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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE PERIOD ENDED MAY 3, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period from to .
-------------- --------------
Commission file number 0-21236
APPLIED SIGNAL TECHNOLOGY, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
California 77-0015491
---------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 WEST CALIFORNIA AVENUE, SUNNYVALE, CA 94086
-----------------------------------------------
(408) 749-1888
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by a check 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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, no par value 7,851,522 Shares outstanding as of June 6, 1996.
This Quarterly Report on Form 10-Q consists of 20 pages. The Exhibit Index is
on Page 19.
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INDEX
APPLIED SIGNAL TECHNOLOGY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -- May 3, 1996 and October 31, 1995
Statements of Income -- Three months ended May 3, 1996 and
April 28, 1995; six months ended May 3, 1996 and April 28, 1995.
Statements of Cash Flows -- Six months ended May 3, 1996 and
April 28, 1995
Notes to Financial Statements -- May 3, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
MAY 3, 1996 OCTOBER 31, 1995
ASSETS (UNAUDITED) (NOTE)
----------- ----------------
<S> <C> <C>
Current assets:
Cash $ -- $ 369
Accounts receivable:
Billed
Unbilled 11,691 12,995
12,768 16,796
-------- --------
Total accounts receivable 24,686 29,564
Inventory 6,874 3,474
Prepaid and other current assets 2,498 2,097
-------- --------
Total current assets 34,058 35,504
Property and equipment, at cost:
Machinery and equipment 21,354 19,504
Furniture and fixtures 3,255 2,903
Leasehold improvements 2,936 1,589
Construction in process 372 751
-------- --------
27,917 24,747
Accumulated depreciation and amortization (15,263) (13,492)
-------- --------
Net property and equipment 12,654 11,255
Long-term investments 2,086 2,095
Other assets 110 176
-------- --------
Total assets $ 48,908 $ 49,030
======== ========
</TABLE>
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APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS (continued)
(In thousands except share data)
<TABLE>
<CAPTION>
MAY 3, 1996 OCTOBER 31, 1995
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) (NOTE)
----------- ----------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 3,129 $ 3,921
Bank line of credit 500 --
Accrued payroll and related benefits 3,737 3,691
Other accrued liabilities 1,509 1,547
Income taxes payable 1,435 2,077
-------- --------
Total current liabilities 10, 310 11,236
Deferred income taxes 847 847
Commitments
Shareholders' equity:
Preferred stock, no par value: 2,000,000 shares
authorized; none issued and outstanding -- --
Common stock, no par value: 20,000,000 shares
authorized; issued and outstanding--7,718,031 at
May 3, 1996 and 7,532,643 at October 31, 1995 19,479 18,895
Retained earnings 18,286 18,057
Net unrealized loss on securities (14) (5)
-------- --------
Total shareholders' equity 37,751 36,947
-------- --------
Total liabilities and shareholders' equity $ 48,908 $ 49,030
======== ========
</TABLE>
Note: The balance sheet at October 31, 1995 has been derived from the audited
financial statement at that date but does not include all of the information and
features required by generally accepted accounting principles for complete
financial statements.
See notes to financial statements.
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APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
May 3, April 28, May 3, April 28,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues from contracts $ 16,970 $ 13,030 $ 32,768 $ 26,851
Operating expenses:
Contract costs 12,180 8,964 22,995 17,423
Research and development 2,155 1,660 4,067 3,473
General and administrative 2,528 2,015 5,368 3,998
-------- -------- -------- --------
Total operating expenses 16,863 12,639 32,430 24,894
-------- -------- -------- --------
Operating income 107 391 338 1,957
Interest income/(expense), net (4) 59 15 193
-------- -------- -------- --------
Income before provision
for income taxes 103 450 353 2,150
Provision for income taxes 24 180 124 860
-------- -------- -------- --------
Net income $ 79 $ 270 $ 229 $ 1,290
======== ======== ======== ========
Net income per common share $ 0.01 $ 0.04 $ 0.03 $ 0.17
Number of shares used in calculating
net income per common share 7,905 7,577 7,840 7,614
</TABLE>
See notes to financial statements.
