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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from      toCommission file number 000-31019
   ARGONAUT TECHNOLOGIES, INC.  DELAWARE
    
    94-3216714(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification Number)
 220 Saginaw Drive
Redwood City, CA 94063
(Address of principal executive offices, including zip code) (650) 716-1600
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ   No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes o   No þ There were 20,685,050 shares of the registrants common stock outstanding on
October 31, 2004. Page 1 of 23




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Argonaut Technologies, Inc.
Form 10-Q
Quarterly Period Ended September 30, 2004  
 TABLE OF CONTENTS PART I:
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2004 (Unaudited) and
December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the Three- and Nine-Month
Periods Ended September 30, 2004 and 2003 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended
September 30, 2004 and 2003 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4.
    
    Controls and Procedures
    
    
    19PART II:
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    19Item 2.
    
    Unregistered Sales of Securities and Use
    
    
    19Item 3.
    
    Defaults Upon Senior Securities
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20Item 5.
    
    Other Information
    
    
    20Item 6.
    
    Exhibits
    
    
    20SIGNATURES
    
    
    
    
    22EXHIBIT INDEX
    
    
    23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I: FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS 
 ARGONAUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) September 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,125
    
    
    $
    9,620Short-term investments
    
    
    1,959
    
    
    
    3,850Accounts receivable, net
    
    
    4,249
    
    
    
    5,993Inventories
    
    
    7,193
    
    
    
    6,946Prepaid expenses & other current assets
    
    
    694
    
    
    
    562Notes receivable
    
    
    51
    
    
    
    56Total current assets
    
    
    22,271
    
    
    
    27,027Restricted cash
    
    
    279
    
    
    
    12,317Property and equipment, net
    
    
    4,166
    
    
    
    4,454Goodwill
    
    
    9,410
    
    
    
    9,410Other intangible assets, net
    
    
    3,997
    
    
    
    4,471Long-term investments
    
    
    1,854
    
    
    
    5,432Other assets
    
    
    175
    
    
    
    204$
    42,152
    
    
    $
    63,315LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,231
    
    
    $
    1,494Accrued compensation
    
    
    512
    
    
    
    971Other accrued liabilities
    
    
    2,175
    
    
    
    2,406Deferred revenue
    
    
    578
    
    
    
    978Current portion of notes payable and capital lease obligations
    
    
    24
    
    
    
    12,200Total current liabilities
    
    
    4,520
    
    
    
    18,049Long term debt
    
    
    56
    
    
    
    23Stockholders equity:Common stock
    
    
    2
    
    
    
    2Additional paid-in capital
    
    
    121,780
    
    
    
    121,670Deferred stock compensation
    
    
    (4
    )
    
    
    (9
    )Accumulated other comprehensive income (loss)
    
    
    1,082
    
    
    
    824Accumulated deficit
    
    
    (85,284
    )
    
    
    (77,244
    )Total stockholders equity
    
    
    37,576
    
    
    
    45,243$
    42,152
    
    
    $
    63,315
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 3 of 23




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ARGONAUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net sales:Products
    
    $
    4,559
    
    
    $
    4,760
    
    
    $
    13,705
    
    
    $
    16,323Services
    
    
    237
    
    
    
    406
    
    
    
    1,056
    
    
    
    1,980Total net sales
    
    
    4,796
    
    
    
    5,166
    
    
    
    14,761
    
    
    
    18,303Costs and Expenses:Costs of products
    
    
    3,874
    
    
    
    2,358
    
    
    
    9,774
    
    
    
    8,445Costs of services
    
    
    130
    
    
    
    200
    
    
    
    549
    
    
    
    1,482Research and development (Note A)
    
    
    1,119
    
    
    
    1,063
    
    
    
    2,992
    
    
    
    3,417Selling, general and administrative (Note A)
    
    
    3,080
    
    
    
    2,835
    
    
    
    9,372
    
    
    
    10,356Amortization of purchased intangibles
    
    
    129
    
    
    
    202
    
    
    
    370
    
    
    
    627Goodwill and other purchased intangibles write-off
    
    
    
    
    
    
    1,612
    
    
    
    
    
    
    
    1,612Total costs and expenses
    
    
    8,332
    
    
    
    8,270
    
    
    
    23,057
    
    
    
    25,939Loss from operations
    
    
    (3,536
    )
    
    
    (3,104
    )
    
    
    (8,296
    )
    
    
    (7,636
    )Other income (expenses):Realized gain on the sale of asset
    
    
    
    
    
    
    460
    
    
    
    
    
    
    
    460Interest and other income
    
    
    125
    
    
    
    172
    
    
    
    474
    
    
    
    704Interest and other expense
    
    
    (16
    )
    
    
    (173
    )
    
    
    (195
    )
    
    
    (499
    )Net loss before provision for income taxes
    
    
    (3,427
    )
    
    
    (2,645
    )
    
    
    (8,017
    )
    
    
    (6,971
    )Provision for income taxes
    
    
    (42
    )
    
    
    (420
    )
    
    
    (23
    )
    
    
    (531
    )Net loss
    
    $
    (3,469
    )
    
    $
    (3,065
    )
    
    $
    (8,040
    )
    
    $
    (7,502
    )Net loss per common share, basic and diluted
    
    $
    (0.17
    )
    
    $
    (0.15
    )
    
    $
    (0.39
    )
    
    $
    (0.37
    )Weighted-average shares used in computing net loss per common share, basic and diluted
    
    
    20,532
    
    
    
    20,196
    
    
    
    20,484
    
    
    
    20,111Note A: Research and development expenses and selling, general and administrative
expenses include charges for stock-based compensation as follows:Research and development
    
    $
    
    
    
    $
    4
    
    
    $
    4
    
    
    $
    22Selling, general and administrative
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    40$
    
    
    
    $
    13
    
    
    $
    4
    
    
    $
    62
 The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 of 23




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ARGONAUT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Nine Months EndedSeptember 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (8,040
    )
    
    $
    (7,502
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    849
    
    
    
    1,075Amortization of other purchased intangibles
    
    
    473
    
    
    
    657Disposal of fixed assets
    
    
    262
    
    
    
    215Stock-based compensation
    
    
    4
    
    
    
    93Impairment charges
    
    
    
    
    
    
    1,612Change in cumulative translation adjustment
    
    
    
    
    
    
    11Changes in assets and liabilities:Accounts receivable
    
    
    1,744
    
    
    
    (487
    )Inventories
    
    
    (247
    )
    
    
    (1,589
    )Prepaid expenses and other current assets
    
    
    (99
    )
    
    
    12Accounts payable
    
    
    (263
    )
    
    
    (512
    )Accrued compensation
    
    
    (459
    )
    
    
    72Other accrued liabilities
    
    
    (180
    )
    
    
    (112
    )Deferred revenue
    
    
    (400
    )
    
    
    (1,491
    )Net cash used in operating activities
    
    
    (6,356
    )
    
    
    (7,946
    )Cash flows from investing activities:Capital expenditures
    
    
    (823
    )
    
    
    (928
    )Proceeds from the sale of the HPLC assets
    
    
    
    
    
    
    1,228Purchase of short-term investments
    
    
    
    
    
    
    (11,236
    )Proceeds from the sales of short-term investments
    
    
    771
    
    
    
    Proceeds from the maturities of short-term investments
    
    
    1,109
    
    
    
    9,400Proceeds from sale of long-term investments
    
    
    3,578
    
    
    
    Purchase of licenses
    
    
    
    
    
    
    (35
    )Restricted cash
    
    
    12,038
    
    
    
