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Argon ST, Inc.

Argon ST, Inc.

12701 Fair Lakes Circle, Suite 800
Fairfax, Virginia 22033
U.S.A.
Telephone: (703) 322-0881
Fax: (703) 322-0885
Web site: http://www.argonst.com

Public Company
Incorporated:
1969 as Daedalus Enterprises, Inc.
Employees: 637
Sales: $271.75 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: STST
NAIC: 334111 Electronic Computer Manufacturing; 334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing; 334519 Other Measuring and Controlling Device Manufacturing; 541512 Computer Systems Design Services; 54171 Research and Development in the Physical, Engineering, and Life Sciences

Argon ST, Inc. is a Washington area systems developer specializing in the intelligence, surveillance, and reconnaissance end of the C4ISR (command, control, communications, computers, intelligence, surveillance, and reconnaissance) market. The company was created by the 2004 merger of military tech contractors Argon Engineering Associates and Sensytech, Inc.

The U.S. Navy typically accounts for roughly 70 percent of revenues or more. Naval products include torpedo defense systems and radars. Though most of Argon ST's business is with the U.S. government, some of the company's systems have been approved for sale to certain foreign countries, which accounted for 11 percent of total revenues in 2005. The company has grown rapidly in the post-September 11, 2001, war on terrorism, forcing it to prepare for competition without the aid of the federal government's preferential treatment for small businesses (of fewer than 750 employees).

Although the majority of Argon's systems focus on radio frequency (RF) wavelengths used in communications and radar, some analyze underwater sounds. Others intercept and process information on computer networks. The company also makes imaging systems.

MERGER OF ARGON AND SENSYTECH: 2004

Argon ST, Inc. is the result of the September 2004 merger of Sensytech, Inc. and Argon Engineering Associates, Inc. These two companies had been built through decades of mergers among high tech military contractors. Argon's strength in communications signal intercept and processing systems complemented Sen-sytech's sensors business.

Argon Engineering had been formed in 1997. The company's complex signal identification and processing systems software was made to run with commercial off-the-shelf (COTS) hardware, a new priority for the Defense Department. Argon's first and main client was the U.S. Navy. Argon was part of the Lockheed Martin team bidding for a $6 billion Aerial Common Sensors contract.

Argon had been formed by Terry Collins, Tom Murdock, and Vic Sellier, who had worked together at ERA (Engineering Research Associates), which was acquired by E-Systems Corporation and ultimately became a part of Raytheon. Collins would become president and CEO of Argon ST after the 2004 merger with Sensytech.

Sensytech had been built up through a number of mergers over the years. Formerly called Sensys Technologies, it had been formed by the 1998 merger of Daedalus Enterprises, Inc. with S.T. Research.

DAEDALUS ENTERPRISES: 19681998

Daedalus Enterprises Inc. was formed in 1968 in Ann Arbor, Michigan. It was incorporated as a Delaware corporation in January 1969. The company's stated aim was to produce "sensitive equipment"; it would become known for airborne imaging systems used for geographic exploration. Mounted on an aircraft, the sensors recorded heat and visible light data, which could be analyzed by computers to produce images of underground fault lines or likely oil fields.

Daedalus made headlines in the late 1970s over the $3 million sale of infrared oil exploration systems to China, which was considered controversial during the height of the Cold War because of its potential military applications. Company President Alan K. Parker told the New York Times that the Defense Department was most worried about the system's tape recorders being used to spy on military communications. Though this technology dated back to the 1950s, it was sensitive enough for the United States to ban its sale to the Soviet Union. The equipment sale also involved an array processor, which generated data by gathering and filtering many different signals.

Daedalus Enterprises, Inc. would be the surviving entity in successive mergers including the one that formed Argon ST, Inc. in 2004. However, in that case, Argon Engineering was deemed the acquirer of Sensytech for financial reporting purposes.

