrant asSpecified in its Charter

 

|                                                                          | **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 Actof 1934 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 16,039,954 shares of voting stock held bynon-affiliates of the registrant is: $464,517,100 as of November 24, 2003,based on the closing stock price on that date.

 

Number of shares of common stock outstanding as of November 24,2003 including shares held by affiliates is: 26,719,845 (after deducting8,944,884 shares held as treasury stock).

 

 

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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.

 

**PART I**

 

**Item1.****           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 militaryrange instrumentation, training and applications systems, communications andsurveillance systems, HF and VHF/UHF surveillance receivers, transceivers andavionics systems.

 

Automated revenue collection systems,including contactless smart cards, passenger gates, central computer systemsand ticket vending machines for mass transit networks, including rail systemsand buses.

 

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 alsomanufacture replacement parts for the products we produce.  In addition, we operate a corrugated paperconverting facility through our subsidiary, Consolidated Converting Company.

 

Our sales have grown over the past five years from $414 million in 1998to $634 million in 2003, a compound annual growth rate of about 9 percent. Thissales growth was fueled by strategic acquisitions we made in the mid-ninetiesand by key contract wins in recent years in both the defense and transportationsystems segments. We also achieved the highest level of net income in ourhistory in fiscal 2003 due to significant operating profit improvements in thedefense segment and continued strong operating profits in the transportationsystems segment. The operating profit improvements in 2003 were augmented bygains from the sale of real estate that was no longer needed in the business.

 

During fiscal year 2003, approximately 44 percent of our total businesswas conducted, either directly or indirectly, with various agencies of theUnited States government.  Most of theremainder of our revenue was from local, regional and foreign governments oragencies.

 

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 relations,” 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 industry segments, is setforth in Note 13 to the Consolidated Financial Statements for the year endedSeptember 30, 2003. Additional information regarding the amounts ofrevenue and operating profit and loss attributable to major classes of productsand services is set forth in Management’s Discussion and Analysis which followsat Item 7 of this filing.

 

**DEFENSE**

 

Cubic’s defense business segment operates as the Cubic DefenseApplications (CDA) group. Continuing the strategic realignment begun in fiscal2002, CDA consolidated its division profit centers into three market-focusedbusiness units in fiscal 2003:  TrainingSystems, Mission Support, and Communications and Electronics.  CDA’s products include customized militaryrange instrumentation systems, tactical engagement simulation systems,communications and surveillance systems, HF and UHF/VHF surveillance receivers,transceivers and avionics systems. Services provided by CDA include training mission support, computersimulation training, distributed interactive simulation, development ofmilitary training doctrine and field operations and maintenance.  The group markets its capabilities directlyto various U. S. government departments and agencies and foreigngovernments.  In addition, CDA contractsor teams frequently with other leading defense suppliers.

 

**TrainingSystems**

 

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 training in actual air and land combat environments, withweapons and other effects simulated by electronic and/or laser technology.  The systems also enable the collection(based on Global Positioning System technology) and analysis of behavior andevent data 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 theinitial developer 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 U. S. 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.  TSBUprovided turnkey systems to instrument two of the three U. S. Army trainingcenters in past years at Fort Polk, LA (Joint Readiness Training Center – JRTC)and Hohenfels, Germany (Combat Maneuver Training Center – CMTC).  Last year, the group completed the second oftwo similar ranges, in the U. K. and Canada, for the British Army.  Early in 2003, TSBU was awarded separatecontracts by Canada ($92 million) and Australia ($46 million) for land combattraining centers in those nations.  Tomeet new customer demand for mobile instrumented training, TSBU has also developeda transportable, deployable system now being fielded by the U. S. 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 U. S. Army and MarineCorps forces, as well as Air Force security forces, other U. S. agencies andmany international customers.  Weproduce MILES equipment in the U. S. and at our New Zealand-based subsidiary,Oscmar International.

 

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TSBU’s newest segment, Simulation Systems, is the result of acquiringECC International Corporation at the end of fiscal 2003.  Simulation Systems produces virtual trainingsystems, employing actual or realistic weapons and systems together with visualimagery to simulate actual battlefield or other environments.

 

**MissionSupport Services**

 

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 U. S. Government and allied nations,with an emphasis on military training. MSBU/ALTD consist of nearly 2,500 people located at 64 sites in 26states and 18 other nations.  The unit’spersonnel 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.  The units plan, prepare, execute anddocument realistic and focused mission rehearsal exercises (live andcomputer-based) as final preparation of forces prior to their deployment tomission areas.  In addition, the unitsprovide high level consultation and advisory services to the governments andmilitaries of allied nations.  U. S.government contracts are typically awarded on a competitive basis with optionsfor multiple years.  In this competitivemarket, MSBU/ALTD are viewed as premier service providers and formidablecompetitors.  They typically compete asprime contractors to the government, but also team with other companiesdepending on the skills required.  Muchof the business unit’s early work centered on battle command simulation andtraining, in which military commanders are taught to make correct decisions inbattle situations.  More recently, thebusiness base has broadened to include live training support, distancelearning, weapons effects modeling, intelligence analysis and military forcemodernization.

 

Principal MSBU programs include providing mission support services totwo of the Army’s major combat training centers, the Joint Readiness TrainingCenter (JRTC), as prime contractor, and the National Training Center (NTC), asa subcontractor.  These services includeplanning, executing and documenting large scale exercises aimed at stressing U.S. forces in situations as close to actual combat as possible.

 

At U. S. Joint Forces Command, Cubic supports and helps manage allaspects of the operations of the Joint Warfighting Center (JWFC).  On the Marine Air Ground Task Force TrainingSystems Support (MTSS) contract, Cubic provides “cradle-to-grave” training andexercise support to U. S. Marine forces worldwide, including real-world missionrehearsals.  We have planned andexecuted virtually all USMC simulation-based exercises worldwide since 1998,directly preparing Marines for combat operations.

 

Cubic initiated and has continued to operate the Korea BattleSimulation Centers (KBSC) since their inception in 1991.  KBSC prepares U. S. forces in Korea to dealwith situations which may develop in their area of responsibility and includesthe world’s largest and most complex training exercise, the annual ULCHI FOCUSLENS.

 

At the U. S. 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 and simulations to assess andpredict the effects of such weapons in combat and other environments, as wellas the training of U. S. forces, first responders, and other users of DTRAproducts.

 

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 

 

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of all aspects of reform.

 

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 U. S.forces 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 U. S. 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 U. S. Army/Air Force Joint STARS systemand supplies the principal datalink for the United Kingdom’s ASTORprogram.  Capitalizing on a multi-yearinternal R&D program, CEBU won a competitive contract in fiscal 2003 todevelop and produce the next-generation Common Data Link Subsystem (CDLS) forthe U. S. Navy.  CDLS is planned forinstallation on major surface ships of the U. S. fleet.  Smaller, tactical versions of our CommonData Link are strong candidates for new military platforms, such as UnmannedAerial Vehicles (UAV), which require high performance in a small package.  A principal opportunity in this area is theUnited Kingdom’s new Watchkeeper UAV program.

 

CEBU’s Personnel Locator System (PLS) is standard equipment on U.S.aircraft 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 3 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 Army and Navy for the initial development of these systemswhich should evolve to production follow-on and open the door for newopportunities within these commands.

 

**RawMaterials**:

 

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 presently adequate to meet the requirements of the segment.

 

**Backlog**:

 

Funded sales backlog of the defense segment at September 30, 2003was $388 million compared to $232 million at September 30, 2002.  Total backlog, including unfunded orunexercised customer orders, was $743 million at September 30, 2003compared to $493 million at September 30, 2002. Approximately $484 millionof the September 30, 2003 total backlog is not expected to be completed bySeptember 30, 2004.

 

**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 withthese same companies on specific bid opportunities.  Well known CDA competitors include Lockheed Martin, NorthropGrumman, General Dynamics, Boeing, L3 Communications and SAIC.  While CDA is generally smaller than itsusual competition, we believe our competitive advantages include pastperformance, incumbent relationships and the ability to rapidly focustechnology and innovation to solve customer problems.

 

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Competition also exists among projects for funding in the defensebudget.  While the U. S. defense budgethas seen sharp increases in recent years, long-term growth will only occur inthose segments which offer very high payoff and are consistent with warfightingpriorities.  The U. S. defense markettoday can be characterized as highly dynamic, with priorities and fundingshifting in reaction to, or anticipation of, world events much more rapidlythan during the Cold War or since. Overarching military priorities include lighter, faster, more lethalforces with the ability and training to rapidly adapt to new situations basedon superior knowledge of the battle environment.  Superior knowledge is enabled by systems which rapidly collect,process and disseminate the right information to the right place at the righttime, resulting in what DoD calls network-centric warfare.  Cubic’s training systems, training supportand intelligence, surveillance and reconnaissance capabilities are well matchedto these sustainable defense priorities.

 

**TRANSPORTATIONSYSTEMS**

 

Cubic Transportation Systems is a leading turnkeysolution provider of automated fare collection systems for public transport authoritiesworldwide.  We provide a range ofservices and systems solutions for the bus, bus rapid transit, light rail,commuter rail, heavy rail, ferry and parking markets.  These solutions and services include system design, centralcomputer systems, equipment design and manufacturing, device-level software,integration, test, installation, warranty, maintenance, computer hostingservices, call center services, card management and distribution services,financial clearing and settlement, multi-application support and outsourcingservices.  In addition, Cubic designs,develops and manufactures its own technology components, such as smart cardreaders, magnetic ticket transports, and controller boards, for use within itssuite of fare collection equipment consisting of on-bus solutions, accesscontrol solutions, vending solutions, retail and card issuing solutions, andmobile inspection 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, Singapore, Bangkok,Thailand, 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 percent ownership,was awarded a contract called “PRESTIGE” to privatize the London Transport farecollection system.  This 17-yearcontract, now in its sixth year, is the largest automated fare collectioncontract ever awarded.  Cubic’s share ofthe work, including all options exercised to date, exceeds $800 million overthe 17-year life of the contract.

 

**IndustryOverview**

 

Transportagencies, particularly those based in the U.S., 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 increasing demand for open systems andcommercial off-the-shelf products. This demand is evidenced by transit agencyparticipation in industry standards initiatives to increase interoperabilityand to actively encourage more competition.

 

Furthermore,advances in 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 

 

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operators,all sharing a common regional smart card. There is an emerging trend for other applications to be added to theseregional systems to expand the utility of the smart card, offering higher valueand incentives to the end users and lowering costs and creating new revenuestreams for the regional system operators. As a result, these regional systems have created opportunities for newlevels of systems support and services including call center support, smartcard production and distribution, financial clearing and settlement andmulti-application support.  In somecases, operators are choosing to outsource the capital development, ongoingoperations and commercialization of these regional ticketing systems.

 

**RawMaterials**:

 

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,supplies of raw materials and purchased parts are presently adequate to meetthe requirements of the segment.

 

**Backlog**:

 

Funded sales backlog of the transportation systems segment atSeptember 30, 2003 was $620 million compared to $545 million atSeptember 30, 2002.  Total backlog,including un-funded or unexercised customer orders, was $762 million atSeptember 30, 2003 compared to $672 million at September 30, 2002.Approximately $544 million of the September 30, 2003 total backlog is not expectedto be completed by September 30, 2004.

 

**Competition**:

 

Weare one of several companies involved in providing automated fare collectionsystems solutions and services for public transport operators worldwideincluding Thales, Ascom, Scheidt & Bachmann and ERG.  In addition, there are many smaller localcompanies, 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.

 

**OTHEROPERATIONS**

 

Consolidated Converting Company converts corrugated paper stock intopizza boxes and other food related corrugated products. EffectiveDecember 15, 2003 the subsidiary will no longer convert paper stock intotoilet seat covers.

 

**RawMaterials**:

 

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

 

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**Backlog**:

 

Consolidated Converting Company had little sales backlog atSeptember 30, 2003 and 2002. The business does not track sales backlog dueto the short-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 deliverattractive returns on capital.  Weintend to build on our position with U.S. and foreign governments as theleading ‘full spectrum” supplier of training systems and mission supportservices, grow our niche position as a supplier of network centric technologiesfor communications systems and products, and maintain our position as thenumber one provider of integrated intermodal regional transit fare collectionsystems to transit authorities worldwide. Our strategies to achieve theseobjectives 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 wecan leverage our returns through repeat business with existing customers andexpand our 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 U.S. air combat training systems forthe next 10 years.  Since pioneeringthis technology in the 1970’s we have played a significant role in developingthis key training technology for U.S. 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.

 

 In our transportation segment we have had arelationship with the Washington Metropolitan Area Transportation Authority(WMATA) for 30 years, since we first implemented their magnetic ticketingsystem, and have over the years installed a complete back office system andover 4,000 pieces of equipment.  In1999, we upgraded their system with SmarTripÒ, the first contactless smart cardimplementation in the U.S. and have since added other applications such as parking,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.

 

**Maintain aDiversified Business Mix**

 

Wehave a diverse mix of business in our defense and transportation systemssegments. Approximately 44 percent of our sales are to the U.S. government,however, this represents a wide variety of product and service sales to manydifferent U.S. government agencies. While 15% of our sales in 2003 and for thepast several years came from the PRESTIGE contract in London, its share oftotal sales should decrease going forward as we expect growth in sales fromother transit customers and in the defense segment.

 

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Our backlog increased in 2003 to $1.5 billion, the highest level in ourhistory. The increase is significant not just because of the amount of theincrease, but because of the makeup of the backlog. Our previous record highbacklog was $1.2 billion in 1998. At that time the PRESTIGE contract represented 55percent of our total backlog and defense was only 28 percent of the total. Asof September 30, 2003, backlog was $300 million higher than in 1998 andPRESTIGE was only 24 percent of the total, with defense about half of thetotal. Therefore, not only has the backlog grown, but it has done so in a muchbroader manner, so we are not as reliant on a single contract or customer forour revenues.

 

We also seek a reasonable balance between systems and service work inboth the defense and transportation segments. In aggregate, approximately 35%of our sales revenue in 2003 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, broaden ourtechnical solutions, gain staffing resources and leverage our entry intorelated new markets. As an example, we recently acquired ECC International.This acquisition expanded our presence in the training market by adding virtualtraining, which complements our existing focus on live and constructivetraining.

 

**OTHER MATTERS**

 

We pursue a policy of seeking patent protection for our products, wheredeemed advisable, but do not regard ourselves as materially dependent on itspatents 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 $4.8 million, $8.4 million and $9.8 million in 2003, 2002, and2001, respectively. We do not rely heavily on independent R&D, as most ofour new product development occurs in conjunction with the performance of workon our contracts. The amount of contract required product development activityincreased in 2003 to $46 million, compared to $41 million in 2002 and 2001;however, these costs are included in cost of sales as they are directly relatedto 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 4,700 persons at September 30, 2003.

 

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. From time to time we also obtain third party financing to assist inworking capital requirements.

 

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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.

 

***Wedepend on government contracts for substantially all of our sales and the lossof government 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 international and UnitedStates, state, regional and local governmental agencies represented more than95 percent of our total sales in fiscal year 2003.  Although government agencies are subject to common budgetarypressures and other factors, many of our government customers exerciseindependent purchasing decisions. Because of the concentration of business with governmental agencies, weare vulnerable to adverse changes in our sales, income and cash flows if asignificant number of our government contracts or subcontracts or prospects aredelayed or canceled for 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 orhostile activities;

 

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

 

•                  changesin government programs or requirements or their timing;

 

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

 

•                  theadoption of 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

 

•                  delaysin the payment of our invoices by government payment offices.