    1,167Net cash provided by (used in) investing activities
    
    
    16,673
    
    
    
    (404
    )Cash flows from financing activities:Principal payments on capital lease obligations
    
    
    
    
    
    
    (94
    )Repayment of long term debt
    
    
    (12,192
    )
    
    
    (1,167
    )Repurchase of common stock
    
    
    (81
    )
    
    
    Net proceeds from issuances of common stock
    
    
    192
    
    
    
    102Net cash used in financing activities
    
    
    (12,081
    )
    
    
    (1,159
    )Effect of exchange rate changes on cash
    
    
    269
    
    
    
    260Net increase (decrease) in cash and cash equivalents
    
    
    (1,495
    )
    
    
    (9,249
    )Cash and cash equivalents at beginning of period
    
    
    9,620
    
    
    
    20,895Cash and cash equivalents at end of period
    
    $
    8,125
    
    
    $
    11,646
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. Page 5 of 23




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ARGONAUT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1  BASIS OF PRESENTATION AND NEW ACCOUNTING STANDARDS Basis of presentation The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles in
the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain
all of the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting of normal recurring
accruals and adjustments, which Argonaut Technologies, Inc. (Argonaut or the
Company) considers necessary to present fairly the financial information
included herein. The condensed consolidated balance sheet at December 31, 2003
has been derived from the audited consolidated financial statements at that
date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. This Quarterly Report on Form 10-Q should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Companys Form 10-K, for the year ended December 31,
2003 as filed with the Securities and Exchange Commission. The interim results
presented herein are not necessarily indicative of the results of operations
that may be expected for the full fiscal year ending December 31, 2004, or any
other future period. Product Warranty The Company generally warrants its equipment for a period of one year and
provides a reserve for estimated warranty costs concurrent with the recognition
of revenue. The Company also sells warranty extensions and the related revenue
is recognized ratably over the term of the extension. Warranty costs incurred
during the extension period are expensed as incurred. Changes in the Companys product warranty accrual for the nine months ended
September 30, 2004 and 2003 are as follows (in thousands): Balance
    
    Increase in
    
    Cost of
    
    BalanceAccrued Product Warranty
    
    Beginning
    
    Warranty
    
    Warranty
    
    End ofNine Months Ended:
    
    of Period
    
    Accrual
    
    Repair
    
    PeriodSeptember 30, 2004
    
    $
    199
    
    
    
    185
    
    
    
    (106
    )
    
    $
    278September 30, 2003
    
    $
    211
    
    
    
    130
    
    
    
    (189
    )
    
    $
    152
 New Accounting Standards On October 13, 2004, the Financial Accounting Standards Board (FASB)
concluded that Statement 123R, Share-Based Payment,(Statement 123R) which
would require all companies to measure compensation cost for all share-based
payments at fair value, would be effective for most public companies for
interim or annual periods beginning after June 15, 2005. Argonaut will be
required to apply Statement 123R beginning July 1, 2005 and could choose to
apply Statement 123R retroactively from January 1, 2005 to June 30, 2005. The
Company is in the process of analyzing Statement 123R and its stock-based
compensation information to determine whether it will apply the Statement
prospectively or retroactively. The cumulative effect of adoption, if any,
would be measured and recognized on July 1, 2005. NOTE 2  STOCK-BASED COMPENSATION The Company accounts for its stock-based employee compensation as permitted by
Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended by Statement of Financial Accounting
Standard No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, whereby stock-based employee compensation arrangements are
accounted for under the intrinsic value method prescribed by Accounting Page 6 of 23




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Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25). Under APB 25, when the exercise price of the Companys stock
options is less than the market price of the underlying shares on the date of
grant, compensation expense is recognized. Pro forma information regarding net
loss per share is required by SFAS 123 as if the Company had accounted for its
employee stock options under the fair value method of SFAS 123. The fair value
of these options granted prior to the Companys initial public offering in July
2000 was estimated at the date of grant using the minimum value method. The
fair value of stock options granted subsequent to the initial public offering
were valued using the Black-Scholes valuation model based on the actual stock
closing price on the date of grant. The fair value of these options
was estimated at the date of grant using the following weighted-average
assumptions: Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    2.30
    %
    
    
    3.00
    %
    
    
    2.01
    %
    
    
    2.30
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average expected life (years)
    
    
    3.7
    
    
    
    3.6
    
    
    
    3.7
    
    
    
    3.6Volatility
    
    
    0.66
    
    
    
    0.81
    
    
    
    0.74
    
    
    
    1.08
 The pro forma disclosures required by SFAS 123 are as follows (in thousands,
except per share amounts): Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (3,469
    )
    
    $
    (3,065
    )
    
    $
    (8,040
    )
    
    $
    (7,502
    )Stock-based employee compensation expense included in
reported net loss
    
    
    
    
    
    
    13
    
    
    
    4
    
    
    
    49Total stock-based employee compensation expense
determined under fair value based methods for all
awards
    
    
    (290
    )
    
    
    (397
    )
    
    
    (930
    )
    
    
    (1,208
    )Pro forma net loss
    
    $
    (3,759
    )
    
    $
    (3,449
    )
    
    $
    (8,966
    )
    
    $
    (8,661
    )Basic and diluted net loss per common share, as reported
    
    $
    (0.17
    )
    
    $
    (0.15
    )
    
    $
    (0.39
    )
    
    $
    (0.37
    )Pro forma basic and diluted net loss per common share
    
    $
    (0.18
    )
    
    $
    (0.17
    )
    
    $
    (0.44
    )
    
    $
    (0.43
    )
 Equity instruments granted to non-employees are accounted for using the
Black-Scholes valuation model prescribed by SFAS 123 and, in accordance with
Emerging Issues Task Force Consensus No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services. The equity instruments are
subject to periodic revaluations over their vesting terms. The expense is
recognized as the instruments vest. NOTE 3  INVENTORIES Inventories consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    4,977
    
    
    $
    5,063Work in process
    
    
    784
    
    
    
    429Finished goods
    
    
    1,432
    
    
    
    1,454$
    7,193
    
    
    $
    6,946
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NOTE 4  NET LOSS PER SHARE Net loss per share has been computed according to Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share, which requires
disclosure of basic and diluted earnings per share. Basic and diluted net loss
per share was computed using the weighted-average number of common shares
outstanding during the period. Due to the net loss position of the Company,
diluted earnings per share is calculated using the weighted average number of
common shares outstanding and excludes the effects of potential common shares
that are antidilutive. Options to purchase 3,334,676 and 3,910,832 shares of
common stock were outstanding at September 30, 2004 and September 30, 2003,
respectively. Warrants to purchase 63,065 and 80,665 shares of common stock
were outstanding at September 30, 2004 and September 30, 2003, respectively.
Options and warrants were not included in the computation of diluted net loss
per share, since the effect would be antidilutive. NOTE 5  COMPREHENSIVE LOSS Comprehensive loss is comprised of net loss and other items of comprehensive
income (loss). Other comprehensive income (loss) includes unrealized gains and
losses on the Companys short-term investments and foreign currency translation
adjustments. For the three- and nine-month periods ended September 30, 2004 and 2003,
comprehensive loss is as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (3,469
    )
    
    $
    (3,065
    )
    
    $
    (8,040
    )
    
    $
    (7,502
    )Unrealized gain (loss) on investments
    
    
    34
    
    
    
    1
    
    
    
    (11
    )
    
    
    1Cumulative translation adjustment
    
    
    268
    
    
    
    55
    
    
    
    269
    
    
    
    367Comprehensive loss
    
    $
    (3,167
    )
    