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APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
May 3, 1996 April 28, 1995
----------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 229 $ 1,290
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,771 1,518
Accounts receivable 4,878 4,860
Inventory, prepaids and other current assets (3,801) (6,037)
Other assets 66 (9)
Accounts payable and accrued expenses (1,426) (1,392)
------- -------
Net cash provided by operating activities 1,717 230
Investing Activities:
Maturity of investments -- 2,000
Additions to property and equipment (3,170) (2,527)
------- -------
Net cash used in investing activities (3,170) (527)
FINANCING ACTIVITIES:
Borrowings under bank line of credit 500 --
Issuance of common stock 585 585
Repurchase of common stock (1) (980)
------- -------
Net cash provided by (used in) financing activities 1,084 (395)
------- -------
Net decrease in cash (369) (692)
Cash, beginning of period 369 1,192
------- -------
Cash, end of period $ 0 $ 500
======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 51 $ 28
</TABLE>
See notes to financial statements.
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APPLIED SIGNAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
May 3, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six-month period ending May 3, 1996 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Registrant Company's annual
report on Form 10-K for the year ended October 31, 1995.
INVESTMENTS
The Company's investment securities, which consist primarily of U.S. Treasury
securities, are classified as available-for-sale and are carried at fair market
value. Unrealized gains and losses, net of tax, are reported in shareholders'
equity as part of retained earnings. Realized gains and losses on
available-for-sale securities are included in interest income (expense), net.
The cost of securities sold is based on the specific identification method.
Interest on securities classified as available-for-sale are included in interest
income (expense), net. At May 3, 1996, the contractual maturities of the debt
securities were staggered through June 30, 1998.
REVENUES FROM CONTRACTS
The Company accounts for fixed-price contracts using the
percentage-of-completion method of accounting. Under this method, all contract
costs are charged to operations as incurred; and a portion of the contract
revenues, based on the estimated profits and the degree of completion of the
contract as measured by a comparison of the actual and estimated costs, is
recognized as revenues each quarter. The Company accounts for cost plus
reimbursement contracts by charging contract costs to operations as incurred and
recognizing contract revenues and profits by applying an estimated fee rate to
actual costs. Management reviews contract performance, costs incurred and
estimated completion costs regularly and adjusts revenues and profits on
contracts in the month in which changes become determinable.
EARNINGS PER SHARE
Net income per common share is computed using the weighted average number of
shares of common stock outstanding and common equivalent shares from stock
options (using the treasury stock method).
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NOTE 2 -- INVENTORY
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
May 3, 1996 October 31, 1995
----------- ----------------
<S> <C> <C>
Raw Materials $ 617 $ 548
Work in Process 5,121 2,148
Finished Goods 526 387
-------- --------
6,264 3,083
Precontract Costs 610 391
-------- --------
$ 6,874 $ 3,474
======== ========
</TABLE>
The Company records contract revenues and costs for interim reporting purposes
based on annual targeted indirect rates. At year end, the revenues and costs are
adjusted for actual indirect rates. During the interim reporting periods,
overhead variances for manufacturing, research and development, and general
administrative expenses may accumulate between the actual indirect rates and the
annual targeted rates. These interim indirect spending variances are inventoried
as part of work in process during these interim reporting periods. These rates
are reviewed regularly and any permanent variances are reflected in the income
statement as they become known. At May 3, 1996, the inventoried variance was
approximately $2,332,000 ($3,246,000 at April 28, 1995) and was included in work
in process. At October 31, 1995 and 1994, the variance was zero since all
revenues and costs were recorded at actual indirect rates for each fiscal year
end.
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ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following information should be read in conjunction with the attached
financial statements and notes thereto.
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors set forth in "Business Considerations and Certain Factors that may
Affect Results from Operations and/or Stock Price."
BUSINESS ENVIRONMENT/BACKGROUND:
Applied Signal Technology designs, develops, manufactures and markets advanced
digital signal processing equipment to collect and process a wide range of
telecommunication signals for both signal reconnaissance and commercial
applications. This equipment is purchased by the U.S. Government as well as
allied foreign governments and is used for foreign signal reconnaissance. The
commercial telecommunication processing equipment is used in digital video
transmission, cellular radio communication systems, and as equipment for a
variety of both cable and wireless communication technologies.