 

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

 

In thepast, our businesses have been adversely affected by significant changes ingovernment spending during periods of declining budgets.  A significant decline in overall spending,or the 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 anexample, the U.S. defense and intelligence budgets generally, and spending inspecific agencies with which we work, such as the Department of Defense, havedeclined from time to time for extended periods since the mid-1980s, resultingin program delays, program cancellations and a slowing of new program starts.  Although spending on defense-relatedprograms by the U.S. government has recently increased, future levels ofexpenditures and authorizations for those programs may decrease, remainconstant or shift to programs in areas where we do not currently provideproducts 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 always enactspending 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 funding could imposeadditional business risks on us.

*** ***

***Ourcontracts with government agencies may be terminated or modified prior tocompletion, which could 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;

 

•                  reducethe value of our existing contracts;

 

•                  modifysome of the terms and conditions in our existing contracts;

 

•                  suspendor permanently prohibit us from doing business with the government or with anyspecific government agency;

 

•                  controland potentially prohibit the export of our products;

 

•                  cancelor delay existing multi-year contracts and related orders if the necessaryfunds for contract performance for any subsequent year are not appropriated;

 

•                  declineto exercise an option to extend an existing multi-year contract; and

 

•                  claimrights in technologies and systems invented, developed or produced by us.

 

MostU.S. 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 to termination.  If an agency terminates a contract with usfor default, we are denied any recovery, and may be liable for excess costsincurred by the agency in procuring undelivered items from an alternativesource.  We may receive show-cause orcure 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.

 

In theevent that any of our contracts were to be terminated or adversely modified,there may be significant adverse effects on our revenues, operating costs andincome that would not be recoverable.

 

***Failureto retain existing contracts or win new contracts under competitive biddingprocesses may adversely 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:

 

•                  theneed to compete against companies or teams of companies with more financial andmarketing resources and more experience in bidding on and performing majorcontracts than we have;

 

•                  theneed to compete against companies or teams of companies that may be long-term,incumbents for a particular contract for which we are competing and that have,as a result, greater domain expertise and better customer relations;

 

•                  theneed to compete to retain existing contracts that have in the past been awardedto us on a sole-source basis;

 

•                  theexpense and delay that may arise if our competitors protest or challenge newcontract awards;

 

•                  theneed to bid on programs in advance of the completion of their design, which mayresult in unforeseen technological difficulties, cost overruns or both;

 

11

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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;

 

•                  theneed to develop, introduce, and implement new and enhanced solutions to ourcustomers’ needs;

 

•                  theneed to locate and contract with teaming partners and subcontractors; and

 

•                  theneed to accurately estimate the resources and cost structure that will berequired to perform any fixed-price contract that we are awarded.

 

We maynot be afforded the opportunity to bid on contracts that are held by othercompanies and are scheduled to expire if the agency determines 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, upon expiration, if the customer requires further services ofthe type provided by the contract, there is frequently a competitive rebiddingprocess and there can be no assurance that we will win any particular bid, orthat we will be able to replace business lost upon expiration or completion ofa 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.

 

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

 

***Governmentaudits of our contracts could result in a material charge to our earnings andhave a negative effect on our cash position 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 significant unallowable costs, we couldincur a material charge to our earnings or reduction in our cash position.

 

***Our international business exposes us toadditional risks, including exchange rate fluctuations, foreign tax and legalregulations and political or economic instability that could harm our operatingresults.***

 

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;

 

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

 

•                  increasesor impositions of withholding and other taxes on remittances and other paymentsby foreign subsidiaries or joint ventures to us;

 

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

 

•                  costsof compliance with local laws, including labor laws;

 

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

 

•                  unfamiliarbusiness practices and customs;

 

•                  domesticand foreign 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;

 

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

 

•                  economicand geopolitical developments and conditions, including internationalhostilities, acts of terrorism and governmental reactions, inflation, traderelationships and 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 cause 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 for applicablecurrencies.  While we use foreignexchange forward and option contracts to hedge significant contract sales andpurchase commitments that are denominated in foreign currencies, our hedgingstrategy may not prevent us from incurring losses due to exchange fluctuations.

 

***Ouroperating margins may decline under our fixed-price contracts if we fail toestimate accurately the time and resources necessary to satisfy ourobligations.***

 

Approximately 85% of our contracts in 2003 were fixed-price contracts underwhich we bear the risk of cost overruns. Our profits are adversely affected if our costs under these contractsexceed the assumptions we used in bidding for the contract.  Often, we are required to fix the price fora contract before the project specifications are finalized, which increases therisk that we will incorrectly price these contracts.

 

***Wemay be liable for civil or criminal penalties under a variety of complexprocurement laws and regulations, and changes in governmental regulations couldadversely affect our business 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:

 

•                  theFederal Acquisition Regulations and all department and agency supplements,which comprehensively regulate the formation, administration and performance ofU.S. government contracts;

 

•                  theTruth in Negotiations Act, and implementing regulations, which requirecertification and disclosure of all cost and pricing data in connection withcontract negotiations;

 

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

 

•                  moststate and regional agencies and foreign governments have regulations similar tothose described above.

 

***Ourfailure to identify, attract and retain qualified technical and managementpersonnel could adversely affect our existing businesses.***

 

We maynot 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.

 

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***Wemay incur significant costs in protecting our intellectual property which couldadversely affect our profit margins. Our inability to protect our patents andproprietary rights 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.

 

***Wecompete primarily for government contracts against many companies that arelarger, better financed and better known than us.  If we are unable to compete effectively, our business andprospects will be adversely affected.***

 

Ourbusinesses operate in highly competitive markets.  Many of our competitors are larger, better financed and betterknown companies who may compete more effectively than we can.  In order to remain competitive, we must keepour capabilities technically advanced and compete on price and on value addedto our customers.  Our ability tocompete may be adversely affected by limits on our capital resources and ourability to invest in maintaining and expanding our market share.

 

***Theterms of our financing arrangements may restrict our financial and operationalflexibility, including our ability to invest in new business opportunities.***

 

Wecurrently have unsecured notes payable to several insurance companies.  The terms of these notes include provisionsthat require and/or limit our levels of working capital, debt and tangible networth and coverage of fixed charges.   We also have provided performance guarantees to various customers thatinclude financial covenants including limits on working capital, debt, tangiblenet worth and cash flow coverage.

 

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

 

***Ourrevenues could be less than expected if we are not able to deliver services orproducts as scheduled 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 other factors.  Any material supply disruptions couldadversely affect our ability to perform our obligations under our contracts andcould result in cancellation of contracts or purchase orders, penalties, delaysin realizing revenues, payment delays, as well as adversely affect our ongoingproduct cost structure.

 

***Failure to perform by one of oursubcontractors could materially and adversely affect our prime contractperformance and our ability to obtain future 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 to satisfactorily deliver productsor services may adversely affect our ability to perform our obligations as aprime contractor.  Any subcontractorperformance deficiencies could result in the customer terminating our

 

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contractfor default, which could expose us to liability for excess costs ofreprocurement by the customer and have a material adverse effect on our abilityto compete for other contracts.

 

For example, one of the subcontractors we engaged to perform a portionof the work on the PRESTIGE contract with TranSys failed to perform.  Consequently, we were forced to terminatethis subcontractor and are completing the subcontractor’s work on our own.  We have incurred and will continue to incuradditional costs to complete this work and have asserted a claim against thesubcontractor to recover appropriate damages. The subcontractor has claimed that we wrongfully terminated thesubcontract and seeks damages from us. This situation has resulted in our realizing lower profit margins thanwe had anticipated, and could limit increases in future profit margins and cashflows from the contract until the situation is resolved.  There can be no assurance that we will beable to complete the subcontractor’s work in a cost effective manner, that thefailure will not adversely affect our contract with TranSys, that we will notbe liable to the subcontractor’s claim or that we will be able to recover anyof our damages from the subcontractor.

 

***We may acquire other companies, which couldincrease our costs or liabilities or be disruptive.***

 

Partof our strategy involves the acquisition of other companies.  We recently completed the acquisition of ECCInternational Corp., a defense company that sells simulated and relatedtraining programs for armed forces, for a cost of approximately $43.9million.  We may not be able tointegrate this business, or any other acquisitions successfully withoutsubstantial expense, delay or operational or financial problems.  The acquisition and integration of newbusinesses involves risk.  Theintegration of acquired businesses may be costly and may adversely impact ourresults of operations or financial condition:

 

•                  wemay need to divert management resources to integration, which may adverselyaffect our ability 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;

 

•                  wemay not eliminate redundant costs in selecting acquisition candidates; and

 

•                  oneor more of our acquisition candidates also may have unexpected liabilities oradverse operating issues.

 

***Ourresults of operations have historically fluctuated and may continue tofluctuate significantly in the future, which could adversely affect the marketprice of our 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 timeit takes 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 contracttype/product mix and unit volume, our ability to keep expenses within budget,and our pricing 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 annual basis.  Consequently, we do not believe thatcomparison of our results of operations from period to period is necessarilymeaningful or predictive of our likely future results of operations. In somefuture financial period our operating results may be below the expectations ofpublic market analysts or investors.  Ifso, the market price of our securities may decline significantly.

 

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**CAUTIONARYSTATEMENT ABOUT FORWARD-LOOKING INFORMATION**

 

Thisreport, including the documents that we incorporate by reference, containsforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended, that are subject to the “safeharbor” created by those sections. Any statements about our expectations,beliefs, plans, objectives, assumptions or future events or our futurefinancial and/or operating performance are not historical and may beforward-looking. These statements are often, but not always, made through theuse of words or phrases such as “may,” “will,” “anticipate,” “estimate,”“plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”“predict,” “potential,” “opportunity” and similar words or phrases or thenegatives of these words or phrases. These statements involve estimates, assumptions and uncertainties,including those discussed in “Risk Factors” and elsewhere throughout thisfiling and in the documents incorporated by reference into this filing thatcould cause actual results to differ materially from those expressed in thesestatements.

 

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.  Inaddition, past financial and/or operating performance is not necessarily areliable indicator of future performance and you should not use our historicalperformance to anticipate results or future period trends.  Further, any forward-looking statementspeaks only as of the date on which it is made, and we undertake no obligationto update any forward-looking statement to reflect events or circumstancesafter the 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 anyfactor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

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**Item2.****           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 75percent of the square footage, including 540,000 square feet located in SanDiego, 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 currently haveneed for approximately 90,000 square feet of the Orlando facility and havehired a property management firm to assist us in leasing the excess space tothird parties.  The following tableidentifies significant properties by business segment:

 
| **Location  of Property**   |   | **Owned or Leased** |   |
|-----------------------------|--------|---------------------|--------|
|                        |   |                |   |
| **Corporate Headquarters:** |   |                |   |
| San Diego,  CA              |   | Owned               |   |
|                        |   |                |   |
| **Defense:**                |   |                |   |
| Alexandria,  VA             |   | Leased              |   |
| Arlington,  VA              |   | Leased              |   |
| Auckland,  New Zealand      |   | Leased              |   |
| Hampton, VA                 |   | Leased              |   |
| Honolulu, HI                |   | Leased              |   |
| Lacey, WA                   |   | Leased              |   |
| Leavenworth,  KS            |   | Leased              |   |
| Orlando, FL                 |   | Leased and  owned   |   |
| San Diego,  CA              |   | Leased and  owned   |   |
| San Jose, 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              |   |
| New York, NY                |   | Leased              |   |
| London,  England            |   | Leased              |   |
| Merstham,  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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**Item3.****           LEGAL PROCEEDINGS.**

 

In October 2003, a former subcontractor of ECC International Corp.(which we acquired in September 2003) sued ECC in the United States DistrictCourt in Orlando, Florida seeking $15 million in compensatory and $10 millionin punitive damages. The suit claims that ECC breached a non-competitioncovenant, misappropriated trade secrets and wrongfully terminated itssubcontract. ECC has filed a motion to dismiss the case and intends tovigorously deny the allegations and defend the matter. We believe that theoutcome of the matter will not have a material effect on our financialstatements and, to date, no expense has been accrued.

 

During the quarter ended March 31, 2003, a former subcontractor tothe Company on the PRESTIGE project in London filed a claim against us underarbitration provisions of the subcontract, alleging wrongful termination, foran amount yet to be determined. We had previously notified the subcontractor ofour intention to file a claim against the subcontractor for failure to performand in July 2003 we filed our defense and counterclaim with thearbitrator. We believe that the subcontractor’s claim is without merit and willvigorously pursue our defense and counterclaim. We believe we will ultimatelybe able to recover some or all of the damages we have incurred due to thesubcontractor’s failure to perform, but we have not anticipated recovery in ourcalculation of profits under the contract with TranSys because the conditionsrequired by accounting principles generally accepted in the United States havenot yet been achieved.

 

In 1991, the government of Iran commenced an arbitration proceedingagainst us seeking $12.9 million for reimbursement of payments made forequipment that was to comprise an Air Combat Maneuvering Range pursuant to asales contract and an installation contract executed in 1977, and an additional$15 million for unspecified damages. We contested the action and brought acounterclaim for compensatory damages of $10.4 million.  In May 1997, the arbitral tribunalawarded the government of Iran a decision in the amount of $2.8 million, plussimple interest at the rate of 12 percent per annum from September 21, 1991through May 5, 1997. In December 1998, the United States DistrictCourt granted a motion by the government of Iran confirming the arbitral awardbut denied Iran’s request for additional costs and interest. Both parties haveappealed. Under current United States law and policy, any payment to or onbehalf of the Revolutionary Government of Iran must first be licensed by theU.S. government. The United States is not now issuing such licenses and we donot expect this policy to change in the foreseeable future. We believe that theultimate outcome of the matter will not have a material effect on our financialstatements and, to date, no expense has been accrued.

 

We are not presently a party to any material pending proceedings, otherthan ordinary litigation incidental to the business. We believe the outcome ofthese proceedings and the proceedings described above will not have amaterially adverse effect on our financial position.

 

**Item4.****           SUBMISSION OFMATTERS TO 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.

 

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**PART II**

 

**Item5.****           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** |   | **Dividends per Share** |   |
|--------------------|--------|----------------------------------|--------|-------------------------|--------|
|               |   | **2003**                         |   | **2002**                |   | **2003** |   | **2002** |   |
| **Quarter ended:** |   | **High**                         |   | **Low**                 |   | **High** |   | **Low** | ** ** |   | ** ** |   | ** ** |
| December 31   |   | $                                | 19.30  |                    | $      | 13.73 |   | $ | 17.16 |   | $ | 11.13 |   | — |   | — |   |
| March 31      |   | 22.72                            |   | 14.27                   |   | 22.78 |   | 15.48 |   | $ | .07 |   | $ | .063 |   |
| June 30       |   | 23.05                            |   | 16.54                   |   | 32.97 |   | 20.51 |   | — |   | — |   |
| September 30  |   | 30.50                            |   | 22.41                   |   | 23.37 |   | 15.27 |   | $ | .07 |   | $ | .07 |   |
|                    |        |                                  |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

On November 24, 2003, the closing price of our common stock on theAmerican Stock Exchange was $28.96.

 

There were approximately 1,300 shareholders of record of our commonstock as of November 24, 2003.