    $
    (3,009
    )
    
    $
    (7,782
    )
    
    $
    (7,134
    )
 NOTE 6  GOODWILL AND OTHER PURCHASED INTANGIBLES Goodwill and other purchased intangible assets with indefinite lives have
resulted from the acquisition of Camile Products, LLC (now Argonaut
Technologies Systems, Inc. (ATSI)) and Jones Chromatography Limited (the
Jones Group). Goodwill and other intangible assets with indefinite lives are
not amortized subsequent to the Companys adoption of SFAS 142, Goodwill and
Other Intangible Assets (SFAS 142). All goodwill and intangible assets have been assigned to one of two reporting
units. The Argonaut (AGNT)-Legacy reporting unit consists primarily of
goodwill and intangible assets related to the Companys acquisition of ATSI.
The Jones-Group reporting unit consists of goodwill and intangible assets
deriving from the Companys acquisition of Jones Chromatography, Ltd. During the third quarter ended September 30, 2003 the Company performed an
interim test for goodwill impairment in light of lower than expected third
quarter revenue. Based on the discounted cash flows of the AGNT-Legacy
reporting unit, the Company recognized an impairment charge of $1.6 million
relating to the goodwill and intangible assets associated with ATSI.
Approximately $763,000 of the impairment charge was related to goodwill
associated with ATSI, and the remainder was related to completed technology
assets associated with the acquisition of ATSI. The Company performed the annual test for impairment of intangible assets with
indefinite lives as prescribed by SFAS 142 during the fourth quarter of fiscal
2003, determining that no further impairment was indicated. The Company
determined the fair value of intangible assets with indefinite lives based on a
present value analysis of the discounted future cash flows. The Company plans
to perform the impairment test in the fourth quarter of 2004. As of September
30, 2004, the Company does not have any intangible assets with indefinite
lives. The amortization expense relating to the intangible assets for the three- and
nine-month periods ended September 30, 2004
was $163,000 and $473,000, respectively. The following represents the gross
carrying amounts and accumulated amortization of amortized intangible assets at
September 30, 2004: Page 8 of 23




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GrossCarrying
    
    AccumulatedAmount
    
    Amortization
    
    NetAmortized intangible assets:Completed technology
    
    $
    5,539
    
    
    $
    (2,865
    )
    
    $
    2,674Licenses
    
    
    1,435
    
    
    
    (292
    )
    
    
    1,143Tradenames
    
    
    250
    
    
    
    (70
    )
    
    
    180Total
    
    $
    7,224
    
    
    $
    (3,227
    )
    
    $
    3,997
 Estimated future amortization expense related to intangible assets at September
30, 2004 is as follows (in thousands): Fiscal Year2004 (remaining 3 months)
    
    $
    1472005
    
    
    7582006
    
    
    6962007
    
    
    6332008
    
    
    5902009
    
    
    556Thereafter
    
    
    617Total
    
    $
    3,997
 NOTE 7  RESTRUCTURING CHARGES On August 8, 2002, the Company announced its intention to execute a
restructuring program focused on improving productivity, reducing operational
expenses in remote offices, and implementing a workforce reduction of
approximately 20% of its existing worldwide employees. As of September 30,
2004, all of the 44 employees had been terminated and amounts related to the
abandonment of excess leased facilities have all been paid. A summary of the restructuring activity is as follows (in thousands): Accrued
    
    
    
    
    
    
    
    
    
    AccruedRestructuring at
    
    Cash
    
    Noncash Charges
    
    Restructuring atDecember 31, 2003
    
    Payments
    
    (Recoveries)
    
    September 30, 2004Workforce reductions
    
    $
    70
    
    
    $
    (65
    )
    
    $
    (5
    )
    
    $
    Abandonment of excess leased facilities
    
    
    88
    
    
    
    (88
    )
    
    
    
    
    
    
    Total
    
    $
    158
    
    
    $
    (153
    )
    
    $
    (5
    )
    
    $
    
 NOTE 8  DEBT REPAYMENT The restricted cash of approximately $12.2 million that served to secure the
notes payable as purchase consideration of the Jones Group was used during the
second quarter of 2004 to repay those notes in full. Page 9 of 23




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This quarterly report contains forward-looking statements for purposes of the
Private Securities Litigation Reform Act of 1995, and it is the Companys
intention that such statements be protected by the safe harbor created thereby.
Examples of such forward-looking statements include statements regarding
future revenues, expenses, losses and cash flows, research and development
activities, possible future acquisitions, our plans to discontinue
non-performing consumable products and certain legacy instrument products,
values of our assets and liabilities over their remaining useful lives and our
testing for impairment of goodwill, and our expectations as to the duration of
our negative cash flows from operations and the sufficiency of existing cash
reserves for the next 12 months. Actual results may differ materially from
those projected in such forward-looking statements due to various known and
unknown risks and uncertainties, including the risk that a decline in the
economy generally or the market for our products will adversely affect our
business, the risk that the market for our products and services does not
develop as anticipated. For a further discussion of these and other risks and
uncertainties related to our business see the discussion set forth herein under
Factors That May Affect Our Future Results. Overview Argonaut develops innovative products designed to help pharmaceutical and other
chemists engaged in the discovery and development of new chemical entities
increase their productivity and reduce their operating costs without
compromising the scientific integrity of their research. Our products are
designed to enable chemists to increase their productivity, reduce their
operating costs through automation and process simplification, and cost
effectively explore the increasing number of drug targets available for drug
development. We derive revenues primarily from the sale of our chemistry
consumable products, instrumentation products and services. We also derive
revenues from the sale of reagents, and other instrument-related consumables
and consumables products of Jones Chromatography Limited (Jones Group), which
we acquired on February 20, 2002. Our expenses have consisted primarily of
costs incurred in research and development, manufacturing and general and
administrative costs associated with our operations, and our sales and
marketing organization. Since our inception, we have incurred significant
losses and, as of September 30, 2004, we had an accumulated deficit of $85.3
million. Recent Developments Headquarter relocation During the third quarter of 2004, the Company moved its corporate headquarters
to Redwood City, CA from Foster City, CA and relocated one of its an ancillary
offices. The new facility in Redwood City allows the Company to operate its
manufacturing operations more efficiently. Moreover, the Company estimates that
future cost savings of $800,000 to $900,000 should be realized from the
relocation of both its corporate headquarters and the ancillary office. New product introduction In the first quarter of 2004, we launched the FlashMaster Personal+ system and
the Advantage Series 2410 personal screening synthesizer. Both of these
products are important to our ability to increase revenues in 2004 and beyond.
Designed for use with pre-packed, disposable ISOLUTE® flash chromatography
columns, the FlashMaster Personal+ system features a second column position for
on-line solid sample loading and a liquid injection port for soluble samples.
The 2410 personal screening synthesizer is designed to help process chemists
who work with small amounts of material, simulate and replicate the thermal and
mixing conditions seen in larger production reactors. Recently, we launched the ISOLUTE® PPT+ Protein Precipitation Plate. Protein
precipitation filterplates are used to remove unwanted components from
biological fluids before they are analyzed by LC-MS. Sample preparation using
ISOLUTE® PPT+ is based on a solvent first method which does not require
mixing and yields cleaner and more dependable results than competitive methods.
Commercialization of ISOLUTE PPT+ represents the first in a series of products
under development for the bio-analytical sample preparation market. Critical Accounting Policies There have been no material changes to the Companys critical accounting
policies that are included/described in our Form Page 10 of 23