In recent years, accurate and comprehensive information regarding foreign
affairs and developments has become increasingly important to the United States
government. The reduction of United States military tactical forces overseas,
coupled with political instability in certain regions such as the Middle East,
Eastern Europe, Africa and South America, has heightened the United States
government's need to be able to monitor overseas activities. In order to obtain
information about activities within foreign countries, the United States
government gathers and analyzes telecommunication signals emanating from those
countries.
The Company devotes significant resources toward understanding the United States
government's signal reconnaissance goals, capabilities and perceived future
needs. The Company obtains information about these signal reconnaissance needs
through frequent marketing contact between its employees and technical and
contracting officials of the United States government. The Company believes that
it has much more marketing contact with customers and potential customers than
is customary among its competitors. In addition, the Company invests in Research
and Development (R&D) which it anticipates will enable it to develop signal
reconnaissance equipment that meets these needs. The Company believes that it
invests a greater percentage of its revenues in R&D than is typical among its
competitors.
Traditionally, the United States government has addressed its signal
reconnaissance needs with custom signal processing solutions which tend to be
both expensive and have long delivery times. These factors, combined with
budgetary constraints, have caused many agencies to search for more flexible and
cost-effective signal reconnaissance solutions that can be deployed promptly.
The Company's signal reconnaissance products can be used, with or without
further modification, to satisfy requirements of a variety of customers. The
Company believes that custom equipment generally cannot be as readily deployed
in as wide a variety of circumstances as the Company's products. The Company
designs its products to use advanced circuitry including Company-designed
application specific integrated circuits
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(ASICs). This enables the Company to offer products that are smaller, consume
less power and cost customers less when multiple units are built.
The rapidly advancing communications marketplace has created numerous new
opportunities for the Company to expand its marketplace.
Through a combination of customer and internally funded development, the Company
is judiciously seeking opportunities to expand its market reach. This is being
accomplished by capitalizing on the Company's accumulated knowledge of advanced
digital signal processing and telecommunications technologies in an effort to
either license the technology to the commercial sector or perform low-to-medium
volume manufacturing on select subsystems.
The following table sets forth selected commercial telecommunications projects
for which the Company is currently in development and identifies the primary
customers:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION CUSTOMER(S)
<S> <C> <C>
QAMalyzer(TM) Digital test equipment for cable service providers TCI, Pacific Telesis, Southwestern Bell
DIF Processor Earth base-station TDMA uplink/downlink processor Lockheed Martin (ACeS)
Cell Phone Modem chip design for the Ericsson "Freeset 1900(TM)" Ericsson, Inc.
Modem Chip PCS cellular phone
QAM Error Error detection chip for set-top converters VLSI Technologies, Inc.
Detection Chip
</TABLE>
BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS AND/OR STOCK PRICE:
Defense and intelligence agencies have accounted for almost all of the Company's
revenues. Future reductions in United States government spending on signal
reconnaissance equipment or future changes in the kind of signal reconnaissance
products or services required by United States government agencies could limit
demand for the Company's products which would have a material adverse effect on
the Company's operating results and financial condition.
The signal reconnaissance equipment market is highly competitive and the Company
expects that competition will increase in the future. Some of the Company's
current and potential competitors have significantly greater technical,
manufacturing, financial and marketing resources than the Company. Substantial
competition could have a material adverse effect on the Company's results of
operations and financial condition.
The Company believes its employees are its most valuable resource and,
accordingly, focuses much of its attention on attracting and retaining staff
members.
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Over the last year, the Company has experienced an increase in its attrition
rate as well as a limitation in attracting new talent into the Company due to
increased competition in the economy. Management believes these effects are
attributable to the expanding U.S. economy and, in particular, the local
California economy where the Company must compete for new talent, and the
explosive growth in the telecommunications sector. The Company has implemented a
more aggressive recruiting program and an employee referral program aimed at
countering this new environment. The Company's ability to execute its business
plan is contingent upon attracting and retaining this talent. There can be no
assurances that this will not have a material adverse effect on the Company's
operating results.
Almost all of the Company's contracts contain termination clauses which permit
contract termination upon the Company's default or for the convenience of the
other contracting party. In either case, termination could adversely affect the
Company's operating results. Although the Company has not experienced any
material cancellations to date, there can be no assurances that such
cancellations will not occur in the future.