 

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**Item6. SELECTED FINANCIAL DATA.**

 

FINANCIAL HIGHLIGHTS ANDSUMMARY OF CONSOLIDATED OPERATIONS

 

(amounts in thousands, exceptper share data)

 
|                                          |   | **Years Ended September 30,** |    |
|-----------------------------------------------|--------|------------------------------------|---------|
|                                          |   | **2003**                           |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                          |   |                               |    |   |   |   |   |   |   |   |   |
| **Results of  Operations:**                   |   |                               |    |   |   |   |   |   |   |   |   |
| Sales                                         |   | $                                  | 634,061 |   | $ | 559,604 |   | $ | 501,679 |   | $ | 531,516 |   | $ | 510,759 |   |
| Cost of sales                                 |   | 493,377                            |    | 426,012 |   | 385,569 |   | 449,913 |   | 404,144 |   |
| Selling, general and administrative  expenses |   | 87,888                             |    | 85,459 |   | 76,052 |   | 76,016 |   | 75,725 |   |
| Interest expense                              |   | 3,659                              |    | 3,538 |   | 3,601 |   | 3,729 |   | 4,313 |   |
| Income taxes (benefit)                        |   | 18,514                             |    | 11,484 |   | 10,266 |   | (433 | ) | 7,482 |   |
| Net income                                    |   | 36,519                             |    | 29,437 |   | 20,842 |   | 674 |   | 14,008 |   |
|                                          |   |                               |    |   |   |   |   |   |   |   |   |
| Average number of shares outstanding          |   | 26,720                             |    | 26,720 |   | 26,720 |   | 26,720 |   | 26,721 |   |
|                                          |   |                               |    |   |   |   |   |   |   |   |   |
| **Per Share Data:**                           |   |                               |    |   |   |   |   |   |   |   |   |
| Net income                                    |   | $                                  | 1.37    |   | $ | 1.10 |   | $ | 0.78 |   | $ | 0.03 |   | $ | 0.52 |   |
| Cash dividends                                |   | 0.14                               |    | 0.133 |   | 0.127 |   | 0.127 |   | 0.127 |   |
|                                          |   |                               |    |   |   |   |   |   |   |   |   |
| **Year-End Data:**                            |   |                               |    |   |   |   |   |   |   |   |   |
| Shareholders’ equity                     |   | $                                  | 255,292 |   | $ | 213,163 |   | $ | 190,895 |   | $ | 176,023 |   | $ | 182,965 |   |
| Equity per share                              |   | 9.55                               |    | 7.98 |   | 7.14 |   | 6.59 |   | 6.84 |   |
| Total assets                                  |   | 460,226                            |    | 374,459 |   | 341,347 |   | 322,350 |   | 330,161 |   |
| Long-term debt                                |   | 47,142                             |    | 48,571 |   | 50,000 |   | 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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**Item7.****           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, 2003, 58 percent of sales were derived from defense, while 42 percent 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 U.S. and other nations around the world. The U.S. Government remains our largest customer, accounting for approximately 44 percent of sales for 2003 compared to 39 percent in 2002 and 37 percent in 2001.

 

Cubic DefenseApplications is a diversified supplier of constructive, live and virtualmilitary training systems, services and communication products to the U.S.Department 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,development of military training doctrine, force modernization services forNATO entrants and field operations and maintenance. Our communications productsare aimed at intelligence, surveillance, and search and rescue markets.

 

CubicTransportation Systems develops and delivers innovative fare collection systemsfor public transit authorities worldwide. We provide hardware, software and multi-agency, multi-modaltransportation integration technologies and services that allow the agencies toefficiently collect fares, manage their operations, reduce shrinkage and makeusing public transit a more convenient and attractive option for commuters.

 

**ConsolidatedOverview**

Sales for fiscal 2003 were $634 million, an increase of 13 percent overfiscal 2002 sales of $560 million, establishing a new record high for Cubic.The 2002 sales level represented a 12 percent increase over 2001 sales of $502million. Sales growth in 2002 and 2003 came from both business segments, with thebiggest increase in 2003 coming from defense. Defense sales in 2003 were up 16percent over 2002, from $314 million to $365 million, due primarily toincreases from training systems contracts. Growth in defense sales had been 11percent from 2001 to 2002. Transportation systems sales increased approximately10 percent in 2003, from $231 million to $253 million, after having increasedalmost 13 percent from 2001 to 2002. Transportation systems sales in 2003 werehigher in North America, due to new contracts won last year, and in London, aswork on the PRESTIGE contract hit a high point in the first two quarters of theyear.

 

Net income grew 24 percent in 2003 to $36.5 million, or $1.37 pershare, also a record high for Cubic. Net income in 2002 had grown by 41 percentover 2001, from $20.8 million ($.78 per share) to $29.4 million ($1.10 pershare). Approximately $5.3 million, after taxes, of the 2003 net income wasfrom gains on the sale of real estate in the second and third quarters,representing about 20 cents per share. Net income in 2002 had included a fourthquarter tax benefit of $2.5 million and charges related to facility closingcosts in the United Kingdom of $0.6 million, after taxes, incurred in the firstquarter. Goodwill amortization under former accounting rules had reduced 2001net income by about $1.7 million after taxes, while we had also realized a $0.9million gain, after taxes, from the sale of securities in that year.

 

As depicted on the table below, without these items net income wouldhave been about $31.3 million, $27.5 million and $21.6 million (pro forma$1.17, $1.03 and $.81 per share) in the years ended September 30, 2003,2002 and 2001, respectively. Earnings before the items identified below grew by14 percent from 2002 to 2003 and by 27 percent from 2001 to 2002. Theseincreases were the result of increased sales volume and improved operatingincome from both segments, with the biggest increases coming from the defensebusiness.

 

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|                                        |   | **2003**           |   | **2002** |   | **2001** |   |
|---------------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                        |   | **(in  millions)** |   |
| Earnings before certain identified items    |   | $                  | 31.3   |     | $      | 27.5     |   | $ | 21.6 |   |
| Change in goodwill accounting               |   | —             |   | —   |   | (1.7     | )      |
| Gains on sale of real estate and securities |   | 5.3                |   | —   |   | 0.9      |   |
| Tax benefit                                 |   | —             |   | 2.5      |   | —   |   |
| Facility closing costs                      |   | —             |   | (0.6     | )      | —   |   |
| Net income, as reported                     |   | $                  | 36.6   |     | $      | 29.4     |   | $ | 20.8 |   |

 

Gross margins declined to 22.2 percent in 2003 from 23.9 percent in2002 and 23.1 percent in 2001. In the transportation segment, sales increasescame from the PRESTIGE contract in London, which has lower than averagemargins, and from new contracts in North America, which are in the developmentphase, a time when contracts typically yield lower margins. Gross margins inthe defense segment also declined somewhat in 2003, due primarily to lower thannormal margins from the operations and maintenance business. See the segmentsections following for further details.

 

Selling, general and administrative (SG&A) expenses grew by about$2.4 million from 2002 to 2003 and fell to 13.9 percent of sales, compared to15.3 percent in 2002 and 15.2 percent in 2001. The increase in 2003 SG&Aspending came primarily from the transportation segment, due to increased legalcosts related to a contractual dispute with a former subcontractor on thePRESTIGE contract and other contract related legal matters in the U.S andAustralia. In 2002 the increase in SG&A spending resulted from heightenedproposal activity for potential new contracts in the defense segment, while thetransportation segment increased its marketing efforts in Europe. In 2002, thetransportation segment also incurred legal costs in connection with our disputeof a contract tender in Australia and we provided for costs related to shuttingdown a facility in England.

 

Research and development (R&D) spending was lower in 2003 than in2002 as we shifted engineering resources from company sponsored activities tocustomer funded development activities. We do not rely heavily on independentR&D, as most of our new product development occurs in conjunction with theperformance of work on our contracts. The amount of contract required productdevelopment activity increased in 2003 to $46 million, compared to $41 millionin 2002 and 2001; however, these costs are included in cost of sales as theyare directly related to contract performance.

 

We realized gains from the sale of two real properties during the year,one in San Diego County and the other in England. Net proceeds from the sale ofthe San Diego property were $7.0 million, which generated a pretax gain of $6.2million. We had owned this property for more than 30 years and had previouslyused it in a divested operation, but have held the property as an investmentfor the past ten years. The gain from the sale of this property was realized inthe second quarter. The facility south of London was sold for approximately$5.0 million, resulting in a pretax gain of $2.2 million. We had owned thatfacility for nearly 20 years, but acquired a different facility in the samearea last year and moved into the refurbished building this year, therefore,the old facility was no longer required. The gain from the sale of thisproperty was realized in the third quarter.

 

Interest and dividend income decreased in both 2003 and 2002, becauseof declining interest rates in both years and due to lower cash balancesavailable for investment in 2003. In addition, other income was lower due todecreased rental income because we sold the building in San Diego Countydescribed above, which was previously leased to an unrelated company.

 

Our effective tax rate for 2003 was about 33.6 percent of pretax incomecompared to 28.1 percent in 2002 and 33.0 percent in 2001. Income tax expensefor the year ended September 30, 2002 was unusually low due to a $2.5 milliontax benefit realized from our subsidiary in Denmark during the fourth quarter.We expect our effective tax rate in 2004 to increase to 34 percent and to ashigh as 35 percent in following years as more of our income is generated fromour U.S. businesses rather than from the U.K., where the corporate income taxrate is lower. This effective rate could be affected in future years by, amongother factors, the

 

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mix of business between the U.S. and foreign jurisdictions, our abilityto take advantage of available tax credits and audits of our records by taxingauthorities.

 

**DefenseSegment**

As depicted in the following table, defense segment sales increasedfrom $314 million in fiscal 2002 to $365 million in fiscal 2003, a 16 percentincrease. This growth followed an 11 percent increase in sales from 2001 to2002. The increase in both years came from our existing defense training andgovernment services businesses. The most significant growth in 2003 came from a42 percent increase in training systems sales due to significant new orders forour MILES products and air combat training systems. Government services salesgrew by 5 percent in 2003 after having increased by 22 percent in 2002. Wecontinued to solidify our position in 2003 as an important service provider tothe U.S. government. Sales of communications and electronics systems decreasedby 7 percent in 2003 from the 2002 level after having decreased by 11 percentin 2002. However, we were awarded several new communications contracts in 2003that create potential for growth in this business area.

 
| **Years ended September 30,**   |   | **2003**           |   | **2002** |   | **2001** |   |
|--------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                 |   | **(in  millions)** |   |
| **Defense Segment Sales**            |   |               |   |     |   |     |   |
| Communications and electronics       |   | $                  | 55.0   |     | $      | 59.0     |   | $ | 66.0 |   |
| Training systems                     |   | 161.2              |   | 113.5    |   | 100.1    |   |
| Government services                  |   | 148.9              |   | 141.9    |   | 116.0    |   |
|                                 |   | $                  | 365.1  |     | $      | 314.4    |   | $ | 282.1 |   |
|                                 |   |               |   |     |   |     |   |
| **Defense Segment Operating Income** |   |               |   |     |   |     |   |
| Communications and electronics       |   | $                  | 4.2    |     | $      | 3.7      |   | $ | 5.6 |   |
| Training systems                     |   | 12.3               |   | 5.0      |   | (3.6     | )      |
| Government services                  |   | 8.1                |   | 9.2      |   | 7.4      |   |
| Goodwill amortization                |   | —             |   | —   |   | (1.8     | )      |
|                                 |   | $                  | 24.6   |     | $      | 17.9     |   | $ | 7.6 |   |

 

Operating income in thedefense segment was up by 37 percent over the 2002 level, from $17.9 million to$24.6 million. This increase followed significant profit improvement from 2001to 2002 as well. Higher operating income came primarily from the trainingsystems business due to sales growth and improved profit margins from aircombat training systems.

 

Operating income intraining systems was impacted by cost growth of nearly $3 million on a contractwhich includes the development of new ground combat training technology for anoverseas customer. This new product development has added important additionalcapability to our ground combat training systems. Approximately offsetting thisexpense provision within the training systems business was the reversal of theremaining balance of a reserve we had established in fiscal 2000 for theestimated costs to complete the original MILES 2000 development and productioncontract. During the year we worked with the customer to resolve all remainingcontractual and financial issues related to this contract without expenditureof the approximately $3 million balance of the reserve; therefore, it is nolonger required.

 

Government servicesoperating income was lower primarily because of a change in estimated profitson an operations and maintenance contract, which produced a loss on thecontract for the year. Work on this contract has now been completed and thesituation that caused the loss has been resolved.

 

Operating income incommunications and electronics improved in 2003 over the 2002 level primarilybecause of improved performance from the surveillance receiver product line.Operating income was impacted in 2003, however, by a strategic decision we madeto invest in new communications technology, which resulted in the award of anew contract in the second quarter. We expect that the development costs willcause total costs of the contract to exceed the contract value by approximately$3 million and, 

 

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therefore, recorded anexpense provision of that amount in the second quarter.

 

Operating income for the segment was also higher in both 2003 and 2002than in 2001 because of the adoption of Financial Accounting Standards Board(FASB) Statement No. 142 in 2002, which required the discontinuance of goodwillamortization. Had this pronouncement been in effect in 2001, operating profitsfor the segment would have been higher by approximately $1.8 million in thatyear.

 

**TransportationSystems Segment**

Transportation segment sales increased 10 percent, from $231 million infiscal 2002 to $253 million in 2003. Sales in 2002 represented a 13 percentincrease over 2001 sales of $205 million. These increases were the result ofnew contracts awarded in recent years in North America as well as sales growthfrom the PRESTIGE contract in London.

 

Operating income increased from $23.3 million in 2002 to $24.4 millionin 2003, a 5 percent increase. Operating income increased 8 percent in 2002from the 2001 level of $21.6 million. Operating income in 2002 included $0.9million in costs for a facility closure, while 2001 had included goodwillamortization expense of $0.8 million. Without these expenses, operating incomewould have been $24.1 million in 2002 and $22.4 million in 2001 and theincreases year over year would have been 2 percent in 2003 and 8 percent in2002.

 

Operating income in the transportation systems segment improved in both2002 and 2003 primarily because of growth in North American revenues and due tothe discontinuance of goodwill amortization, as described above. Growth ofoperating income in 2003 was limited due to legal costs incurred related to adispute with a subcontractor on the PRESTIGE contract described below and dueto a legal settlement in Australia which occurred during the fourth quarter.The growth in operating profits in fiscal 2002 had also been limited somewhatdue to the facility closing costs mentioned above and by legal costs incurredin connection with our dispute of a contract tender in Australia.

 

Profit margins recordedon the PRESTIGE contract continue to be at a lower level than we expectultimately to achieve as the result of work we are performing in place of asubcontractor that was terminated in fiscal 2002. As discussed in Note 12 tothe financial statements, we expect to ultimately recover the additional costsincurred from the subcontractor, but cannot anticipate recovery in ourcalculation of profits on the contract at this time because the conditionsrequired by generally accepted accounting principles have not yet beenachieved.

 

**Backlog**

Both funded and total backlog increased significantly during 2003 to$1.0 billion and $1.5 billion, respectively, with increases coming from bothsegments. The biggest increase in defense funded backlog was in trainingsystems, due to contracts we won for ground combat training systems in Canadaand Australia. Funded backlog also increased in communications because ofimportant contract awards in this business as well. Total defense backlog wasbolstered by service contracts awards for multi-year contracts that will befunded in annual increments.

 

Transportation systems backlog increased in 2003 because of a contractfor nearly $95 million awarded by the city of Brisbane, Australia for atransportation system and ten years of operations and maintenance. Not includedin the backlog as of September 30, 2003 is a $72 million contract awardedto Cubic by MARTA, the city of Atlanta’s transit agency, in October 2003,after the close of the fiscal year.