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10-K for the year ended December 31, 2003 filed with the Securities and
Exchange Commission on March 30, 2004. RESULTS OF OPERATIONS FOR THE THREE- AND NINE- MONTH PERIODS ENDED SEPTEMBER 30, 2004 Net Sales
Net sales in the three-month period ended September 30, 2004 were $4.8 million
compared to $5.2 million for the same period in 2003, a decrease of 7%. The
decrease in net sales is primarily due to the discontinuation of certain
non-strategic product lines during 2003, the winding down of a contract
research and development (R&D) project, and decreased integration services
sales. For the third quarter of 2004, instrument sales comprised approximately
26% of net sales, chemistry consumables sales comprised approximately 54% of
net sales, and service, integration services and contract R&D together
comprised approximately 20% of net sales. Instrument sales were $1.3 million
in the third quarter of 2004 versus $1.5 million for the same period in 2003,
primarily due to the discontinuation of certain product lines during 2003.
Chemistry consumables sales were $2.6 million in the third quarter of 2004
compared to $2.7 million for the same period in 2003. Sales of current products
increased approximately 4% in the third quarter of 2004 but were offset by
lower revenue from discontinued products. Service, integration services and
contract R&D sales were $948,000 in the third quarter of 2004 versus $999,000
in the same period of 2003, a decrease of about 5%. The decline is primarily
due to the winding down of a contract R&D project and lower service revenue.
For the nine-month period ended September 30, 2004, instrument sales were $4.5
million or 30% of total net sales, versus $6.1 million, or 33% of total net
sales for the same period in 2003 due primarily to the effects of product
transitions. Chemistry consumable sales for the nine-month period ended
September 30, 2004 were $8.0 million versus $9.0 million in the same period in
2003, a decrease of 11%. The decline is primarily attributable to the sale of
certain product lines to a third party. Cost of sales
Gross margin as a percent of sales was 16.5% for the third quarter of 2004
compared to 50.5% for the third quarter of 2003. For the nine-month period
ended September 30, 2004, gross margin as a percent of sales was 30.1% as
compared to 45.8% for the same period in 2003. Lower margin performance in the
third quarter was primarily the result of recording a charge of approximately
$1.1 million for the write-down of discontinued and slow moving inventory and
additional costs incurred related to our integration service revenue. For the
nine-month period ended September 30, 2004, the lower margin is attributable to
the events of the third quarter and the fact that lower revenue did not support
the relatively fixed manufacturing costs. In addition, during the first quarter
of 2004, we incurred costs of approximately $211,000 due to the transfer of the
manufacturing of our flash chromatography instrument business from Cardiff,
Wales to Foster City, California and the transfer of a chemistry resins
business from Foster City to Cardiff. Further, there was also an additional
inventory write-off of approximately $120,000 due to excess and obsolete
inventory. Research and development expenses
Research and development expenses of $1.1 million for the three-month period
ended September 30, 2004 remained about the same compared to the same period in
2003. These expenses include salaries and related costs of research and
development personnel, fees paid to consultants and outside service providers,
the costs of facilities and related expenses, non-recurring engineering charges
and prototype costs related to the design, development testing,
pre-manufacturing and significant improvement of our products. For the
nine-month period ended September 30, 2004, research and development expenses
decreased to $3.0 million from $3.4 million, a decrease of 12%, primarily due
to lower personnel costs, along with lower outside services and engineering
supplies expense. Selling, general and administrative expenses
Selling, general and administrative expenses increased to $3.1 million in the
three-month period ended September 30, 2004 from $2.8 million for the same
period in 2003, an increase of 9%. These expenses consist primarily of
salaries and related costs for executive, sales and marketing, finance and
other administrative personnel, the cost of facilities and related spending,
and the costs associated with promotional and other marketing expenses. The
increase was primarily attributable to higher legal fees and outside services
expense. Selling, general and administrative expenses decreased to $9.4
million for the nine-month period ended September 30, 2004 from $10.4 million,
a decrease of 10%. The decrease was due primarily to lower personnel costs and
lower costs associated with promotional activities, offset by higher legal fees
and outside services expense. Restructuring charges
On August 8, 2002, the Company announced its intention to execute a
restructuring program focused on improving productivity, reducing operational
expenses in remote offices, and implementing a workforce reduction of
approximately 20% of the existing worldwide employees. As a result, the
Company recognized a charge of $1.8 million in the third quarter Page 11 of 23




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ended September 30, 2002. The charge included termination benefits and related
expenses of approximately $630,000 related to the reduction of our workforce by
44 employees, expenses of approximately $683,000 related to the abandonment of
excess equipment, expenses of approximately $356,000 for the abandonment of
excess leased facilities, and expenses of approximately $133,000 for various
related charges. The restructuring program is estimated to result in
annualized savings of approximately $3.0 million beginning in fiscal 2003,
realized primarily in reduced operating costs as a result of reduced
employee-related costs. As of September 30, 2004, all of the 44 employees had
been terminated. For the three and nine months ended September 31, 2004,
there were $22,000 and $153,000 of cash payments related to the restructuring
program, respectively. Amounts related to the abandonment of excess leased
facilities have all been paid as of September 30, 2004. Amortization of purchased intangible assets
For the quarter ended September 30, 2004, as part of operating expenses, the
Company recorded amortization of purchased intangibles of $129,000 compared to
$202,000 in the same period in 2003. For the nine-month period ended
September 30, 2004, the Company recorded amortization of purchased intangibles
of $370,000 compared to $627,000 for the same period in 2003. The decrease in
amortization expense for both periods is due to the lower carrying value of the
purchased intangible assets, as a result of an impairment write-off made in
September 2003. Interest and Other Income (Expense), net
Interest and other income decreased to $125,000 for the three-month period
ended September 30, 2004 as compared to $172,000 for the same period in 2003,
primarily because of lower interest income due to lower cash balances invested.
Interest and other expense was $16,000 for the third quarter of 2004 compared
to $173,000 in the same period in 2003, primarily due to lower interest expense
as the notes payable for the Jones Group acquisition were repaid in full during
the quarter ended June 30, 2004. For the nine-month period ended September 30,
2004, interest and other income decreased to $441,000 as compared to $704,000
for the same period in 2003 due to the same factors contributing to the results
for the third quarter. Interest and other expense was $195,000 for the first
nine months of 2004 as compared to $499,000 for the same period in 2003. Provision for Income Taxes
The Company recorded a provision for income taxes of approximately $42,000 and
$23,000 for the UK corporate tax liability of Jones Group for the three and
nine months ended September 30, 2004, respectively, as compared to
approximately $420,000 and $531,000 for the same periods in 2003. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2004, the Company had cash, cash equivalents, investments
and restricted cash of $11.9 million compared to $31.2 million at December 31,
2003. The decrease was primarily due to the use of $6.4 million in general
operating activities, repayment of the notes payable, using restricted cash of
approximately $12.2 million related to the acquisition of the Jones Group and
$0.8 million used for capital expenditures. Restricted cash of $0.3 million at September 30, 2004 represents deposits
against operating leases. The restricted cash of approximately $12.2 million
that served to secure the notes payable as purchase consideration of the Jones
Group was used during the second quarter of 2004 to repay those notes in full. Net cash used to support operating activities has historically fluctuated based
on the timing of payments of accounts payable balances, receipts of customer
deposits, receipt of payments of accounts receivable balances, changes in
inventory balances resulting from varying levels of manufacturing activities,
the timing of research and development projects, the timing and scope of our
sales and marketing initiatives and fluctuations in the Companys net loss. On August 8, 2002, the Company announced the approval by its Board of Directors
of a stock repurchase program pursuant to which shares of its outstanding
common stock having an aggregate value of up to $500,000 may be repurchased
through open market transactions at prices deemed appropriate by the Company.
The duration of the stock repurchase program is open-ended. The timing and
amount of repurchase transactions under this program will depend on market
conditions, corporate and regulatory considerations, and will be funded from
available working capital. During the nine months ended September 30, 2004,
the Company repurchased 50,000 shares of its common stock on the open market
for approximately $81,000 at an average price of $1.62 per share. Through
September 30, 2004, the Company had repurchased 100,000 shares of its
outstanding common stock at an average price of $1.28, pursuant to our stock
repurchase program. The Company expects to have negative cash flows from operations through the
fourth quarter of 2004 and into 2005. We may also use cash resources to fund
additional collaborative or strategic relationships, acquisitions or
investments in other Page 12 of 23