A significant portion of the Company's revenues are derived from fixed-price
contracts. Under fixed-price contracts, unexpected increases in the cost to
develop or manufacture a product, whether due to inaccurate estimates in the
bidding process, unanticipated increases in materials costs, inefficiencies or
other factors, are borne by the Company. The Company has experienced cost
overruns in the past that have caused the Company to realize losses on
contracts. There can be no assurance that the Company will not experience cost
overruns in the future or that such overruns will not have a material adverse
effect on the Company's operating results.
The Company is still experiencing some constraint in earnings resulting from
lower average profitability on its production jobs. This is due, in part, to the
unfavorable adjustments in estimated costs-to-complete on production jobs
recorded during the first quarter of this fiscal year and due, in part, to
absorbing unrecoverable indirect costs at a rate higher than was provided for in
the prices of these contracts. The Company is currently in the process of taking
several steps aimed at improving its margins. This includes revising prices of
its products and services and examining its cost structures. There can be no
assurances that these steps will result in improved margins.
The Company has experienced significant fluctuations in operating results from
quarter to quarter and expects that it will continue to experience such
fluctuations in the future. These fluctuations are caused by factors inherent in
government contracting and the Company's business such as the timing of cost and
expense recognition for contracts and the United States government contracting
and budget cycles. Fluctuations in quarterly results may cause the price of the
Company's common stock to fluctuate substantially.
The market for the Company's products is characterized by rapidly changing
technology. The Company believes that it has been successful to date in
identifying United States government signal reconnaissance needs early,
investing in research and development to meet these needs and delivering
products before the Company's competitors. The Company believes that its future
success will depend upon continuing to develop and introduce, in a timely
manner, products capable of collecting or processing new types of
telecommunications signals. There can be no assurance that the Company will be
able to develop and market new products successfully in the future or respond
effectively to technological changes or that new
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products introduced by others will not render the Company's products or
technologies noncompetitive or obsolete.
The Company has had numerous discussions with companies in the commercial cable
TV/video compression and telecommunications marketplaces. The Company invested
14% of its fiscal 1995 research and development expenditures and plans to invest
approximately 20% of its fiscal 1996 research and development expenditures
exploiting opportunities in these areas. The Company's primary business strategy
in this area is to capitalize on its experience as a technology company and to
explore areas where current or newly developed technology can be licensed or
products can be manufactured and sold into the commercial marketplace. To date,
revenues from the commercial marketplace have been less than 5% of the Company's
revenues. There can be no assurance that this strategy will be successful.
There can be no assurance that an active trading market will be sustained for
the Company's common stock. Further, the market price of the common stock could
be subject to significant fluctuations in response to quarter-to-quarter
variations in operating results, United States government spending patterns and
other factors. In addition, the stock market in recent years has experienced
extreme price and volume fluctuations that have particularly affected the market
prices of many technology companies and that have been unrelated or
disproportionate to the operating performance of such companies. These
fluctuations, as well as general economic and market conditions, may adversely
affect the future market price of the Company's common stock.
Sales of shares of common stock in the public market by existing shareholders or
option holders could adversely affect the market price of the common stock.
Certain options become exercisable and eligible for sale on the market in future
periods and may affect the stock price.
Due to the factors noted above, the Company's future earnings and stock price
may be subject to volatility, particularly on a quarterly basis. Any shortfall
in revenue or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of the Company's
common stock in any given period. Additionally, the Company may not learn of
such shortfalls until late in the fiscal quarter, which could result in an even
more immediate and adverse effect on the trading price of the Company's common
stock.
QUARTER AND SIX MONTHS ENDED MAY 3, 1996 COMPARED TO QUARTER AND SIX MONTHS
ENDED APRIL 28, 1995:
RESULTS OF OPERATIONS:
REVENUES AND BACKLOG: Revenues for the second quarter of fiscal 1996 were
$16,970,000, representing a 30% increase over second quarter fiscal 1995
revenues of $13,030,000. Revenues for the six months ended May 3, 1996 were
$32,768,000, up 22% from $26,851,000 for the first six months of fiscal 1995.
Revenues for the quarter and first six months of fiscal 1996 were up compared to
the same periods of fiscal 1995, primarily due to increased development contract
activity experienced in the Company's three engineering divisions.