 

We believe the increase in backlog to the highest level in our historyis significant not just because of the amount of the increase, but because ofthe makeup of the backlog. Our previous record high backlog was $1.2 billion in1998. At that time the PRESTIGE contract represented 55 percent of our total backlogand defense was only 28 percent of the total. As of September 30, 2003,backlog was $300 million higher than in 1998 and PRESTIGE was only 24 percentof the total, with defense about half of the total. Therefore, not only has thebacklog grown, but it has done so in a much broader manner, so we are not asreliant on a single contract or customer for our revenues.

 

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Not reflected in the backlog amounts below, because they are indefinitedelivery, indefinite quantity (IDIQ) contracts, are two significant defensecontracts with the U.S. government that were awarded during 2003. One is a10-year contract with a ceiling value of $525 million to develop and deliverthe next-generation of rangeless air-to-air and air-to-ground combat trainingsystems. We expect that the customer will order most of the systems specifiedby this contract from us over the next 10 years.

 

The second major IDIQ contract awarded during the year is one whereCubic and four other companies will performresearch-and-development services for the U.S. government aimed at reducingthreats to national defense and homeland security from weapons of massdestruction. The five companies will share a total of up to $1.26 billion intask orders. Although relatively small, we did receive our first task orderunder this contract in August 2003. The initial term of this contract isfive years, with an option for a five-year extension.

 
| **September 30,**         |   | **2003**           |    | **2002** |   |
|--------------------------------|--------|--------------------|---------|----------|--------|
|                           |   | **(in  millions)** |    |
| **Total backlog**              |   |               |    |     |   |
| Transportation systems         |   | $                  | 761.9   |     | $      | 672.1 |   |
| Defense                        |   |               |    |     |   |
| Communications and electronics |   | 68.8               |    | 45.7     |   |
| Training systems               |   | 267.3              |    | 148.3    |   |
| Government services            |   | 406.9              |    | 299.1    |   |
| Total defense                  |   | 743.0              |    | 493.1    |   |
| Total                          |   | $                  | 1,504.9 |     | $      | 1,165.2 |   |
|                           |   |               |    |     |   |
| **Funded backlog**             |   |               |    |     |   |
| Transportation systems         |   | $                  | 620.2   |     | $      | 545.0 |   |
| Defense                        |   |               |    |     |   |
| Communications and electronics |   | 68.8               |    | 45.7     |   |
| Training systems               |   | 267.3              |    | 148.3    |   |
| Government services            |   | 52.0               |    | 37.8     |   |
| Total defense                  |   | 388.1              |    | 231.8    |   |
| Total                          |   | $                  | 1,008.3 |     | $      | 776.8 |   |

 

In transportation systems, the difference between total backlog andfunded backlog represents extension of the service portion of the PRESTIGEcontract for the final five years of the seventeen year contract. We havetreated this portion of the contract as unfunded until we complete the initialsystem installation phase of the contract, which is expected to occur withinthe next several months. Options for the purchase of additional systems orequipment are not included in backlog until exercised.

 

In defense, the difference between total backlog and funded backlogrepresents options under multi-year service contracts. Funding for thesecontracts comes from annual operating budgets of the U.S. government and theoptions are normally exercised annually. Options for the purchase of additionalsystems or equipment are not included in backlog until exercised nor are IDIQcontracts until an order is received.

 

**Business Acquisition**

In lateSeptember 2003, we acquired all the shares of Orlando, Florida-based ECCInternational Corporation (ECC) for $43.9 million. The acquisition furtherstrengthens our position in the defense marketplace, broadening the scope ofour core training business to include virtual simulation capabilities.  Cubic Defense Applications has now formed aSimulation Systems Division, enhancing our position in Orlando, from which weconduct overall Central Florida business development and general management ofkey U.S. Marine Corps and Navy programs for our Mission Support Business Unit.The acquisition

 

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had no impacton operating results for fiscal 2003, as it was made within days of the end ofthe fiscal year.

 

**NewAccounting Standards**

InNovember 2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers* (FIN 45), which makes changes in the accounting for, anddisclosures of, guarantees. FIN 45 requires certain guarantees to be recordedat fair value rather than recording a liability only when a loss is probableand reasonably estimable. FIN 45 also requires a guarantor to make significantnew disclosures, even when the likelihood of making any payments under theguarantee is remote. The disclosure requirements of the new standard wereeffective December 15, 2002 and the initial recognition and measurementprovisions were applicable on a prospective basis to guarantees issued ormodified after December 31, 2002. We did not have any guaranteesoutstanding as of September 30, 2003 that fall within the scope of FIN 45.

 

InApril 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable InterestEntities* (FIN 46), which will significantly change whether entitiesincluded in its scope are consolidated by their sponsors, transferors, orinvestors. FIN 46 introduces a new consolidation model, the variable interestsmodel, which determines control based on potential variability in gains andlosses of the entity being evaluated for consolidation. The new standard iseffective at the end of fiscal years ending after December 15, 2003, whichfor us will be as of September 30, 2004. We have not yet completed ourevaluation of the impact, if any, FIN 46 will have on our financial positionand results of operations.

 

**Liquidityand Capital Resources**

Growth in unbilled accounts receivable during the year resulted innegative cash flows from operations in 2003 of $26 million, compared topositive cash flows from operations of $17 million in 2002 and $11 million in2001. Cash flows from the defense segment were positive in 2003, while thetransportation segment experienced negative cash flows due to the PRESTIGEcontract situation. Of the $94 million increase in accounts receivable fromoperations during the year, approximately $55 million was from the PRESTIGEproject. The payment terms on this contract were established five years ago atthe outset of the contract and the customer is making payments in accordancewith those terms. However, due to the termination of the subcontractordescribed above, we have incurred substantial costs during 2003 that were notoriginally planned and are included in our claim against the subcontractor. Weexpect to recover these costs late in 2004 through the adjudication process;however, the timing cannot be predicted with any certainty and it may takelonger. If we are not able to recover our costs from the subcontractor, it willtake several years for cash flows from this contract to recover the additionalcosts expended this year. As described in the operating section above, allof these costs have been taken into consideration in our revenue and profitmargin recognition for this contract. A portion of the amount receivable underthis long-term contract has been classified as non current on the ConsolidatedBalance Sheet as we do not expect to receive payment of that amount withintwelve months.

 

In addition to the PRESTIGE contract, the most significant additionalcause of increased accounts receivable was a transportation systems contractwith a customer in North America that was bid with unfavorable cash paymentterms in a competitive situation. This contract, which is at an early stage ofcompletion, caused an additional $14 million growth in accounts receivable.However, we expect this situation to improve in 2004 as certain milestones are reachedthat will trigger payments from the customer. The remainder of the $94 millionincrease in accounts receivable can be attributed to the overall increase insales volume.

 

In addition to the $94 million increase in accounts receivablereflected on the Consolidated Statement of Cash Flows for 2003, accountsreceivable increased by another $23 million from September 30, 2002 toSeptember 30, 2003. This increase includes accounts receivable added fromthe acquisition of ECC of $18 million and an increase of $5 million fromforeign currency translation.

 

Cash in the amount of $33.9 million (net of cash acquired of $5million) was used for the acquisition of ECC, as described above. The remainingpurchase price of $5 million was paid subsequent to the balance sheet date,during the first quarter of fiscal 2004, and was included in Other CurrentLiabilities on the

 

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Consolidated Balance Sheet as of September 30, 2003.

 

Other investing activities included cash receipts from the two sales ofreal estate described earlier in this report which amounted to $12 million. Inaddition, $2.6 million was used to purchase marketable securities, which wereavailable for sale as of September 30, 2003, and for additions to fixedassets totaling $8.2 million. Of this amount $2.7 million was for theoutfitting of our new European transportation systems headquarters locatedsouth of London, a task which is now completed.

 

During 2003, we borrowed $6.3 million on a short-term basis to financethe working capital needs of our subsidiaries in the U.K. and New Zealand.Other financing activities included a scheduled debt payment of $1.4 millionand the payment of $3.7 million in dividends to shareholders (14 cents pershare).

 

Accumulated Other ComprehensiveIncome (Loss) improved by $9.4 million in 2003 primarily because of favorableforeign currency translation adjustments of $6.9 million. This leaves anegative balance of about $0.7 million in Accumulated Other Comprehensive Incomeas of September 30, 2003 compared to $10.1 million at September 30,2002. Pension plan accounting had generated an accumulated charge in previousyears of $11.2 million through September 30, 2002, but this was partiallyoffset by a positive adjustment of $1.6 million in 2003.

 

Our pension plan under fundedbalance changed only slightly from the September 30, 2002 balance of $34.3million to a September 30, 2003 balance of $36.0 million. A healthy returnon plan assets during the year helped to offset significant growth in the netbenefit obligation, caused by further decline in the discount rate used formeasurement of the obligation from 6.4 percent to 6.0 percent. Pension expenseincreased from $6.0 million in 2002 to $9.1 million in 2003, and is expected toremain at approximately the 2003 level in 2004. Minimum funding requirementsfor fiscal 2004 are estimated to be $8 million.

 

Our net deferred tax asset was$19.0 million at September 30, 2003 compared to $24.1 million atSeptember 30, 2002. Of these amounts, $5.2 million and $6.0 million atSeptember 30, 2003 and 2002 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 $177million and a current ratio of 2.2 to 1 at September 30, 2003. We expectthat cash on hand and our ability to access the debt markets will be adequateto meet our working capital requirements for the foreseeable future. Inaddition to the short-term borrowing arrangements we have in the U.K. and NewZealand, we have $25 million in unsecured short-term borrowing arrangementswith U.S. financial institutions for working capital requirements which werenot used as of September 30, 2003. The following is a schedule of our contractual obligationsoutstanding as of September 30, 2003:

 
|                  |   | **Total**          |   | **Less than  1  Year** |   | **1 - 3  years** |   | **4 - 5  years** |   | **After 5  years** |   |
|-----------------------|--------|--------------------|--------|------------------------|--------|------------------|--------|------------------|--------|--------------------|--------|
|                  |   | **(in  millions)** |   |
| Long-term debt        |   | $                  | 48.6   |                   | $      | 1.4              |   | $                | 10.9   |               | $      | 10.9 |   | $ | 25.4 |   |
| Interest payments     |   | 15.5               |   | 3.0                    |   | 5.0              |   | 3.6              |   | 3.9                |   |
| Operating leases      |   | 14.3               |   | 4.1                    |   | 4.7              |   | 2.9              |   | 2.6                |   |
| Deferred compensation |   | 6.6                |   | 0.5                    |   | 0.8              |   | 0.6              |   | 4.7                |   |
|                       |        |                    |        |                        |        |                  |        |                  |        |                    |        |  |  |  |  |  |

 

Subsequent to September 30, 2003 we commenced discussionsregarding a $50 million short-term credit facility for working capital needsfrom a group of financial institutions. We contemplate finalizing this facility by the end of January 2004under the terms of a commitment letter with the agent bank organizing thefacility.

 

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**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 ofFederal Government Contractors*, and the AICPA’s Statement ofPosition No. 81-1, *Accounting for Performance of Construction-Type andCertain Production-Type Contracts*. We consider the nature of thesecontracts and the types of products and services provided when we determine theproper accounting for a particular contract. Generally we record long-termfixed price contracts on a percentage of completion basis using thecost-to-cost method to measure progress toward completion. Most of ourlong-term fixed-price contracts require us to deliver minimal quantities over along period of time or to perform a substantial level of development effort inrelation to the total value of the contract. Under the cost-to-cost method ofaccounting, we recognize revenue based on a ratio of the costs incurred to theestimated total costs at completion. Amounts representing contract changeorders, claims or other items are included in the contract value only when theycan be reliably estimated and realization is considered more likely than not.Provisions are made on a current basis to fully recognize any anticipatedlosses 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.

 

*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

 

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supportable, we believe that certain positions are likely to be challenged and that we may not succeed. 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 atdifferent times than the items are reflected in the financial statements andare referred to as timing differences. In addition, some expenses are notdeductible on our tax return and are referred to as permanent differences.Timing differences create deferred tax assets and liabilities. Deferred taxassets generally represent items that can be used as a tax deduction or creditin future years for which we have already recorded the benefit in our incomestatement. We establish valuation allowances for our deferred tax assets whenthe amount of expected future taxable income is not likely to support the useof the deduction or credit. Deferred tax liabilities generally representdeductions we have taken on our tax return but have not yet recognized asexpense in our financial statements. We have not recognized any United Statestax expense on undistributed earnings of our foreign subsidiaries since weintend to reinvest the earnings outside the United States for the foreseeablefuture. These undistributed earnings totaled approximately $47.6 million atSeptember 30, 2003.

 

*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 at September 30, 2003:

 
| **September 30,**       |   | **2003**           |   | **2002** |   |
|------------------------------|--------|--------------------|--------|----------|--------|
|                         |   | **(in  millions)** |   |
|                         |   |               |   |
| Defense systems and products |   | $                  | 16.5   |     | $      | 3.0 |   |
| Defense services             |   | 9.7                |   | 9.7      |   |
| Transportation systems       |   | 7.1                |   | 6.9      |   |
| Total goodwill               |   | $                  | 33.3   |     | $      | 19.6 |   |

 

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:

•     Discountrates

•     Inflation

•                  Salarygrowth

•                  Expectedreturn on plan assets

•     Retirementrates

•                  Mortalityrates

 

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We base the discount rate assumption on investment yields available at year-end on corporate long-term bonds rated AA. 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.

 

**Item7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

**InterestRate 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 United Kingdom (U.K.) and New Zealand, which are also tied to floatinginterest rates (the U.K. 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 7 to theConsolidated Financial Statements for more information.

 

Interest income earned on our short-term investments is affected bychanges in the general level of U.S. and U.K. interest rates. These incomestreams are generally not hedged. Interest expense incurred under the short-term borrowing arrangements isaffected by changes in the general level of interest rates in the U.K and NewZealand.  The expense related to thesecost streams is usually not hedged since it is either revolving, payable withinthree months and/or immediately callable by the lender at any time. Interestexpense incurred under the long-term notes payable is not affected by changesin any interest rate because it is fixed. However, we have in the past, and may in the future, use an interestrate swap to essentially convert this fixed rate into a floating rate for someor all of the long-term debt outstanding. The purpose of a swap is to tie the interest expense risk related tothese borrowings to the interest income risk on our short-term investments,thereby mitigating our net interest rate risk. We believe that we are notsignificantly exposed to interest rate risk at this point in time.  There was no interest rate swap outstandingat September 30, 2003.

 

**ForeignCurrency 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, Singapore 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 or coststream that offsets the change in the value of the underlying commitment.  See Note 1 to the Consolidated FinancialStatements for more information on our foreign currency translation andtransaction accounting policies.  Wealso use balance sheet hedges to mitigate foreign exchange risk.  This strategy involves incurring BritishPound denominated debt (See Interest Rate Risk above) and having the option ofpaying off the debt using U.S. Dollar or British Pound funds. We do not believethat we are significantly exposed to foreign currency exchange rate risk atthis point in time.

 

Investments in our foreign subsidiaries in the U.K., Australia, NewZealand and Singapore 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.