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businesses, technologies or product lines. Based on our current expectations,
we believe that our current cash balances will be sufficient to fund our
operations through at least the next 12 months. At September 30, 2004, there have not been any substantial changes to the
Companys contractual cash obligations from those reported at December 31,
2003. New Accounting Standards On October 13, 2004, the FASB concluded that Statement 123R, Share-Based
Payment,(Statement 123R) which would require all companies to measure
compensation cost for all share-based payments at fair value, would be
effective for most public companies for interim or annual periods beginning
after June 15, 2005. Argonaut will be required to apply Statement 123R
beginning July 1, 2005 and could choose to apply Statement 123R retroactively
from January 1, 2005 to June 30, 2005. The Company is in the process of
analyzing Statement 123R and its stock-based compensation information to
determine whether it will apply the Statement prospectively or retroactively.
The cumulative effect of adoption, if any, would be measured and recognized on
July 1, 2005. FACTORS THAT MAY AFFECT OUR FUTURE RESULTS We have a history of operating losses and we may never achieve or sustain
profitability and may be required to raise additional funds if losses continue. We have incurred operating losses and negative cash flows from operations since
our inception. As of September 30, 2004, we had an accumulated deficit of
$85.3 million and we recorded a net loss of $8.0 million for the nine-month
period ended September 30, 2004. We expect to continue to incur operating and
net losses through the fourth quarter of 2004 and into 2005 and we may never
generate positive cash flows. Our future capital requirements depend on a number of factors, including market
acceptance of our products, the resources we devote to developing and
supporting our products, continued progress of our research and development of
potential products, the need to acquire licenses to new technology and the
availability of other financing on acceptable terms. To the extent that our
capital resources are insufficient to meet future capital requirements, we will
need to raise additional capital or incur indebtedness to fund our operations.
To the extent that we raise additional capital through the sale of equity, the
issuance of those securities will result in dilution to our stockholders. There
can be no assurance that additional debt or equity financing will be available
on acceptable terms, if at all. If adequate funds are not available, we may be
required to delay, reduce the scope of, or eliminate, our operations. We may
be required to obtain funds through arrangements with collaborative or
strategic partners or others that may require us to relinquish rights to
certain technologies or products that we might otherwise seek to retain. If our products do not become widely used in the pharmaceutical, biotechnology,
life sciences and chemical industries, it is unlikely that we will ever become
profitable. Pharmaceutical, biotechnology, life sciences and chemical organizations have
historically performed chemistry development using traditional laboratory
methods. To date, our products have not been as widely adopted by these
industries as we had expected. The commercial success of our products will
depend upon the adoption of these products as a method to develop chemical
compounds for these industries. In order to be successful, our products must
meet the performance and pricing requirements for chemistry development within
the pharmaceutical, biotechnology, life sciences and chemical industries.
Market acceptance will depend on many factors, including our ability to:  
    
    Convince prospective customers that our products are a cost-effective alternative to traditional methods and
other technologies that may be introduced for chemistry development.
    
    Convince prospective customers that our products provide the same or enhanced quality and
accuracy as compared with traditional methods and other new technologies that may be developed.
    
    Manufacture products in sufficient quantities with acceptable quality and at an acceptable cost.
    
    Install and service sufficient numbers of our instruments, particularly new instruments such as
the Advantage Series 3400 process chemistry workstation.
    
    Convince prospective customers that our products and our ability to supply and support our
products are equivalent or better as compared to competitor companies. Page 13 of 23




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If we cannot achieve these objectives, our products will not gain market
acceptance. Our product development efforts may not produce commercially viable products. We continue to devote significant personnel and financial resources to research
and development activities to develop new products. We may not be successful
in developing new products, and we may never realize any benefits from such
research and development activities, which may not produce commercially viable
products. Our ability to increase our revenues and achieve and sustain
profitability is dependent upon our ability to successfully develop new and
commercially viable products. During the first half of 2003, we launched a new
product, the Advantage Series 3400 workstation and in the first half of 2004,
we launched the FlashMaster Personal+ system and the Advantage Series 2410
personal screening synthesizer. Our ability to increase revenues in 2004 and
beyond is dependent on the success of these products. Our instrument products have lengthy sales cycles, which could cause our
operating results to fluctuate significantly from quarter to quarter. Our ability to obtain customers for our instrument products depends, in
significant part, upon the perception that our products can help accelerate
efforts in chemical development. The sale of many of our instrument products
typically involves a significant technical evaluation and commitment of capital
by customers. Accordingly, the sales cycles of many of our instrument products
are lengthy and subject to a number of risks that are beyond our control,
including customers budgetary constraints and internal acceptance reviews.
Our revenues could fluctuate significantly from quarter to quarter, due to this
lengthy and unpredictable sales cycle. A large portion of our expenses,
including expenses for facilities, equipment and personnel, are relatively
fixed. Accordingly, if our revenues decline or do not grow as we anticipate,
we might not be able to correspondingly reduce our operating expenses. Our
failure to achieve our anticipated levels of revenues could significantly harm
our operating results for a particular fiscal period. Due to the possibility
of fluctuations in our operating results, we believe that quarter-to-quarter
comparisons of our operating results are not always a good indication of our
future performance. The capital spending policies of pharmaceutical, biotechnology, life sciences
and other chemical research organizations have a significant effect on the
demand for our instruments. We market our products to and receive our revenues principally from
pharmaceutical, biotechnology, life sciences and other chemical research
organizations, and the capital spending policies of these entities can have a
significant effect on the demand for our instruments. These policies are based
on a wide variety of factors, including the resources available for purchasing
research equipment, the spending priorities among various types of research
equipment and the policies regarding capital expenditures. In particular, the
volatility of the public stock market for biotechnology and related companies
has at certain times significantly impacted their ability to raise capital,
which has directly affected their capital spending budgets. In addition,
continued consolidation within these industries will likely delay and may
potentially reduce capital spending by pharmaceutical companies involved in
such consolidations. Any decrease or delay in capital spending by life
sciences companies could cause our revenues to decline and harm our
profitability. Our direct worldwide sales force and network of distributors may not be
sufficient to successfully address the market for our products. We sell a major portion of our products through our own sales force. We may
not be able to build an efficient and effective sales and marketing force and
continue to expand our network of distributors. Our failure to build an
efficient and effective sales and marketing force could negatively impact sales
of our products, thus reducing our revenues and profitability. In order to be successful, we must recruit, retain and motivate key employees,
and failure to do so could seriously harm us. In order to be successful, we must recruit, retain and motivate executives and
other key employees, including those in managerial, technical, marketing and
sales positions. In particular, our product generation efforts depend on
hiring and retaining qualified technical personnel. Attracting and retaining
qualified sales representatives is also critical to our future. Experienced
management and technical, marketing and support personnel in the chemistry
instrumentation and consumables industry are in high demand and competition for
their talents is intense, although current economic conditions have moderated
this demand and competition for talent. The loss of key employees could have a
significant impact on our operations. We also must continue to motivate
employees and keep them focused on Argonauts strategies and goals, which Page 14 of 23