Daedalus had annual revenues of nearly $5 million by the end of the 1980s; net earnings were exceptional at almost $1 million. However, by 1991, sales had slipped below $3 million and the company fell into the red due to delays in a major development award. Daedalus continued to accumulate losses into the mid-1990s.

S.T. RESEARCH: 19721998

In 1998, Daedalus merged with S.T. Research Corporation to form Sensys Technologies Inc. S.T. Research, formed in 1972, was based in the high tech center of Fairfax County, Virginia. It specialized in communication and radar signals interception and electronic warfare systems.

S.T. Research's revenues were nearly $12 million in 1990. The company landed a major radar signal detection contract in 1991 after the U.S. Navy limited the contest to small businesses. The giant Litton Corp. supported S.T. in the project.

One niche product of the mid-1990s was a "ruggedized," waterproof portable computer. Company CEO Sandy R. Perrino told the Washington Post that Virginia's Center for Innovative Technology had been instrumental in its development.

COMPANY PERSPECTIVES

Our most important goal is to have our systems demonstrate excellence in field operation. Excellence includes more than technical performance, as it is equally important that they be stable, reliable, and operable. Argon ST has made a commitment to establish, document, implement and maintain a quality management system. We continually improve its effectiveness in accordance with the requirements of CMMI and ISO 9001:2000 by adopting a process approach and a set of standard interrelated processes to enhance customer satisfaction by exceeding customer expectations. We have an obligation to supply those men and women who risk their lives to provide security to our country and our families with the best operational capabilities possible. We can accomplish this only through the efforts of an excellent staff and our customers who place confidence in our ability to produce and deliver quality products.

Perrino became chairman of the combined company, Sensys Technologies, after the 1998 Daedalus/S.T. Research merger. In a statement, he said, "The new entity will be capable of supporting platforms anywhere from under the sea to space." At the time, utilities and transportation industries were key markets, in addition to government business. Sensys Technologies was organized into a Systems Group and Communications Group in Newington, Virginia, with an Imaging Group at the old Daedalus Enterprises home of Ann Arbor, Michigan.

SENSYTECH: 19982004

Sensys Technologies reported revenues of $22 million for the fiscal year ended September 30, 1998. The company became known as Sensytech, Inc. in September 1999.

The war on terrorism following the September 11, 2001 attacks resulted in more business for Sensytech. While revenues fell 28 percent to $16 million in the fiscal year ended September 30, 2001 (net income was $1.2 million), the next year sales doubled to a record $32 million, while net income reached $2.2 million. In early 2002, Sensytech bought the military electronics assets of FEL Corporation (Frequency Engineering Laboratories), which included a number of naval electronic warfare and communications businesses. The buy added an engineering and manufacturing site in Farmingdale, New Jersey. Sensytech was also growing organically, hiring about 50 tech workers toward the end of the year.

The newly acquired factory in New Jersey was relocated to western Pennsylvania early in the 2004 fiscal year. Sensytech then made a couple of strategic acquisitions before its merger with privately owned Argon. It bought Winter Park, Florida's Image Sensors and Systems, Inc. (ISS), which added forward looking infrared (FLIR) and visible spectrum imaging systems. It also bought ST Productions of Smithfield, Pennsylvania, bringing additional production and testing capacity.

THE ARGON-SENSYTECH MERGER

Like the merger of Daedalus with S.T. Research six years earlier, the combination of Argon and Sensytech brought together complementary business lines. "The synergistic value of bringing together Sensytech sensors with Argon software will permit us to be a more fully integrated supplier of system solutions to our markets," said Sensytech Chairman and CEO S. Kent Rockwell.

Employee-owned Argon Engineering had been about twice as large as Sensytech, which had revenues of $53 million in 2003. Argon had 350 employees to Sensytech's 220. Investors applauded the combination, making the new Argon ST stock one of the top performers in the C4ISR category, which was a $19 billion market in the United States by this time, according to Frost & Sullivan.