 

30

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**Item8.****           FINANCIAL STATEMENTSAND SUPPLEMENTAL DATA.**

** **

CUBICCORPORATION

 

CONSOLIDATED BALANCE SHEETS

 
|                                      |   | **September 30,** |    |
|-------------------------------------------|--------|------------------------|---------|
|                                      |   | **2003**               |    | **2002** |   |
|                                      |   | **(in  thousands)**    |    |
|                                      |   |                   |    |
| ASSETS                                    |   |                   |    |   |   |
|                                      |   |                   |    |   |   |
| CURRENT ASSETS                            |   |                   |    |   |   |
| Cash and cash equivalents                 |   | $                      | 22,370  |   | $ | 78,656 |   |
| Marketable securities, available-for-sale |   | 2,994                  |    | 406 |   |
| Accounts receivable:                      |   |                   |    |   |   |
| Trade and other receivables               |   | 11,476                 |    | 8,760 |   |
| Long-term contracts                       |   | 240,598                |    | 154,838 |   |
| Allowance for doubtful accounts           |   | (1,053                 | )       | (315 | ) |
|                                      |   | 251,021                |    | 163,283 |   |
|                                      |   |                   |    |   |   |
| Inventories                               |   | 24,922                 |    | 29,200 |   |
| Deferred income taxes                     |   | 16,212                 |    | 20,543 |   |
| Prepaid expenses and other current assets |   | 10,751                 |    | 4,719 |   |
| TOTAL CURRENT ASSETS                      |   | 328,270                |    | 296,807 |   |
|                                      |   |                   |    |   |   |
| LONG-TERM CONTRACT RECEIVABLES            |   | 29,200                 |    | — |   |
|                                      |   |                   |    |   |   |
| PROPERTY, PLANT AND EQUIPMENT             |   |                   |    |   |   |
| Land and land improvements                |   | 15,016                 |    | 14,482 |   |
| Buildings and improvements                |   | 38,283                 |    | 23,732 |   |
| Construction in progress                  |   | —                 |    | 7,361 |   |
| Machinery and other equipment             |   | 80,935                 |    | 80,049 |   |
| Leasehold improvements                    |   | 2,799                  |    | 2,618 |   |
| Accumulated depreciation and amortization |   | (84,761                | )       | (85,823 | ) |
|                                      |   | 52,272                 |    | 42,419 |   |
|                                      |   |                   |    |   |   |
| OTHER ASSETS                              |   |                   |    |   |   |
| Deferred income taxes                     |   | 2,781                  |    | 3,593 |   |
| Goodwill                                  |   | 33,311                 |    | 19,650 |   |
| Miscellaneous other assets                |   | 14,392                 |    | 11,990 |   |
|                                      |   | 50,484                 |    | 35,233 |   |
|                                      |   |                   |    |   |   |
| TOTAL ASSETS                              |   | $                      | 460,226 |   | $ | 374,459 |   |

 

See accompanying notes.

 

31

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CUBICCORPORATION

 

CONSOLIDATEDBALANCE SHEETS

 
|                                            |   | **September 30,** |    |
|-------------------------------------------------|--------|------------------------|---------|
|                                            |   | **2003**               |    | **2002** |   |
|                                            |   | **(in  thousands)**    |    |
|                                            |   |                   |    |
| LIABILITIES AND SHAREHOLDERS’ EQUITY       |   |                   |    |   |   |
|                                            |   |                   |    |   |   |
| CURRENT LIABILITIES                             |   |                   |    |   |   |
| Short-term borrowings                           |   | $                      | 6,254   |   | $ | — |   |
| Trade accounts payable                          |   | 25,222                 |    | 16,374 |   |
| Customer advances                               |   | 40,422                 |    | 30,232 |   |
| Accrued compensation                            |   | 26,013                 |    | 19,994 |   |
| Accrued pension liability                       |   | 22,669                 |    | 22,311 |   |
| Other current liabilities                       |   | 23,581                 |    | 13,430 |   |
| Income taxes payable                            |   | 6,064                  |    | 2,558 |   |
| Current maturities of long-term debt            |   | 1,429                  |    | 1,429 |   |
| TOTAL CURRENT LIABILITIES                       |   | 151,654                |    | 106,328 |   |
|                                            |   |                   |    |   |   |
| LONG-TERM DEBT                                  |   | 47,142                 |    | 48,571 |   |
|                                            |   |                   |    |   |   |
| OTHER LIABILITIES                               |   |                   |    |   |   |
| Deferred compensation                           |   | 6,138                  |    | 6,397 |   |
|                                            |   |                   |    |   |   |
| COMMITMENTS AND CONTINGENCIES                   |   | —                 |    | — |   |
|                                            |   |                   |    |   |   |
| SHAREHOLDERS’ EQUITY                       |   |                   |    |   |   |
| Common stock, no par value:                     |   |                   |    |   |   |
| Authorized—50,000,000 shares               |   |                   |    |   |   |
| Issued—35,664,729 shares                   |   | 234                    |    | 234 |   |
| Additional paid-in capital                      |   | 12,123                 |    | 12,123 |   |
| Retained earnings                               |   | 279,746                |    | 246,968 |   |
| Accumulated other comprehensive income (loss)   |   | (745                   | )       | (10,096 | ) |
| Treasury stock at cost — 8,944,884 shares  |   | (36,066                | )       | (36,066 | ) |
|                                            |   | 255,292                |    | 213,163 |   |
|                                            |   |                   |    |   |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |   | $                      | 460,226 |   | $ | 374,459 |   |

 

See accompanying notes.

 

32

----

 

CUBIC CORPORATION

 

CONSOLIDATED STATEMENTS OFINCOME

 
|                                          |   | **Years  Ended September 30,**                |    |
|-----------------------------------------------|--------|----------------------------------------------------|---------|
|                                          |   | **2003**                                           |    | **2002** |   | **2001** |   |
|                                          |   | **(amounts  in thousands, except per share data)** |    |
|                                          |   |                                               |    |
| Net sales                                     |   | $                                                  | 634,061 |   | $ | 559,604 |   | $ | 501,679 |   |
|                                          |   |                                               |    |   |   |   |   |
| Costs and expenses:                           |   |                                               |    |   |   |   |   |
| Cost of sales                                 |   | 493,377                                            |    | 426,012 |   | 385,569 |   |
| Selling, general and administrative expenses  |   | 87,888                                             |    | 85,459 |   | 76,052 |   |
| Research and development                      |   | 4,819                                              |    | 8,381 |   | 9,755 |   |
| Goodwill amortization                         |   | —                                             |    | — |   | 2,638 |   |
|                                          |   | 586,084                                            |    | 519,852 |   | 474,014 |   |
|                                          |   |                                               |    |   |   |   |   |
| Operating income                              |   | 47,977                                             |    | 39,752 |   | 27,665 |   |
|                                          |   |                                               |    |   |   |   |   |
| Other income (expenses):                      |   |                                               |    |   |   |   |   |
| Gain on sale of real estate                   |   | 8,448                                              |    | — |   | — |   |
| Interest and dividends                        |   | 1,161                                              |    | 2,266 |   | 3,915 |   |
| Interest expense                              |   | (3,659                                             | )       | (3,538 | ) | (3,601 | ) |
| Other income                                  |   | 1,106                                              |    | 2,441 |   | 3,129 |   |
|                                          |   |                                               |    |   |   |   |   |
| Income before income taxes                    |   | 55,033                                             |    | 40,921 |   | 31,108 |   |
|                                          |   |                                               |    |   |   |   |   |
| Income taxes                                  |   | 18,514                                             |    | 11,484 |   | 10,266 |   |
|                                          |   |                                               |    |   |   |   |   |
| Net income                                    |   | $                                                  | 36,519  |   | $ | 29,437 |   | $ | 20,842 |   |
|                                          |   |                                               |    |   |   |   |   |
| Basic and diluted net income per common share |   | $                                                  | 1.37    |   | $ | 1.10 |   | $ | 0.78 |   |
|                                          |   |                                               |    |   |   |   |   |
| Average number of common shares outstanding   |   | 26,720                                             |    | 26,720 |   | 26,720 |   |

 

See accompanying notes.

 

33

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CUBIC CORPORATION

 

CONSOLIDATEDSTATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 
| **(in  thousands except  per share amounts)**                                                 |   | **Comprehensive  Income (Loss)** |   | **Treasury  Stock** |    | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Retained  Earnings** |   | **Additional  Paid-in  Capital** |    | **Common  Stock** |   |
|-----------------------------------------------------------------------------------------------|--------|----------------------------------|--------|---------------------|---------|------------------------------------------------------|--------|------------------------|--------|----------------------------------|---------|-------------------|--------|
|                                                                                          |   |                             |   |                |    |                                                 |   |                   |   |                             |    |              |   |
| October 1, 2000                                                                          |   |                             |   | $                   | (36,063 | )                                                    | $      | (3,908                 | )      | $                                | 203,637 |              | $      | 12,123 |   | $ | 234 |   |
|                                                                                          |   |                             |   |                |    |                                                 |   |                   |   |                             |    |              |   |
| Comprehensive income:                                                                         |   |                             |   |                |    |                                                 |   |                   |   |                             |    |              |   |
| Net income                                                                                    |   | $                                | 20,842 |                | —  |                                                 | — |                   | 20,842 |                             | —  |              | — |   |
| Unrealized holding gains on marketable securities                                             |   | 495                              |   | —              |    | 495                                                  |   | —                 |   | —                           |    | —            |   |
| Reclassification adjustment for gain on sale of marketable securities  included in net income |   | (789                             | )      | —              |    | (789                                                 | )      | —                 |   | —                           |    | —            |   |
| Additional minimum pension liability                                                          |   | (2,270                           | )      | —              |    | (2,270                                               | )      | —                 |   | —                           |    | —            |   |
| Foreign currency translation adjustment                                                       |   | (22                              | )      | —              |    | (22                                                  | )      | —                 |   | —                           |    | —            |   |
|                                                                                          |   |                             |   |                |    |                                                 |   |                   |   |                             |    |              |   |
| Comprehensive income                                                                          |   | $                                | 18,256 |                |    |                                                 |   |                   |   |                             |    |              |   |   |
| Cash dividends paid — $.127 per share of common stock                                    |   |                             |   | —              |    | —                                               |   | (3,384                 | )      | —                           |    | —            |   |
| September 30, 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 |   |

 

Seeaccompanying notes.

 

34

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CUBIC CORPORATION

 

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
|                                                                                         |   | **Years Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                         |   | **2003**                            |   | **2002** |   | **2001** |   |
|                                                                                         |   | **(in  thousands)**                 |   |
|                                                                                         |   |                                |   |
| Operating Activities:                                                                        |   |                                |   |   |   |   |   |
| Net income                                                                                   |   | $                                   | 36,519 |   | $ | 29,437 |   | $ | 20,842 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |   |                                |   |   |   |   |   |
| Depreciation and amortization                                                                |   | 6,483                               |   | 6,542 |   | 12,795 |   |
| Deferred income taxes                                                                        |   | 5,405                               |   | 2,327 |   | 1,052 |   |
| Gain on sale of real estate                                                                  |   | (8,448                              | )      | — |   | — |   |
| Changes in operating assets and liabilities, net of effects from  acquisitions:              |   |                                |   |   |   |   |   |
| Accounts receivable                                                                          |   | (93,687                             | )      | (19,451 | ) | (16,444 | ) |
| Inventories                                                                                  |   | 6,256                               |   | 134 |   | (871 | ) |
| Prepaid expenses                                                                             |   | (4,934                              | )      | 1,844 |   | (1,838 | ) |
| Accounts payable and other current liabilities                                               |   | 14,730                              |   | 4,228 |   | (6,285 | ) |
| Customer advances                                                                            |   | 9,236                               |   | (816 | ) | 476 |   |
| Income taxes                                                                                 |   | 3,438                               |   | (7,860 | ) | 4,049 |   |
| Other items - net                                                                            |   | (1,115                              | )      | 1,093 |   | (3,012 | ) |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                          |   | (26,117                             | )      | 17,478 |   | 10,764 |   |
|                                                                                         |   |                                |   |   |   |   |   |
| Investing Activities:                                                                        |   |                                |   |   |   |   |   |
| Acquisition of businesses, net of cash acquired                                              |   | (33,949                             | )      | — |   | — |   |
| Proceeds from sale of real estate                                                            |   | 12,038                              |   | — |   | — |   |
| Decrease (increase) in marketable securities                                                 |   | (2,588                              | )      | — |   | 3,557 |   |
| Purchases of property, plant and equipment                                                   |   | (8,184                              | )      | (13,004 | ) | (4,375 | ) |
| Other items - net                                                                            |   | —                              |   | — |   | 27 |   |
| NET CASH USED IN INVESTING ACTIVITIES                                                        |   | (32,683                             | )      | (13,004 | ) | (791 | ) |
|                                                                                         |   |                                |   |   |   |   |   |
| Financing Activities:                                                                        |   |                                |   |   |   |   |   |
| Change in short-term borrowings                                                              |   | 6,254                               |   | — |   | — |   |
| Principal payments on long-term debt                                                         |   | (1,429                              | )      | — |   | — |   |
| Purchases of treasury stock                                                                  |   | —                              |   | (3 | ) | — |   |
| Dividends paid to shareholders                                                               |   | (3,741                              | )      | (3,564 | ) | (3,384 | ) |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                          |   | 1,084                               |   | (3,567 | ) | (3,384 | ) |
|                                                                                         |   |                                |   |   |   |   |   |
| Effect of exchange rates on cash                                                             |   | 1,430                               |   | 912 |   | 495 |   |
|                                                                                         |   |                                |   |   |   |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                         |   | (56,286                             | )      | 1,819 |   | 7,084 |   |
|                                                                                         |   |                                |   |   |   |   |   |
| Cash and cash equivalents at the beginning of the year                                       |   | 78,656                              |   | 76,837 |   | 69,753 |   |
|                                                                                         |   |                                |   |   |   |   |   |
| CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                             |   | $                                   | 22,370 |   | $ | 78,656 |   | $ | 76,837 |   |

 

Seeaccompanying notes.

 

35

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CUBIC CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2003

 

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 primarily tolarge local government agencies in the United States and worldwide.

 

Principles of Consolidation:  The consolidated financial statementsinclude the accounts of Cubic Corporation and its majority-owned subsidiaries.All significant intercompany balances and transactions have been eliminated inconsolidation. The consolidation of foreign subsidiaries requires translationof their assets and liabilities into U.S. 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 guidelines pursuantto which its cash and cash equivalents are diversified among various moneymarket 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:  Financialinstruments, including cash equivalents, accounts receivable, accounts payableand accrued liabilities, are carried at cost, which management believesapproximates the fair value because of the short-term maturity of theseinstruments.  Receivables consistprimarily of amounts due from U. S. and foreign governments for defenseproducts and local government agencies for transportation systems.  Due to the nature of its customers, theCompany generally does not require collateral. The Company has limited exposure to credit risk as the Company hashistorically collected substantially all of its receivables from governmentagencies.  The Company maintains noallowance for doubtful accounts for these customers and would only do so if itwas warranted by changed circumstances.

 

Marketable Securities, Available-for-Sale:  Marketable securities are classified asavailable-for-sale and are stated at fair market value. The net excess of fairmarket value over cost is included in Accumulated Other Comprehensive Income(Loss) on the Consolidated Balance Sheets.

 

Inventories:  Inventories are stated at the lower of costor market. Cost is determined using primarily the first-in, first-out (FIFO)method, which approximates current replacement cost. Work in process is statedat the actual production and engineering costs incurred to date, includingapplicable overhead, and is reduced by charging any amounts in excess ofestimated realizable value to cost of sales. Although costs incurred forcertain government contracts include general and administrative costs asallowed by government cost accounting standards, the amounts remaining ininventory at September 30, 2003 and 2002 were immaterial.

 

36

----

 

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 $6,483,000, $6,542,000, and$10,157,000 in 2003, 2002 and 2001, respectively.