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may be particularly difficult due to morale challenges posed by workforce
reductions and general uncertainty. Changes in management may be disruptive to
our business and may result in the departure of existing employees, customers
and/or research collaborators. It may take significant time to locate, retain
and integrate qualified management personnel. The life sciences industry is highly competitive and subject to rapid
technological change, and we may not have the resources necessary to
successfully compete. We compete with companies worldwide that are engaged in the development and
production of similar products. We face competition primarily from the
following three sectors:  
    
    pharmaceutical companies developing their own instruments;  
    
    companies marketing products based upon parallel synthesis and other
non-traditional technologies, such as Mettler-Toledo AG and several
smaller instrument and reagent companies; and  
    
    companies marketing conventional products based on traditional
chemistry methodologies, such as Biotage AB, and Isco, Inc. Many of our competitors have access to greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do. We
face, and will continue to face, intense competition from organizations serving
the life sciences industry that are developing or marketing competing products
and technologies. These organizations may develop products or technologies
that are superior to our products or technologies in terms of performance, cost
or both. These organizations may offer price discounts or other concessions as
a competitive tactic that we may not be in a position to match. We will need to develop new applications for our products to remain
competitive. Our present or future products could be rendered obsolete or
uneconomical by technological advances of one or more of our current or future
competitors. In addition, the introduction or announcement of new products by
us or by others could result in a delay of or decrease in sales of existing
products, as customers evaluate these new products. Our future success will
depend on our ability to compete effectively against current technology as well
as to respond effectively to technological advances. We are exposed to the credit risk of some of our customers. Due to the prior slowdown in the economy, the credit risks relating to our
customers increased. Although we have programs in place to monitor and
mitigate the associated risk, there can be no assurance that such programs will
be effective in reducing our credit risks. We have experienced losses due to
customers failing to meet their obligations. Although these losses have not
been significant, future losses, if incurred, could harm our business and have
a material adverse effect on our operating results and financial conditions. Because we outsource our instrument component, chemical intermediates and
product manufacturing, our ability to produce and supply our products could be
impaired. We outsource most of the production of components of our instruments to
vendors. We also outsource significant quantities of our high volume chemical
intermediates for our consumables products. Our reliance on our outside
vendors exposes us to risks including:  
    
    the possibility that one or more of our vendors could terminate their services at any time without notice;  
    
    reduced control over pricing, quality and timely delivery, due to the difficulties in switching to alternative vendors; and  
    
    the potential delays and expenses of seeking alternative sources of manufacturing services. Consequently, in the event that components from our suppliers or work performed
by our vendors are delayed or interrupted for any reason, our ability to
produce and deliver our products in sufficient quantities and at acceptable
costs would decline.
Additionally, certain components are provided by a single source. The effect
of a disruption of delivery of those single source components could impact our
ability to deliver product to our customers. We may face litigation from some of our stockholders that might be costly to
resolve. We have received correspondence from a stockholder claiming that our Board of
Directors wasted corporate funds, breached their fiduciary duty and otherwise
took actions contrary to Delaware law. Such claims may result in our being
involved in Page 15 of 23




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litigation. Although we believe that these claims are without merit, we cannot
assure you that these or additional claims will not result in litigation in the
future or that any lawsuits will not be successful. We could incur substantial
costs and diversion of management resources to defend any lawsuit, which could
harm our business. In addition, we may be obligated under our charter
documents and written indemnification agreements to indemnify our management
and directors for legal fees and other costs incurred in defending any such
lawsuits. Legal fees and costs in connection with any litigation are likely to
be substantial. We are exposed to fluctuations in the exchange rates of foreign currency and
the U.S. dollar. As a global concern, we face exposure to adverse movements in foreign currency
and U.S. dollar exchange rates. During the nine months ended September 30,
2004, approximately 56% of our net sales were exposed to foreign currency risk.
During the same period, approximately 24% of our operating expenses were
exposed to foreign currency risk. These exposures may change over time as
business practices evolve and could have a material adverse impact on our
financial results. We will monitor our exposure and may hedge against this and
any other emerging market currencies as necessary. Our business is subject to risks from international operations. We conduct business globally. Accordingly, our future results could be
materially adversely affected by a variety of uncontrollable and changing
factors including, among others, foreign currency exchange rates; regulatory,
political, or economic conditions in a specific country or region; trade
protection measures and other regulatory requirements; and natural disasters.
Any or all of these factors could have a material adverse impact on our future
international business. Our business is subject to the effects of general global economic conditions,
and particularly economic conditions in the United States and the United
Kingdom. Specifically, our business is subject to the effects of market
conditions in the pharmaceutical, biotechnology, life sciences and chemical
industries. In recent quarters, our operating results have been adversely
affected as a result of unfavorable economic conditions and reduced capital
spending in the United States, Europe, and Asia. If the economic conditions in
the United States and globally do not improve, or if we experience a worsening
in the global economic slowdown, we may continue to experience material adverse
impacts on our business, operating results, and financial condition. If we infringe on or misappropriate the proprietary rights of others or we are
unable to protect our own intellectual property rights our revenues could be
harmed. We may be sued for infringing on the intellectual property rights of others.
Intellectual property litigation is costly, and, even if we prevail, the cost
of such litigation could affect our profitability. In addition, litigation is
time consuming and could divert management attention and resources away from
our business. If we do not prevail in any litigation, in addition to any
damages we might have to pay, we could be required to stop the infringing
activity or obtain a license. We may not be able to obtain required licenses
on acceptable terms, or at all. In addition, some licenses may be
nonexclusive, and therefore, our competitors may have access to the technology
licensed to us. If we fail to obtain a required license or are unable to
design around a patent, we may be unable to sell some of our products, which
could harm our ability to compete and result in a decline in our revenues. Our success may depend on our ability to obtain and enforce patents on our
technology and to protect our trade secrets. Any patents we own may not afford
meaningful protection for our technology and products. Others may challenge
our patents and, as a result, our patents could be narrowed, invalidated or
rendered unenforceable. In addition, our current and future patent
applications may not result in the issuance of patents to us in the United
States or foreign countries. Moreover, competitors may develop products
similar to ours that are not covered by our patents. We try to protect our non-patented trade secrets by requiring our employees,
consultants and advisors to execute confidentiality agreements. However, we
cannot guarantee that these agreements will provide us with adequate protection
against improper use or disclosure of our trade secrets. Further, others may
independently develop substantially equivalent proprietary information and
techniques. If we are unable to protect our proprietary information and
techniques, our ability to exclude certain competitors from the market will be
limited. There may not be an active, liquid trading market for our common stock. We are listed on the NASDAQ National Market. There is no guarantee that an
active trading market for our Common Stock will be maintained on the NASDAQ
National Market. You may not be able to sell your shares quickly or at the
market price Page 16 of 23