Argon ST was primarily involved in intelligence, surveillance, and reconnaissance aspects. The company's CFO, Donald Fultz, told the Wall Street Transcript that its competition was mainly from large aerospace companies. Though Argon was on track to outgrow the preferential treatment the federal government accorded to small businesses on certain contracts, Argon ST's relatively small size made it more flexible and responsive than defense industry giants. The company was itself a prime contractor on some programs.

The company was still considering potential acquisitions but was selective, said Fultz. With organic growth running around 40 percent, Argon's immediate challenge was hiring enough skilled employees.

ACQUISITION OF RADIX TECHNOLOGIES: 2005

For the fiscal year ended September 30, 2005, Argon ST reported revenues of $271.8 million, more than double the previous year's figure. Net income also more than doubled, to $21.8 million. The company had a $271 million backlog.

Argon ST acquired signal processing specialist Radix Technologies of Mountain View, California, in October 2005. Radix, established in December 1990, was a pioneer in advanced signal processing for reconnaissance and navigation. The deal cost Argon $10.9 million plus performance-based incentives worth up to $1.5 million.

KEY DATES

1968:
Daedalus Enterprises Inc. is founded.
1972:
S.T. Research Corporation is founded.
1990:
Signal processing specialist Radix Technologies is formed.
1997:
Naval signal intelligence specialist Argon Engineering is formed.
1998:
Daedalus Enterprises merges with S.T. Research to form Sensys Technologies Inc.
1999:
Sensys Technologies is renamed Sensytech.
2004:
Argon ST, Inc. is formed by merger of Sensytech, Inc. and Argon Engineering Associates.
2005:
Argon ST buys Radix Technologies.

PRINCIPAL SUBSIDIARIES

Radix Technologies, Inc.; Sensytech Financial Services, Inc.

PRINCIPAL DIVISIONS

Active Systems; Imaging Sensors and Systems; Imaging Services; PRO Design Solutions; Radix Technologies.

PRINCIPAL COMPETITORS

The Boeing Company; BAE Systems, Inc.; Lockheed Martin Corporation; Northrop Grumman Corporation; Raytheon Company.

FURTHER READING

"Argon Engineering to Acquire Sensytech," Defense Daily, June 8, 2004.

Browne, Malcolm W., "Equipment for China Designed to Analyze a Variety of Signals," New York Times, June 9, 1978, p. A5.

Chandrasekaran, Rajiv, "Tying Research to the Bottom Line; After an Abrupt Make-Over, the Center for Innovative Technology Has Become a Catalyst," Washington Post, April 14, 1997, p. F12.

"Company Interview: Donald Fultz, Argon ST, Inc.," Wall Street Transcript, April 2005.

Gwertzman, Bernard, "U.S. Rejects a Bid to Sell China Device with Possible Military Use," New York Times, May 9, 1978, p. 3.

Higgins, Marguerite, "Fairfax Tech Firm Exhibits Fast Start," Washington Times, February 22, 2005, p. C8.

, "Sensytech's Slip Seen As Short Term," Washington Times, February 17, 2004, p. C9.

Isaac, David, "Deal Has Military Supplier on the Offensive," Investor's Business Daily, June 15, 2004, p. A8.

, "Maker of High-Tech Defense Gear Uses Buyout to Cover Its Flanks," Investor's Business Daily, February 18, 2005, p. A7.

Knight, Jerry, "Merger Led to Big Stock-Price Gains at Argon ST," Washington Post, January 3, 2005, p. E3.

Koklanaris, Maria, "S.T. Research Beats Odds on Navy Contract," Washington Post, March 18, 1991, p. F6.

"Techworking: A Weekly Conversation with a Local Technology Employer," Newsbytes News Network, October 28, 2002.

Weinraub, Bernard, "U.S., in Reversal, Will Sell China Equipment Withheld from Soviet," New York Times, June 9, 1978, p. A1.

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