 

Goodwill:  Goodwill is evaluated for potentialimpairment annually by comparing the fair value of a reporting unit to itscarrying value, including recorded goodwill. If the carrying value exceeds thefair value, impairment is measured by comparing the derived fair value ofgoodwill to its carrying value, and any impairment determined would be recordedin the current period. To date there has been no impairment of the Company’srecorded goodwill.  The changes in thecarrying amount of goodwill for the two years ended September 30, 2003 areas follows:

 
|                                   |   | **Transportation  Segment** |   | **Defense  Segment** |   | **Total** |   |
|----------------------------------------|--------|-----------------------------|--------|----------------------|--------|-----------|--------|
|                                   |   | **(in  thousands)**         |   |
|                                   |   |                        |   |
| Balances October 1, 2001          |   | $                           | 6,521  |                 | $      | 12,406    |   | $ | 18,927 |   |
| Foreign currency exchange rate changes |   | 419                         |   | 304                  |   | 723       |   |
| Balances September 30, 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 |   |

 

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 (Loss):  Comprehensive income (loss) and itscomponents are presented in the statement of changes in shareholders’equity.  Accumulated comprehensiveincome (loss) consisted of the following:

 
| **September 30,**                            |   | **2003**            |   | **2002** |   |
|---------------------------------------------------|--------|---------------------|--------|----------|--------|
|                                              |   | **(in  thousands)** |   |
| Minimum pension liability                         |   | $                   | (9,610 | )        | $      | (11,191 | ) |
| Foreign exchange translation                      |   | 7,910               |   | 992      |   |
| Unrealized holding gains on marketable securities |   | 160                 |   | 103      |   |
| Net unrealized gains from cash flow hedges        |   | 795                 |   | —   |   |
|                                              |   | $                   | (745   | )        | $      | (10,096 | ) |

 

The minimum pension liability is shown net of tax benefits of$5,174,000 and $6,026,000 at September 30, 2003 and 2002,respectively.  Deferred income taxes arenot recognized for translation-related temporary differences of foreignsubsidiaries whose undistributed earnings are considered to be permanentlyinvested.

 

The unrealized  holding gains onmarketable securities are shown net of tax liabilities of $85,000 and $55,000as of September 30, 2003 and 2002, respectively.  The net unrealized gain from cash flow hedges is shown net of taxliabilities of $327,000.

 

Revenue Recognition:  Sales and profits under the Company’slong-term fixed-price contracts, which

 

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generally require a significant amount of development effort inrelation to total contract value, are recognized using the cost-to-costpercentage of completion method of accounting. Sales and profits are recordedbased on the ratio of costs incurred to estimated total costs at completion. Inthe early stages of contract performance, profit is not recognized untilprogress 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.

 

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 theweighted average number of shares of common stock outstanding., afterretroactive adjustments to reflect a 3-for-1 stock split which occurred inApril 2002.

 

Derivative Financial Instruments:  TheCompany’s use of derivative financial instruments is limited to foreignexchange forward and option contracts used to hedge significant contract salesand purchase commitments that are denominated in currencies other than thefunctional currency of the subsidiary responsible for the commitment.  The purpose of the Company’s foreign currencyhedging activities is to fix the dollar value of specific commitments andpayments to foreign vendors and the value of foreign currency denominatedreceipts from customers. At September 30, 2003, the Company had foreignexchange contracts with a notional value of $82.1 million outstanding.

 

TheCompany accounts for derivatives pursuant to SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, as amended. This standard requires that all derivativeinstruments be recognized in the financial statements and measured at fairvalue regardless of the purpose or intent for holding them. The classificationof gains and losses resulting from changes in the fair values of derivatives isdependent on the intended use of the derivative and its resulting designation.The change in fair value of the ineffective portion of a hedge and changes infair values of derivatives that are not considered highly effective hedges areimmediately recognized in earnings. If the derivative is designated as a fairvalue hedge, the changes in the estimated fair value of the derivative and theunderlying hedged item are recognized in earnings. If the derivative isdesignated as a cash flow hedge, the effective portions of changes in the fairvalue of the derivative are recorded in Other Comprehensive Income (Loss) andare subsequently recognized in earnings when the hedged item affects earnings.Ineffectiveness between the change in fair value of the derivatives and thechange in fair value of hedged items was immaterial for the years endedSeptember 30, 2003, 2002 and 2001. At September 30, 2003 net gains of$1,122,000 ($795,000 net of taxes) were recorded in accumulated othercomprehensive income associated with cash flow hedging transactions.

 

AccountingStandards:  InNovember 2002, the FASB issued Interpretation No. 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers* (FIN 45), which makes changes to the accounting for, anddisclosures of, guarantees. FIN 45 requires certain guarantees to be recordedat fair value rather than recording a liability only when a loss is probableand reasonably estimable. FIN 45 also requires a guarantor to make significantnew disclosures, even when the likelihood of making any payments under the guaranteeis remote. The disclosure requirements of the new standard were effectiveDecember 15, 2002 and the initial recognition and 

 

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measurementprovisions were applicable on a prospective basis to guarantees issued ormodified after December 31, 2002. The Company did not have any guaranteesoutstanding as of September 30, 2003 that fall within the scope of FIN 45.

 

InApril 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(FIN 46), which will significantly change whether entities included in itsscope are consolidated by their sponsors, transferors, or investors. FIN 46introduces a new consolidation model, the variable interests model, whichdetermines control based on potential variability in gains and losses of theentity being evaluated for consolidation. The new standard is effective at theend of fiscal years ending after December 15, 2003, which for us will beas of September 30, 2004. The Company has not yet completed its evaluationof the impact, if any, FIN 46 will have on its financial position and resultsof operations.

 

Use of Estimates:  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Significantestimates include the estimated total costs at completion of the Company’slong-term contracts and the estimated rates of return and discount ratesrelated to the Company’s defined benefit pension plans. Actual results coulddiffer from those estimates.

 

Risks and Uncertainties:  The Company is subject to the normal risksand uncertainties of performing large, multi-year, often fixed-price contracts.In addition, the Company is subject to audit of incurred costs related to manyof its U.S. 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.

 

NOTE2 – CHANGE IN ACCOUNTING

 

InJune 2001, the Financial Accounting Standards Board issued Statements ofFinancial Accounting Standards No. 141, *Business Combinations* and No. 142, *Goodwill andOther Intangible Assets*, effective for fiscal years beginning afterDecember 15, 2001. Under the new rules, goodwill will no longer beamortized but will be subject to annual impairment tests in accordance with theStatements.

 

Asallowed by early adoption provisions, the Company began applying the new ruleson accounting for goodwill and other intangible assets effectiveOctober 1, 2001. The following table presents a reconciliation of netincome and per share data to what would have been reported had the new rulesbeen in effect during the year ended September 30, 2001 (in thousands,except per share data):

 
| **Years ended September 30,**             |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                           |   |     |   |     |   |     |   |
| Reported net income                            |   | $        | 36,519 |     | $      | 29,437   |   | $ | 20,842 |   |
| Add back goodwill amortization, net of tax     |   | —   |   | —   |   | 1,715    |   |
| Adjusted net income                            |   | $        | 36,519 |     | $      | 29,437   |   | $ | 22,557 |   |
|                                           |   |     |   |     |   |     |   |
| Basic and diluted net income per common share: |   |     |   |     |   |     |   |
| Reported net income                            |   | $        | 1.37   |     | $      | 1.10     |   | $ | 0.78 |   |
| Goodwill amortization, net of tax              |   | —   |   | —   |   | 0.06     |   |
| Adjusted net income                            |   | $        | 1.37   |     | $      | 1.10     |   | $ | 0.84 |   |

 

NOTE 3 – ACQUISITION

 

On September 25, 2003, the Company acquired majority ownership ofECC International Corp. (“ECC”).  Theacquisition was completed through a cash tender offer by CDA Acquisition Corporation,a wholly owned subsidiary of Cubic, for all of the outstanding shares of ECCcommon stock at a price of $5.25 per share. The total cost of the purchase was $43.9 million (less cash acquired of$5 million).  Cash

 

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consideration paid including costs of the acquisition, net of cashacquired, as of September 30, 2003 totaled $33.9 million.  The Company’s $5 million obligation toacquire the remaining outstanding shares of ECC is included in other currentliabilities at September 30, 2003 and has been subsequently paid.

 

Intangible contract assets arising out of the purchase of ECC totaled$2 million and will be amortized over the remaining life of the relatedlong-term contracts, approximately four years. The remaining $13 million excessof the purchase price over the net book value of the assets acquired wasallocated to goodwill. ECC is located in Orlando, Florida and designs,manufactures, and markets computer controlled simulators used primarily fortraining personnel to perform maintenance and operator procedures on militaryweapons systems. The operations and assets of ECC are included in the defensesegment, however, the acquisition had no impact on operating results for theyear ended September 30, 2003, as it was made within days of the end ofthe year.

 

Preliminary purchase price allocation is as follows (in millions):

 
| Assets:                                |   |   |   |
|----------------------------------------|--------|--------|--------|
| Cash                                   |   | $      | 5.0    |   |
| Accounts receivable                    |   | 17.7   |   |
| Other current assets                   |   | 1.4    |   |
| Total current assets                   |   | 24.1   |   |
| Property, plant and equipment          |   | 10.6   |   |
| Goodwill, intangibles and other assets |   | 15.1   |   |
|                                   |   | 49.8   |   |
| Less current liabilities               |   | 5.9    |   |
| Acquisition purchase price             |   | $      | 43.9   |   |

 

Managementdoes not believe that the final purchase price allocation will be materiallydifferent than the amounts presented above.

 

The following summarized unaudited pro forma financial informationassumes the acquisition had occurred on October 1 of each year. Thisinformation may not be indicative of the results that actually would haveoccurred if the acquisition had taken place on the dates indicated or which mayoccur in the future:

 
| **Years ended September 30,** |   | **2003**                                    |    | **2002** |   |
|------------------------------------|--------|---------------------------------------------|---------|----------|--------|
|                               |   | **(in  thousands, except per  share data)** |    |
| Net sales                          |   | $                                           | 665,468 |     | $      | 592,771 |   |
| Net earnings                       |   | $                                           | 38,224  |     | $      | 32,636 |   |
| Earnings per share                 |   | $                                           | 1.43    |     | $      | 1.22 |   |
|                               |   |                                        |    |     |   |

 

NOTE 4—INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

 

The Company owns 37.5 percent of the common stock of TransactionSystems Limited (TranSys), an unconsolidated joint venture company in theUnited Kingdom. This joint venture company was formed to bid on a contractcalled “PRESTIGE” (Procurement of Revenue Services, Ticketing, Information,Gates and Electronics), the purpose of which is to outsource most of thefunctions of the London Transport (LT) fare collection system for a period ofseventeen years. In August 1998, TranSys was awarded the contract andbegan operations. Cubic and the other parties to the joint venture participatein the PRESTIGE contract solely through subcontracts from TranSys. All of thework to be performed by TranSys is subcontracted to the joint venture partnersand the joint venture provides for the pass-through of virtually all revenuesfrom London Transport to the joint venture partners. As a result, TranSys hasoperated on a break-even basis and is expected to continue to do so. If TranSyswere to eventually generate a net income or loss, the joint venture partnerswould share in this income or loss in accordance with their percentageownership in the

 

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joint venture. The Company’s investment in the joint venture isimmaterial.

 

LT elected to finance the project throughprivate financing rather than incurring public debt. Financing for the projectwas provided by a syndicate of banks which participated in creating theproject’s financial structure. During the first four years of the project,through August 2002, the banks provided financing to TranSys totaling 200million British Pounds (approximately $330 million). Debt servicing began in2003 and will continue until the debt is fully paid in 2015. This debt isguaranteed by LT and is non-recourse to the joint venture partners.

 

The Company has also provided certainperformance guarantees to various parties related to the PRESTIGE contract and theTranSys joint venture, including LT, the banks and the joint venture partners.The joint venture partners have also provided similar performance guarantees tothe same parties and to Cubic.

 

Summarized unaudited financial informationfor this unconsolidated joint venture is as follows:

 
| **September 30,**                            |   | **2003**          |   | **2002** |   |
|---------------------------------------------------|--------|-------------------|--------|----------|--------|
|                                              |   | **(in millions)** |   |
|                                              |   |              |   |
| **Balance Sheets:**                               |   |              |   |     |   |
| Current assets                                    |   | $                 | 69.6   |     | $      | 51.6 |   |
| Non-current unbilled contract accounts receivable |   | 270.7             |   | 264.0    |   |
| Total Assets                                      |   | $                 | 340.3  |     | $      | 315.6 |   |
|                                              |   |              |   |     |   |
| Current liabilities                               |   | $                 | 22.4   |     | $      | 15.7 |   |
| Long-term debt                                    |   | 317.9             |   | 299.9    |   |
| Equity                                            |   | —            |   | —   |   |
| Total Liabilities and Equity                      |   | $                 | 340.3  |     | $      | 315.6 |   |

 
| **Years  ended September 30,** |   | **2003**          |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|-------------------|--------|----------|--------|----------|--------|
|                                |   | **(in millions)** |   |
|                                |   |              |   |
| **Statement of Operations:**        |   |              |   |     |   |     |   |
| Sales                               |   | $                 | 109.6  |     | $      | 130.0    |   | $ | 118.8 |   |
| Operating profit                    |   | $                 | — |     | $      | —   |   | $ | — |   |
| Net income                          |   | $                 | — |     | $      | —   |   | $ | — |   |

 

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NOTE 5—ACCOUNTS RECEIVABLE

 

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

 
| **September 30,**                                                      |   | **2003**            |    | **2002** |   |
|-----------------------------------------------------------------------------|--------|---------------------|---------|----------|--------|
|                                                                        |   | **(in  thousands)** |    |
| U.S. Government Contracts:                                                  |   |                |    |     |   |
| Amounts billed                                                              |   | $                   | 31,217  |     | $      | 21,546 |   |
| Recoverable costs and accrued profits on progress completed—not billed |   | 66,892              |    | 27,803   |   |
|                                                                        |   | 98,109              |    | 49,349   |   |
| Commercial Customers:                                                       |   |                |    |     |   |
| Amounts billed                                                              |   | 36,568              |    | 20,739   |   |
| Recoverable costs and accrued profits on progress completed—not billed |   | 135,121             |    | 84,750   |   |
|                                                                        |   | 171,689             |    | 105,489  |   |
|                                                                        |   | 269,798             |    | 154,838  |   |
| Less estimated amounts not currently due—commercial customers          |   | (29,200             | )       | —   |   |
|                                                                        |   | $                   | 240,598 |     | $      | 154,838 |   |

 

A portion ofrecoverable costs and accrued profits on progress completed is billable underprogress payment provisions of the related contracts. The remainder of theseamounts is billable upon delivery of products or furnishing of services, withan immaterial 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, 2003,and, therefore, has been classified as a non-current asset.  This amount relates primarily to thecontract with TranSys for the PRESTIGE system in London.  The customer has been paying the Company inaccordance with the terms of the contract and it is expected that all amountsdue under the contract will ultimately be collected.  It is anticipated that substantially all of the unbilled portionof receivables identified as current assets will be billed and collected underprogress billing provisions of the contracts or upon completion of performancetests and/or acceptance by the customers during fiscal 2004.