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if trading in our stock is not active. If we fail to comply with the continued
listing requirements of the NASDAQ National Market, we may be de-listed from
trading on such market, and thereafter trading in our common stock, if any,
would likely be conducted through the NASDAQ SmallCap Market, the
over-the-counter market or on the Electronic Bulletin Board of the National
Association of Securities Dealers, Inc. On October 19, 2004 we received a
notice from the NASDAQ Stock Market stating that we are currently out of
compliance with the minimum per share requirement for continued listing on the
NASDAQ National Market and that we have until April 18, 2005 to regain
compliance. Our stock price has been highly volatile, and your investment could suffer a
further decline in value. The trading price of our common stock has been highly volatile and ranged in
2004 from a per-share high of $2.68 to a low of $0.89 and could continue to be
subject to wide fluctuations in price in response to various factors, many of
which are beyond our control, including;  
    
    actual or anticipated variations in quarterly operating results;  
    
    failure to achieve, or changes in, financial estimates by securities analysts;  
    
    announcements of new products or services or technological innovations by us or our competitors;  
    
    conditions or trends in the pharmaceutical, biotechnology, life sciences and chemical industries;  
    
    announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;  
    
    additions or departures of key personnel, including any directors;  
    
    developments in the application or interpretation of new or existing accounting pronouncements and reporting obligations;  
    
    purchases or sales of our common stock, including any repurchases of our common stock under the existing or future stock
repurchase program; and  
    
    developments regarding our patents or other intellectual property or that of our competitors. In addition, the stock market in general, and the NASDAQ Stock Markets
National Market and SmallCap Market and the market for technology companies in
particular, have experienced significant price and volume fluctuations that
have often been unrelated or disproportionate to the operating performance of
those companies. Further, there has been particular volatility in the market
prices of securities of life science companies. These broad market and
industry factors may negatively impact the market price of our common stock,
regardless of our operating performance. In the past, following periods of
volatility in the market price of a companys securities, securities class
action litigation has often been instituted. A securities class action suit
against us could result in substantial costs, potential liabilities and the
diversion of managements attention and resources. Recently Enacted and Proposed Changes in Securities Laws and Regulations are
Likely to Increase Our Costs The Sarbanes-Oxley Act of 2002 that became law in July 2002 requires changes in
some of our corporate governance and securities disclosure or compliance
practices. That Act also requires the SEC to promulgate new rules on a variety
of subjects, in addition to rule proposals already made, and Nasdaq has
proposed revisions to its requirements for companies that are Nasdaq-listed.
We expect these developments to increase our legal compliance costs, and to
make some activities more time-consuming. We are presently evaluating and
monitoring regulatory developments and cannot estimate the timing or magnitude
of additional costs we may incur as a result. Legislative Actions, Potential New Accounting Pronouncements and Higher
Compliance Costs are Likely to Adversely Impact Our Future Financial Position
and Results of Operations. Future changes in financial accounting standards, including the possibility
that we will be required to expense all stock option grants and other
stock-based compensation to employees, may cause adverse, unexpected earnings
fluctuations and affect our financial position and results of operations. New
accounting pronouncements and varying interpretations of such pronouncements
have occurred with frequency in the recent past and may occur in the future.
In addition we may make changes in our accounting policies in the future.
Compliance with changing regulation of corporate governance and public
disclosure will also result in additional expenses. Changing laws, regulations
and standards relating to corporate governance and public disclosure, including
the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq National Market
listing requirements, are creating uncertainty for companies such as ours and
compliance costs are increasing as a result of this uncertainty and other
factors. We are committed to maintaining high standards of corporate governance
and public disclosure. As a result, we intend to invest all reasonably
necessary resources to comply with evolving standards, and this investment will
result in increased general and administrative expenses and may cause a
diversion of management time and attention from revenue-generating activities
to compliance activities. Page 17 of 23




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Sales of large numbers of shares of our common stock could cause our stock
price to decline. The market price of our common stock could decline as a result of sales of
substantial amounts of our common stock in the public market, or the perception
that these sales could occur. In addition, these factors could make it more
difficult for us to raise funds through future offerings of common stock. All
of the shares sold in our initial public offering are now freely transferable
without restriction or further registration under the Securities Act, except
for any shares purchased by our affiliates, as defined in Rule 144 of the
Securities Act. The remaining shares of common stock outstanding are
restricted securities as defined in Rule 144. These shares may be sold in the
future without registration under the Securities Act, to the extent permitted
by Rule 144 or other exemptions under the Securities Act. On March 1, 2001, we issued 666,667 shares of unregistered common stock in
connection with the acquisition of ATSI. On February 5, 2002, we registered 2,628,618 shares of common stock that are
reserved for issuance upon exercise of options granted under our stock option
and employee stock purchase plans. These shares can be sold in the public
market upon issuance, subject to restrictions under the securities laws
applicable to resales by affiliates. On February 20, 2002, we issued 572,152 shares of unregistered common stock in
connection with the acquisition of Jones Group. We face risks associated with past and future acquisitions. Our success depends in part on our ability to continually enhance and broaden
our product offerings in response to changing technologies, customer demands
and competitive pressures. To meet these challenges, we have acquired
complementary businesses and may choose to acquire others in the
future. We do not know if we will be able to complete any future acquisitions, or
whether we will be able to successfully integrate any acquired business,
operate it profitably or retain its key employees. Integrating any business,
product or technology we acquire could be expensive and time consuming, and may
disrupt our ongoing business and distract our management. If we are unable to
effectively integrate any acquired entities, products or technologies, our
business may suffer. In addition, any amortization of goodwill or other assets
or charges resulting from the costs of acquisitions could negatively impact our
operating results. Our available cash and securities may be used to buy or
invest in companies or products, possibly resulting in significant
acquisition-related charges to earnings and dilution to our stockholders. Due
to volatile market conditions, the value of long live assets may be negatively
impacted, which may result in future, additional impairment charges. Moreover,
if we buy a company, we may have to incur or assume that companys liabilities,
including liabilities that are unknown at the time of acquisition. Anti-takeover provisions in our charter, bylaws and Preferred Stock Rights
Agreement and under Delaware law could make a third-party acquisition of us
difficult. Our certificate of incorporation, bylaws and Stockholder Rights Plan contain
provisions that could make it more difficult for a third party to acquire us,
even if doing so might be deemed beneficial by our stockholders. These
provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock. We are also subject to certain
provisions of Delaware law that could delay, deter or prevent a change in
control of us. The rights issued pursuant to our Preferred Stock Rights Agreement will become
exercisable the tenth day after a person or group announces acquisition of 10%
or more of our common stock or announces commencement of a tender or exchange
offer the consummation of which would result in ownership by the person or
group of 10 % or more of our common stock. If the rights become exercisable,
the holders of the rights (other than the person acquiring 10 % or more of our
common stock) will be entitled to acquire, in exchange for the rights exercise
price, shares of our common stock or shares of any company in which we are
merged, with a value equal to twice the rights exercise price. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the second quarter of 2004, we repaid in full, the notes payable that
were denominated in British Pound Sterling in the amount of £7,650,000 related
to the acquisition of the Jones Group. With the exception of this event, our
market risk disclosures have not changed significantly from those set forth in
the Managements Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended
December 31, 2003 filed with the Securities and Exchange Commission on March
30, 2004. Page 18 of 23




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Condition and Results of Operations in our Form 10-K for the year ended
December 31, 2003 filed with the Securities and Exchange Commission on March
30, 2004. 
 ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures. Based on this
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures as defined in
Rules 13(a)-14(c) under the Securities Exchange Act of 1934 (Exchange Act)
are effective to ensure that information required to be disclosed by the
Company in this report and other reports that it files under the Exchange Act
is recorded, processed, summarized and reported within the periods specified in
SEC rules and forms. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote. There have been no significant changes in our internal controls over financial
reporting that occurred during our most recent fiscal quarter that have
materially affected or are reasonably likely to materially affect our internal
controls over financial reporting. 
 PART II. OTHER INFORMATION 
 ITEM 1: LEGAL PROCEEDINGS The Company is not currently involved in any material legal proceedings. 
 ITEM 2: UNREGISTERED SALES OF SECURITIES AND USE Company Purchases of Common Stock The following table provides information about purchases by the Company for the
nine months ended September 30, 2004 of our common stock: Total Number of
    
    Approximate DollarShares Purchased as
    
    Value of SharesTotal Number
    
    Average
    
    Part of Publicly
    
    that May Yet Beof Shares
    
    Price Paid
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Purchased1
    
    Per Share
    
    Programs2
    
    Plans or Programs1/01/04 - 1/31/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2/01/04 - 2/28/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3/01/31 - 3/31/04
    
    
    50,000
    
    
    $
    1.62
    
    
    
    50,000
    
    
    $
    372,0004/01/04 - 4/30/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5/01/04 - 5/31/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6/01/04 - 6/30/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7/01/04 -
7/31/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8/01/04 -
8/31/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9/01/04 -
9/30/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    50,000
    
    
    $
    1.62
    
    
    
    50,000
    
    
    
    372,000.00
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1.
    