 

NOTE 6—INVENTORIES

 

Inventories are classified as follows:

 
| **September 30,**        |   | **2003**           |   | **2002** |   |
|-------------------------------|--------|--------------------|--------|----------|--------|
|                          |   | **(in thousands)** |   |
|                          |   |               |   |     |   |
| Finished products             |   | $                  | 593    |     | $      | 1,219 |   |
| Work in process               |   | 12,300             |   | 14,746   |   |
| Materials and purchased parts |   | 12,029             |   | 13,235   |   |
|                          |   | $                  | 24,922 |     | $      | 29,200 |   |

 

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NOTE 7—FINANCING ARRANGEMENTS

 

Long-term debt consists of the following:

 
| **September 30,**                                                                                                                                                                                        |   | **2003**            |   | **2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|----------|--------|
|                                                                                                                                                                                                          |   | **(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 semi-annually 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  semi-annually in November and May.                               |   | 8,571               |   | 10,000   |   |
|                                                                                                                                                                                                          |   | 48,571              |   | 50,000   |   |
| Less current portion                                                                                                                                                                                          |   | (1,429              | )      | (1,429   | )      |
|                                                                                                                                                                                                          |   |                |   |     |   |
|                                                                                                                                                                                                          |   | $                   | 47,142 |     | $      | 48,571 |   |

 

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 30,2003, the most restrictive covenant under these agreements leaves consolidatedretained earnings of $72.2 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 $16.6 million) with aUnited Kingdom financial institution to help meet the short-term workingcapital requirements of its subsidiary, Cubic Transportation Systems Ltd. Anyoutstanding balances are guaranteed by Cubic Corporation, are repayable ondemand, and bear interest at the bank’s base rate, as defined, plus onepercent. At September 30, 2003, there was $5.4 million outstanding underthis borrowing arrangement bearing interest at 4.5%.

 

The Company maintains a short-term borrowing arrangement totaling 2.05million New Zealand Dollars (equivalent to approximately $1.2 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’sprime rate plus one percent. At September 30, 2003 there was $0.9 millionoutstanding under this borrowing arrangement, bearing interest at 6.8%.  Subsequent to September 30, 2003, thisborrowing facility was increased to $20.1 million New Zealand Dollars(equivalent to approximately $12.0 million).

 

The Company has $25 million in unsecured short-term borrowingarrangements with U.S. financial institutions for working capitalrequirements.  The terms of thesearrangements require repayment on demand and bear interest at a LIBOR rate plusa margin of 1 to1.25 percent. At September 30, 2003 there were nooutstanding balances under these arrangements.

 

Maturities of long-term debt for each of the five years in the periodending September 30, 2008, are as follows: 2004—$1.4 million; 2005—$5.4million; 2006—$5.4 million; 2007—$5.4 million; 2008—$5.4 million;thereafter—$25.4 million.

 

43

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Interest paid amounted to $3.7 million, $3.5 million, and $3.6 millionin 2003, 2002, and 2001, respectively.

 

As of September 30, 2003 the Company had letters of credit andbank guarantees outstanding totaling $30.9 million, which guarantee either theCompany’s performance or customer advances under certain contracts. Inaddition, the Company had financial letters of credit outstanding totaling $3.4million as of September 30, 2003, which guarantee the Company’s payment ofcertain self-insured liabilities and payments to a foreign subcontractor. TheCompany has never had a drawing on a letter of credit instrument, nor are anyanticipated; therefore, the fair value of these instruments is estimated to bezero.

 

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 $4.6 million and $4.7 million as ofSeptember 30, 2003 and 2002, respectively.

 

NOTE 8—COMMITMENTS

 

TheCompany leases certain office, manufacturing and warehouse space andmiscellaneous computer and other office equipment under non-cancelable operatingleases expiring in various years through 2012. These leases, some of which may be renewed for periods up to 10 years,generally require the lessee to pay all maintenance, insurance and propertytaxes. Several leases are subject to periodic adjustment based on price indicesor cost increases. Rental expense, net of sublease income, for all operatingleases amounted to $3.5 million, $3.8 million, and $3.6 million in 2003, 2002,and 2001, respectively.

 

Future minimum payments, net of minimum sublease income, undernon-cancelable operating leases with initial terms of one year or more consistof the following at September 30, 2003 (in thousands):

 

| 2004       |   | $     | 4,093  |   |
|------------|--------|-------|--------|--------|
| 2005       |   | 2,575 |   |
| 2006       |   | 2,113 |   |
| 2007       |   | 1,624 |   |
| 2008       |   | 1,282 |   |
| Thereafter |   | 2,602 |   |
|       |   | $     | 14,289 |   |

 

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NOTE 9—INCOME TAXES

 

Significant components of the provision (benefit) for income taxes areas follows:

 
| **Years  ended September 30,** |   | **2003**           |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                |   | **(in thousands)** |   |
|                                |   |               |   |     |   |     |   |
| Current:                            |   |               |   |     |   |     |   |
| Federal                             |   | $                  | 4,805  |     | $      | 3,108    |   | $ | 4,089 |   |
| State                               |   | 2,587              |   | 1,735    |   | 1,665    |   |
| Foreign                             |   | 5,717              |   | 4,314    |   | 3,460    |   |
| Total current                       |   | 13,109             |   | 9,157    |   | 9,214    |   |
|                                |   |               |   |     |   |     |   |
| Deferred (credit):                  |   |               |   |     |   |     |   |
| Federal                             |   | 5,323              |   | 3,124    |   | (2,369   | )      |
| State                               |   | 820                |   | 437      |   | 149      |   |
| Foreign                             |   | (738               | )      | (1,234   | )      | 3,272    |   |
| Total deferred                      |   | 5,405              |   | 2,327    |   | 1,052    |   |
| Total income tax expense            |   | $                  | 18,514 |     | $      | 11,484   |   | $ | 10,266 |   |

 

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:

 
| **September 30,**                                 |   | **2003**            |   | **2002** |   |
|--------------------------------------------------------|--------|---------------------|--------|----------|--------|
|                                                   |   | **(in  thousands)** |   |
| Deferred tax assets:                                   |   |                |   |     |   |
| Accrued employee benefits                              |   | $                   | 3,397  |     | $      | 3,710 |   |
| Additional minimum pension liability                   |   | 5,174               |   | 6,025    |   |
| Long-term contracts and inventory valuation reductions |   | 5,449               |   | 10,058   |   |
| Self-insurance and other reserves                      |   | 2,909               |   | 2,862    |   |
| Deferred compensation                                  |   | 2,744               |   | 2,347    |   |
| Net operating loss carryforwards                       |   | 3,972               |   | —   |   |
| Other                                                  |   | 3,279               |   | 2,229    |   |
| Total deferred tax assets                              |   | 26,924              |   | 27,231   |   |
| Valuation allowance for deferred tax assets            |   | (3,972              | )      | —   |   |
| Deferred tax assets                                    |   | 22,952              |   | 27,231   |   |
| Deferred tax liabilities:                              |   |                |   |     |   |
| Tax over book depreciation                             |   | 137                 |   | 471      |   |
| Amortization of goodwill and intangibles               |   | 1,769               |   | 603      |   |
| Prepaid expenses                                       |   | 894                 |   | 727      |   |
| State taxes                                            |   | 295                 |   | 498      |   |
| Other                                                  |   | 864                 |   | 796      |   |
| Deferred tax liabilities                               |   | 3,959               |   | 3,095    |   |
| Net deferred tax asset                                 |   | $                   | 18,993 |     | $      | 24,136 |   |

 

45

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In September 2003, the Company acquired ECC, which had a netoperating loss carryforward (NOL) of approximately $10 million. The NOLs beginto expire in 2019 unless previously utilized. The associated deferred tax asset amounted to approximately $4 millionat September 30, 2003, against which the Company has established avaluation allowance of $4 million. The utilization of some or all of the NOLmay be limited pursuant to Internal Revenue regulations.  In the future, if the Company is able todetermine that a tax benefit from the NOL will be realized, the valuationallowance will be reduced accordingly and credited against the goodwill balancerecorded at acquisition.

 

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

 
| **Years  ended September 30,**              |   | **2003**           |   | **2002** |   | **2001** |   |
|--------------------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                             |   | **(in thousands)** |   |
|                                             |   |               |   |     |   |     |   |
| Tax at federal statutory rate                    |   | $                  | 19,262 |     | $      | 14,322   |   | $ | 10,888 |   |
| State income taxes, net of federal tax benefit   |   | 2,215              |   | 1,412    |   | 1,179    |   |
| Tax exempt interest and dividend income          |   | (46                | )      | (91      | )      | (276     | )      |
| Income exclusion on export sales                 |   | (945               | )      | (536     | )      | (565     | )      |
| Non-deductible expenses                          |   | 359                |   | 282      |   | 457      |   |
| Reversal of deferred tax asset valuation reserve |   | —             |   | (2,460   | )      | —   |   |
| Tax effect from foreign subsidiaries             |   | (349               | )      | (475     | )      | (565     | )      |
| Tax credits and other                            |   | (1,982             | )      | (970     | )      | (852     | )      |
|                                             |   | $                  | 18,514 |     | $      | 11,484   |   | $ | 10,266 |   |

 

The Company made income tax payments, net of refunds, totaling $9.9million, $15.6 million, and $5.2 million in 2003, 2002, and 2001, respectively.

 

Income before income taxes includes the following components:

 
| **Years  ended September 30,** |   | **2003**           |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                |   | **(in thousands)** |   |
|                                |   |               |   |     |   |     |   |
| United States                       |   | $                  | 40,318 |     | $      | 24,100   |   | $ | 10,845 |   |
| Foreign                             |   | 14,715             |   | 16,821   |   | 20,263   |   |
| Total                               |   | $                  | 55,033 |     | $      | 40,921   |   | $ | 31,108 |   |

 

Undistributed earnings of the Company’s foreign subsidiaries amountedto approximately $47.6 million at September 30, 2003. Those earnings areconsidered to be indefinitely reinvested and, accordingly, no provision forU.S. federal and state income taxes has been provided thereon. Upondistribution of those earnings in the form of dividends or otherwise, theCompany would be subject to both U.S. income taxes and withholding taxespayable to the foreign countries but would also be able to offset unrecognizedforeign tax credit carryforwards. Determination of the amount of unrecognizeddeferred U.S. income tax liability is not practicable because of thecomplexities associated with its hypothetical calculation; however, the Companydoes not believe the amount would be material.

 

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 believes that its accruals for tax liabilities areadequate for the open years.

 

46

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NOTE 10—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 U.S. 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 $9.4million, $8.7 million and $8.0 million in 2003, 2002 and 2001, respectively.

 

Approximately one-half of the Company’s non-union employees in the U.Sare covered by a non-contributory 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,**                                      |   | **2003**            |   | **2002** |   |
|-------------------------------------------------------------|--------|---------------------|--------|----------|--------|
|                                                        |   | **(in  thousands)** |   |
| **Change in benefit obligations:**                          |   |                |   |     |   |
| Net benefit obligation at the beginning of the year         |   | $                   | 92,085 |     | $      | 74,160 |   |
| Service cost                                                |   | 5,741               |   | 5,024    |   |
| Interest cost                                               |   | 6,073               |   | 5,496    |   |
| Plan amendments                                             |   | 52                  |   | —   |   |
| Actuarial loss                                              |   | 7,615               |   | 7,110    |   |
| Participant contributions                                   |   | 858                 |   | 782      |   |
| Gross benefits paid                                         |   | (1,881              | )      | (1,764   | )      |
| Foreign currency exchange rate changes                      |   | 1,597               |   | 1,277    |   |
| Net benefit obligation at the end of the year               |   | 112,140             |   | 92,085   |   |
|                                                        |   |                |   |     |   |
| **Change in plan assets:**                                  |   |                |   |     |   |
| Fair value of plan assets at the beginning of the year      |   | 57,793              |   | 60,437   |   |
| Actual return on plan assets                                |   | 11,871              |   | (6,477   | )      |
| Employer contributions                                      |   | 6,585               |   | 4,071    |   |
| Participant contributions                                   |   | 858                 |   | 782      |   |
| Gross benefits paid                                         |   | (1,881              | )      | (1,764   | )      |
| Administrative expenses                                     |   | (121                | )      | (55      | )      |
| Foreign currency exchange rate changes                      |   | 1,036               |   | 799      |   |
| Fair value of plan assets at the end of the year            |   | 76,141              |   | 57,793   |   |
|                                                        |   |                |   |     |   |
| **Net amount recognized:**                                  |   |                |   |     |   |
| Funded status                                               |   | (35,999             | )      | (34,292  | )      |
| Unrecognized net actuarial loss                             |   | 28,145              |   | 29,198   |   |
| Unrecognized prior service cost                             |   | 47                  |   | (1       | )      |
| Net amount recognized                                       |   | $                   | (7,807 | )        | $      | (5,095 | ) |
|                                                        |   |                |   |     |   |
| **Amounts recognized in the Consolidated Balance  Sheets:** |   |                |   |     |   |
| Accrued benefit cost                                        |   | $                   | (7,807 | )        | $      | (5,095 | ) |
| Additional minimum liability                                |   | (14,831             | )      | (17,216  | )      |
| Deferred tax asset                                          |   | 5,174               |   | 6,025    |   |
| Intangible asset                                            |   | 47                  |   | —   |   |
| Accumulated other comprehensive loss                        |   | 9,610               |   | 11,191   |   |
| Net amount recognized                                       |   | $                   | (7,807 | )        | $      | (5,095 | ) |

 

47

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 The components of net periodicpension cost for these plans are as follows:

 
| **Years  ended September 30,** |   | **2003**           |   | **2002** |   | **2001** |   |
|-------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                |   | **(in thousands)** |   |
|                                |   |               |   |     |   |     |   |
| Service cost                        |   | $                  | 5,741  |     | $      | 5,024    |   | $ | 4,027 |   |
| Interest cost                       |   | 6,073              |   | 5,496    |   | 4,971    |   |
| Expected return on plan assets      |   | (4,989             | )      | (5,097   | )      | (5,721   | )      |
| Amortization of:                    |   |               |   |     |   |     |   |
| Prior service cost                  |   | 4                  |   | (2       | )      | (2       | )      |
| Actuarial (gain) loss               |   | 2,238              |   | 400      |   | (139     | )      |
| Administrative expenses             |   | 82                 |   | 185      |   | 171      |   |
| Net pension cost                    |   | $                  | 9,149  |     | $      | 6,006    |   | $ | 3,307 |   |
|                                |   |               |   |     |   |     |   |
| Weighted-average assumptions:       |   |               |   |     |   |     |   |
| 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      | %      |

 

NOTE 11—RELATED PARTY TRANSACTION

 

The Company is party to an agreement with a trust established by WalterJ. Zable, CEO of the Company, and Mrs. Zable, whereby the Company agreed tomake advances of premiums payable on a split-dollar life insurance policypurchased by the trust on the life of Mrs. Zable. The advances are secured by acollateral assignment of the policy to the Company. If the assumptions made asto mortality experience, policy dividends and other factors were realized, atthe death of Mrs. Zable the Company would recover all of its insurance premiumpayments as well as other costs associated with the policy. The differencebetween policy premiums and other payments, and the increase in the cashsurrender value of the policy has been expensed or added to income in the yearincurred, although no policy premiums have been paid since 2001.  The amount added to income in 2003, 2002 and2001 due to increases in the cash surrender value was $245,000, $308,000 and$482,000, respectively. As of September 30, 2003, the cash surrender valueof the policy exceeded the total of all premium payments made by the Company throughthat date. The Company may cause the agreement to be terminated and the policyto be surrendered at any time. Due to changes in the tax law and othercircumstances, the Company no longer considers the policy to be effective infulfilling the original purpose intended by the Board. The Company and Mr.Zable are now discussing alternative courses of action including holding thepolicy to maturity, selling the Company’s interest to the trust, selling thepolicy to a third party or surrendering the policy.

 

NOTE 12—LEGAL MATTERS

 

In October 2003, a former subcontractor of ECCInternational Corp. (which the Company acquired in September 2003) suedECC in the United States District Court in Orlando, Florida seeking $15 millionin compensatory and $10 million in punitive damages. The suit claims that ECCbreached a non-competition covenant, misappropriated trade secrets andwrongfully terminated its subcontract. ECC has filed a motion to dismiss thecase and intends to vigorously deny the allegations and defend the matter. TheCompany believes that the outcome of the matter will not have a material effecton its financial statements and, to date, no expense has been accrued.

 

During the quarter ended March 31, 2003, aformer subcontractor to the Company on the PRESTIGE project in London filed aclaim against the Company under arbitration provisions of the subcontract,alleging wrongful termination, for an amount yet to be determined. The Companyhad previously notified the

 

48

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subcontractor of its intention to file a claimagainst the subcontractor for failure to perform and in July 2003 theCompany filed its defense and counterclaim with the arbitrator. The Companybelieves that the subcontractor’s claim is without merit and will vigorouslypursue its defense and counterclaim. The Company believes it will ultimately beable to recover some or all of the damages it has incurred due to thesubcontractor’s failure to perform, but has not anticipated recovery in itscalculation of profits under its contract with TranSys because the conditionsrequired by accounting principles generally accepted in the United States havenot yet been achieved.

 

In1991, the government of Iran commenced an arbitration proceeding against theCompany seeking $12.9 million for reimbursement of payments made for equipmentthat was to comprise an Air Combat Maneuvering Range pursuant to a salescontract and an installation contract executed in 1977, and an additional $15million for unspecified damages. The Company contested the action and brought acounterclaim for compensatory damages of $10.4 million.  In May 1997, the arbitral tribunalawarded the government of Iran a decision in the amount of $2.8 million, plussimple interest at the rate of 12 percent per annum from September 21,1991 through May 5, 1997. In December 1998, the United StatesDistrict Court granted a motion by the government of Iran confirming thearbitral award but denied Iran’s request for additional costs and interest.Both parties have appealed. Under current United States law and policy, anypayment to or on behalf of the Revolutionary Government of Iran must first belicensed by the U.S. government. The United States is not now issuing suchlicenses and the Company does not expect this policy to change in theforeseeable future. The Company believes that the ultimate outcome of thematter will not have a material effect on its financial statements and, todate, no expense has been accrued.

 

NOTE 13—BUSINESS SEGMENT INFORMATION

 

###### Description of the types ofproducts and services from which each reportable segment derives its revenues:

The Company has two primarybusiness segments: transportation systems and defense. The transportationsystems segment designs, produces, installs and services electronic revenuecollection systems for mass transit projects, including railways and buses. Thedefense segment performs work under U.S. and foreign government contractsrelating to electronic defense systems and equipment, computer simulationtraining, development of training doctrine and field operations andmaintenance. Products include customized range instrumentation and trainingsystems, communications and surveillance systems, avionics systems,transceivers and receivers.

 

###### Measurement of segment profit orloss and segment assets:

The Company evaluates performance and allocates resources based ontotal segment operating profit or loss. The accounting policies of thereportable segments are the same as those described in the summary of significantaccounting policies. Intersegment sales and transfers are immaterial.

 

###### Factors management used to identifythe Company’s reportable segments:

The Company’s reportable segmentsare business units that offer different products and services. The reportablesegments are each managed separately because they develop and manufacturedistinct products with different customer bases.

 

49

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Business segment financial data is as follows:

 
| **Years ended September 30,**       |   | **2003**           |   | **2002** |   | **2001** |   |
|------------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                                     |   | **(in  millions)** |   |
|                                     |   |               |   |
| **Sales:**                               |   |               |   |     |   |     |   |
| Transportation systems                   |   | $                  | 253.4  |     | $      | 230.7    |   | $ | 204.9 |   |
| Defense                                  |   | 365.1              |   | 314.4    |   | 282.1    |   |
| Other                                    |   | 15.6               |   | 14.5     |   | 14.7     |   |
| Total sales                              |   | 634.1              |   | 559.6    |   | 501.7    |   |
|                                     |   |               |   |     |   |     |   |
| **Operating income:**                    |   |               |   |     |   |     |   |
| Transportation systems                   |   | $                  | 24.4   |     | $      | 23.3     |   | $ | 21.6 |   |
| Defense                                  |   | 24.6               |   | 17.9     |   | 7.6      |   |
| Unallocated corporate expenses and other |   | (1.0               | )      | (1.4     | )      | (1.5     | )      |
| Total operating income                   |   | $                  | 48.0   |     | $      | 39.8     |   | $ | 27.7 |   |
|                                     |   |               |   |     |   |     |   |
| **Assets:**                              |   |               |   |     |   |     |   |
| Transportation systems                   |   | $                  | 186.7  |     | $      | 118.0    |   | $ | 83.9 |   |
| Defense                                  |   | 220.5              |   | 144.8    |   | 148.4    |   |
| Corporate and other                      |   | 53.0               |   | 111.7    |   | 109.0    |   |
| Total assets                             |   | $                  | 460.2  |     | $      | 374.5    |   | $ | 341.3 |   |
|                                     |   |               |   |     |   |     |   |
| **Depreciation and amortization:**       |   |               |   |     |   |     |   |
| Transportation systems                   |   | $                  | 2.3    |     | $      | 2.4      |   | $ | 4.6 |   |
| Defense                                  |   | 3.6                |   | 3.5      |   | 7.5      |   |
| Corporate and other                      |   | 0.6                |   | 0.6      |   | 0.7      |   |
| Total depreciation and amortization      |   | $                  | 6.5    |     | $      | 6.5      |   | $ | 12.8 |   |
|                                     |   |               |   |     |   |     |   |
| **Expenditures for long-lived assets:**  |   |               |   |     |   |     |   |
| Transportation systems                   |   | $                  | 5.3    |     | $      | 10.9     |   | $ | 1.5 |   |
| Defense                                  |   | 1.9                |   | 1.8      |   | 2.2      |   |
| Other                                    |   | 1.0                |   | 0.3      |   | 0.7      |   |
| Total expenditures for long-lived assets |   | $                  | 8.2    |     | $      | 13.0     |   | $ | 4.4 |   |

 

50

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| **Years ended September 30,** |   | **2003**           |   | **2002** |   | **2001** |   |
|------------------------------------|--------|--------------------|--------|----------|--------|----------|--------|
|                               |   | **(in  millions)** |   |
|                               |   |               |   |
| **Geographic Information:**        |   |               |   |     |   |     |   |
| Sales (a):                         |   |               |   |     |   |     |   |
| North America                      |   | $                  | 432.8  |     | $      | 341.9    |   | $ | 285.2 |   |
| United Kingdom                     |   | 147.4              |   | 161.0    |   | 148.5    |   |
| Far East                           |   | 13.4               |   | 16.1     |   | 32.5     |   |
| Other foreign countries            |   | 40.5               |   | 40.6     |   | 35.5     |   |
| Total sales                        |   | $                  | 634.1  |     | $      | 559.6    |   | $ | 501.7 |   |

 

----

(a)Sales are attributed to countries or regions based on the location ofcustomers.

 
| Long-lived assets, net:      |   |   |   |   |   |   |   |
|------------------------------|--------|--------|--------|--------|--------|--------|--------|
| United States                |   | $      | 75.4   |   | $      | 51.2   |   | $ | 50.4 |   |
| United Kingdom               |   | 20.4   |   | 19.7   |   | 10.6   |   |
| Other foreign countries      |   | 4.2    |   | 3.2    |   | 2.9    |   |
| Total long-lived assets, net |   | $      | 100.0  |   | $      | 74.1   |   | $ | 63.9 |   |

 

Defense segment sales include $281.9 million, $216.6 million and $183.5million in 2003, 2002 and 2001, respectively, of sales to United StatesGovernment agencies. Transportation systems sales include $98.5 million, $86.1million, and $76.3 million of sales to TranSys in 2003, 2002 and 2001,respectively.  No other single customeraccounts for 10 percent or more of the Company’s revenue.

 

NOTE 14—SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

 

The following is a summary of the quarterlyresults of operations for the years ended September 30, 2003 and 2002:

 
|                 |   | **Quarter  Ended**                         |    |
|----------------------|--------|--------------------------------------------|---------|
|                 |   | **December 31**                       |    | **March 31** |   | **June 30** |   | **September 30** |   |
|                 |   | **(in  thousands, except per share data)** |    |
|                 |   |                                       |    |
| 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 |   |
|                 |   |                                       |    |   |   |   |   |   |   |
| Fiscal 2002          |   |                                       |    |   |   |   |   |   |   |
| Net sales            |   | $                                          | 123,877 |   | $ | 138,493 |   | $ | 148,208 |   | $ | 149,230 |   |
| Gross profit         |   | 30,576                                     |    | 31,350 |   | 33,769 |   | 37,897 |   |
| Net income           |   | 5,691                                      |    | 6,441 |   | 7,128 |   | 10,177 |   |
| Net income per share |   | 0.21                                       |    | 0.24 |   | 0.27 |   | 0.38 |   |

 

51

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**Reportof Ernst & Young LLP, Independent Auditors**

 

Board of Directors and Shareholders

Cubic Corporation

 

We have audited the accompanying consolidatedbalance sheets of Cubic Corporation as of September 30, 2003 and 2002, andthe related consolidated statements of income, changes in shareholders’ equityand cash flows for each of the three years in the period endedSeptember 30, 2003. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the 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 testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Cubic Corporation at September 30, 2003 and 2002,and the consolidated results of its operations and its cash flows for each ofthe three years in the period ended September 30, 2003, in conformity withaccounting principles generally accepted in the United States.

 

As discussed in Notes 1 and 2 to the consolidatedfinancial statements, effective October 1, 2001, the Company adoptedFinancial Accounting Standards Board Statement No. 142, *Goodwill and Other Intangible Assets.*

 

 
|                   |   |   |   | /s/    | Ernst & Young LLP |
|------------------------|--------|--------|--------|--------|-----------------------|
|                   |   |   |   |   |                  |
|                   |   |   |   |   |                  |
| San Diego, California  |   |   |   |   |                  |
| November 19, 2003 |   |   |   |   |                  |

 

52

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**Item9.****           DISAGREEMENTS ONACCOUNTING AND FINANCIAL DISCLOSURE**.

 

None.

 

**Item 9a. STATEMENT ON DISCLOSURE CONTROLSAND PROCEDURES**.

 

Under the supervision and with the participation ofthe Company’s management, including the Chief Executive Officer and ChiefFinancial Officer, an evaluation was performed of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures atSeptember 30, 2003. Based on that evaluation, the Company’s management,including the Chief Executive Officer and Chief Financial Officer, concludedthat, as of the evaluation date, the Company’s disclosure controls andprocedures were effective in ensuring that all material information relating tothe Company and its consolidated subsidiaries is made known to them by otherswithin those entities, particularly during the period in which this report was prepared.There were no significant changes in the Company’s internal controls or inother factors that could significantly affect internal controls during the mostrecent quarter subsequent to the date of their evaluation.

 

**PART III**

 

**Item 10. DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT**.

 

Certain information regarding directors andexecutive officers 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 11. EXECUTIVE COMPENSATION**.

 

Information regarding executive compensationis incorporated herein by reference from our definitive Proxy Statement, whichwill be filed no later than 30 days prior to the date of the Annual Meeting of Shareholders.

 

**Item 12. SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**.

 

Information regarding security ownership ofcertain beneficial owners and management 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 13. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**.

 

Information regarding “Certain Relationshipsand Related Transactions” is included in Note 11 to the Consolidated FinancialStatements for the year ended September 30, 2003.

 

**Item 14. PRINCIPAL ACCOUNTANTS FEES ANDSERVICES**

 

Notapplicable for the Company's fiscal year ended September 30, 2003.

 

53

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**PART IV**

 

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

 

(a)                                  Documents filed aspart of this Report:

 

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

 
|   | Consolidated Balance Sheets  September 30, 2003 and 2002                                                        |
|--------|----------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                 |
|   | Consolidated Statements of Income  Years ended September 30, 2003, 2002 and 2001                                |
|   |                                                                                                                 |
|   | Consolidated Statements of Changes in  Shareholders’ Equity  Years ended September 30, 2003, 2002 and 2001 |
|   |                                                                                                                 |
|   | Consolidated Statements of Cash Flows  Years ended September 30, 2003, 2002 and 2001                            |
|   |                                                                                                                 |
|   | Notes to Consolidated Financial Statements  September 30, 2003                                                  |

 

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

 
|   | None are  required under the applicable accounting rules and regulations of the  Securities and Exchange Commission. |
|--------|----------------------------------------------------------------------------------------------------------------------|

 

(b)                                 Reports on Form 8-Kduring the last quarter of 2003:

 

(1)                                  AForm 8-K was filed on August 20, 2003, Item 5, “Other Events” disclosingthat the Company and ECC International Corp. (“*ECC*”) had entered into adefinitive Agreement and Plan of Merger under which a subsidiary of the Companywould acquire all the issued and outstanding shares of ECC common stock at aprice of $5.25 per share.

 

(2)                                  AForm 8-K was filed on September 29, 2003, Item 2, disclosing that theCompany had acquired a majority ownership of ECC.

 

(3)                                  AForm 8-K was filed on December 2, 2003, Item 12, disclosing the Company’sresults of operations for the quarter and year ended September 30, 2003.

 

(c)                                  Exhibits:

 

21.                                 List of Subsidiaries

31.1                           Section 302 Certifications

32.1                           Section 906 Certifications

 

(d)                                 FinancialStatement Schedules

 

None

 

54

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**SIGNATURES**

 

Pursuant to the requirements of Sections 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized:

 
| (Registrant) | CUBIC CORPORATION |                       |
|--------------|-------------------|----------------------------|
|         |              |                       |
| *12/10/03*   |              | /s/ Walter J. Zable        |   |   |
| Date         |              | WALTER J. ZABLE, President |   |
|              |                   |                            |  |  |  |

 

Pursuant tothe requirements 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:

 
| *12/10/03* |   |                                                 | /s/ Walter J. Zable     |   |
|------------|--------|------------------------------------------------------|-------------------------|--------|
| Date       |   | WALTER J. ZABLE, President, Chief                    |
|       |   | Executive Officer and Chairman of the                |
|       |   | Board of Directors                                   |
|       |   |                                                 |
| *12/10/03* |   |                                                 | /s/ Walter C. Zable     |   |
| Date       |   | WALTER C. ZABLE, Vice President and                  |
|       |   | Vice Chairman of the Board of Directors              |
|       |   |                                                 |
| *12/10/03* |   |                                                 | /s/ Richard C. Atkinson |   |
| Date       |   | RICHARD C. ATKINSON, Director                        |
|       |   |                                                 |
| *12/10/03* |   |                                                 | /s/ Raymond L. deKozan  |   |
| Date       |   | RAYMOND deKOZAN, Director                            |
|       |   |                                                 |
| *12/10/03* |   |                                                 | /s/ Robert T. Monagan   |   |
| Date       |   | ROBERT T. MONAGAN, Director                          |
|       |   |                                                 |
| *12/10/03* |   |                                                 | /s/ Raymond E. Peet     |   |
| Date       |   | RAYMOND E. PEET, Director                            |
|       |   |                                                 |
| *12/10/03* |   |                                                 | /s/ William W. Boyle    |   |
| Date       |   | WILLIAM W. BOYLE, Director, Vice President           |
|       |   | and Chief Financial Officer                          |
|       |   |                                                 |
| *12/10/03* |   |                                                 | /s/ Thomas A. Baz       |   |
| Date       |   | THOMAS A. BAZ, Vice President and                    |
|       |   | Corporate Controller (Principal Accounting  Officer) |
|            |        |                                                      |                         |        |  |

 

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