    All purchases were made pursuant to our publicly announced
repurchase program.2.
    
    On August 8, 2002, we announced the approval by our Board of
Directors of a stock repurchase program under which we may repurchase
up to $500,000 of our outstanding common stock through open market
transactions. The duration of our stock repurchase program is
open-ended and the timing and amount of repurchase transactions under
this program will depend on market conditions, corporate and
regulatory considerations, and will be funded from available working
capital. 
 ITEM 3: DEFAULTS UPON SENIOR SECURITIES None. 
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5: OTHER INFORMATION None. 
 ITEM 6: EXHIBITS (a) Exhibits. The following exhibits have been filed with this report. Number
    
    Description of Document2.1(c)
    
    Agreement and Plan of Merger dated January 31, 2001, by and among the Registrant, CPL Acquisition
Corp. and Camile Products, LLC.2.2(d)
    
    Agreement for the sale and purchase of the entire issued share capital of Jones Chromatography
Limited, dated February 11, 2002, by and among the Registrant and the former Jones Group
shareholders.3.1(a)
    
    Amended and Restated Certificate of Incorporation of the Registrant.3.2(h)
    
    Amended and Restated Bylaws of Registrant.3.3(h)
    
    Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred
Stock of the Registrant.4.3(c)
    
    Registration Rights Agreement dated March 1, 2001, by and among the Registrant and the members of
Camile Products, LLC.4.4(d)
    
    Registration Rights Agreement dated February 20, 2002, by and among the Registrant and the former
Jones Group shareholders.4.5(d)
    
    £7,650,000 Loan Note Instrument Creating Principal Amount Guaranteed Loan Notes 2004 guaranteed by
Barclays Bank PLC dated February 20, 2002.4.6(h)
    
    Preferred Stock Rights Agreement, dated as of May 24, 200410.19(i)
    
    Agreement between the Registrant and Howard Goldstein dated April 16, 2004.10.20(i)
    
    Lease Agreement between the Registrant and Metropolitan Life Insurance Company dated April 2, 2004.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act .32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(a)
    
    Incorporated by reference from our registration statement on Form S-1, registration number
333-35782, declared effective by the Securities and Exchange Commission on July 18, 2000.(b)
    
    Incorporated by reference from our Form 10-K filed with the Securities and Exchange Commission on
April 1, 2002.(c)
    
    Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on
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March 16, 2001.(d)
(e)
(f)
(g)
(h)
(i)
    
    Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on
March 6, 2002.
Incorporated by reference from our Form 10-Q filed with the Securities and Exchange Commission on
September 30, 2002. Certain portions of this exhibit have been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been requested with respect to
such omitted portions.
Incorporated by reference from our Form 10-K filed with the Securities and Exchange Commission on
March 31, 2003.
Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on May
14, 2003.
Incorporated by reference from our Form 8-K/A filed with the Securities and Exchange Commission on
July 2, 2004.
Incorporated by reference from our Form 10-Q filed with the Securities and Exchange Commission on
May 13, 2004.
 (b) Reports on Form 8-K.  On
    July 29, 2004, the Company filed a report on Form 8-K providing the
contents of a press release issued by the Company announcing its
financial results for the quarter ended June 30, 2004.On
    August 6, 2004, the Company filed a report on Form 8-K providing the
contents of a letter written by Lissa Goldenstein, CEO of the Company,
to Seymour Holtzman, Chairman of Jewelcor Companies, in response to a
letter sent by Mr. Holtzman. The Company filed no other reports on Form 8-K during the period ended September 30, 2004. Page 21 of 23




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Date: November 12, 2004
    
    ARGONAUT TECHNOLOGIES, INC.By:
    
    /s/ LISSA A. GOLDENSTEINLissa A. GoldensteinPresident and Chief Executive OfficerBy:
    
    /s/ DAVID J. FOSTERDavid J. FosterSr. Vice President and Chief Financial Officer
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ARGONAUT TECHNOLOGIES, INC.
FORM 10-K
Quarterly Period Ended September 30, 2004 EXHIBIT INDEX Number
    
    Description of Document2.1(c)
    
    Agreement and Plan of Merger dated January 31, 2001, by and among the Registrant, CPL Acquisition
Corp. and Camile Products, LLC.2.2(d)
    
    Agreement for the sale and purchase of the entire issued share capital of Jones Chromatography
Limited, dated February 11, 2002, by and among the Registrant and the former Jones Group
shareholders.3.1(a)
    
    Amended and Restated Certificate of Incorporation of the Registrant.3.2(h)
    
    Amended and Restated Bylaws of Registrant.3.3(h)
    
    Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred
Stock of the Registrant.4.3(c)
    
    Registration Rights Agreement dated March 1, 2001, by and among the Registrant and the members of
Camile Products, LLC.4.4(d)
    
    Registration Rights Agreement dated February 20, 2002, by and among the Registrant and the former
Jones Group shareholders.4.5(d)
    
    £7,650,000 Loan Note Instrument Creating Principal Amount Guaranteed Loan Notes 2004 guaranteed by
Barclays Bank PLC dated February 20, 2002.4.6(h)
    
    Preferred Stock Rights Agreement, dated as of May 24, 200410.19(i)
    
    Agreement between the Registrant and Howard Goldstein dated April 16, 2004.10.20(i)
    
    Lease Agreement between the Registrant and Metropolitan Life Insurance Company dated April 2, 2004.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(a)
    
    Incorporated by reference from our registration statement on Form S-1, registration number
333-35782, declared effective by the Securities and Exchange Commission on July 18, 2000.(b)
    
    Incorporated by reference from our Form 10-K filed with the Securities and Exchange Commission on
April 1, 2002.(c)
    
    Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on
March 16, 2001.(d)
    
    Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on
March 6, 2002.(e)
    
    Incorporated by reference from our Form 10-Q filed with the Securities and Exchange Commission on
September 30, 2002. Certain portions of this exhibit have been omitted and filed separately with
the Securities and Exchange Commission. Confidential treatment has been requested with respect to
such omitted portions.(f)
    
    Incorporated by reference from our Form 10-K filed with the Securities and Exchange Commission on
March 31, 2003.(g)
    
    Incorporated by reference from our Form 8-K filed with the Securities and Exchange Commission on May
14, 2003.(h)
    
    Incorporated by reference from our Form 8-K/A filed with the Securities and Exchange Commission on
July 2, 2004.(i)
    
    Incorporated by reference from our Form 10-Q filed with the Securities and Exchange Commission on
May 13, 2004.
 Page 23 of 23