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New order levels for the second quarter were a record $64,044,000, up 410% from
the $12,559,000 reported for the same period of fiscal 1995. New orders for the
first six months of fiscal 1996 were $78,173,000. This compares favorably to the
$16,145,000 for new orders experienced during the same period of fiscal 1995.
Management believes the increased order levels reflect the customers' strong
vote of confidence in the Company's products and people and, to a lesser extent,
reflect a lessening of the federal budget constraints.
The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts (excluding unexercised options) was
$75,110,000 at May 3, 1996 versus $19,815,000 at April 28, 1995. This represents
a 279% increase over the prior year's backlog. The increase in backlog is due to
the record order levels experienced during the second quarter.
CONTRACT COSTS: Contract costs consist of direct costs on contracts, including
materials and labor, and manufacturing overhead costs. Contract costs, as a
percentage of revenues, were 71.8% for the second quarter of fiscal 1996 versus
68.8% for the same period of fiscal 1995. Contract costs for the six months
ended May 3, 1996 were 70.2% of revenues versus 64.9% for the first six months
of fiscal 1995. Contract costs expressed as a percentage of revenues for the
second quarter of fiscal 1996 are up due to a targeted, higher overhead rate
being applied to contracts for fiscal year 1996 as compared to fiscal 1995. The
increase in overhead rate being applied to contracts is necessitated by the
higher growth in overhead expenses estimated to be incurred in fiscal 1996. For
the first six months of fiscal 1996, the increase in contract costs as a percent
of revenues is due, in part, to the higher overhead rate applied to contracts
and due, in part, to the unfavorable adjustments in estimated costs-to-complete
on production jobs recorded during the first quarter of this fiscal year.
RESEARCH AND DEVELOPMENT (R&D): Company-directed investment in research and
development consists of expenditures recoverable from customers through the
Company's billing rates and expenditures funded by the Company from earnings. It
is the Company's accounting practice to record R&D expenses based on annual,
targeted indirect rates. (See "Notes to Financial Statements, Note 2 --
Inventory".) Research and development expenses, as a percentage of revenues were
12.7% for the second quarters of fiscal years 1996 and 1995. R&D expenses for
the first six months of fiscal years 1996 and 1995 were 12.4% and 12.9% of
revenues, respectively. The fiscal 1996 quarter and year-to-date spending on
research and development are nominally unchanged when compared to the same
periods of fiscal 1995. The portion of R&D funded from Company earnings for the
most recent six months of fiscal 1996 was 4.5% of revenues versus 5.5% for the
same period during fiscal 1995.
GENERAL AND ADMINISTRATIVE: General and administrative expenses include
administrative salaries, costs related to the Company's marketing and proposal
activities, and other administrative costs. It is the Company's accounting
practice to record general and administrative expenses based on annual, targeted
indirect rates. (See "Notes to Financial Statements, Note 2 -- Inventory".)
General and administrative expenses were $2,528,000 or 14.9% of revenues for the
second quarter of fiscal 1996 compared to $2,015,000 or 15.5% for the second
quarter of fiscal 1995. General and administrative expenses were $5,368,000, or
16.4%, and $3,998,000, or 14.9%, of revenues for the six months ended May 3,
1996 and April 28, 1995, respectively. Consistent with government contracting
methodology, the Company considers both general and administrative expenses and
research and development expenses part of its general and
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administrative indirect expense pool. Combined, R&D and general and
administrative expenses were 28.8% for the first six months of fiscal 1996
versus 27.8% for the same period of fiscal 1995. General and administrative
expenses as a percentage of revenues are up for the first six months of fiscal
1996 when compared to the same period of fiscal 1995 because lower average fees
were recognized on production programs during the first six months of fiscal
1996.
INTEREST INCOME/(EXPENSE): For the quarter ended May 3, 1996, interest expense
was $4,000, down from $59,000 of interest income for the same period of fiscal
1995. Interest income for the first six months of fiscal 1996 was $15,000
compared to interest income of $193,000 for the same period of fiscal 1995. The
drop in interest income received during the quarter and year-to-date is
primarily due to the reduction of cash balances resulting from the investment in
fixed assets and accounts receivable during the first half of fiscal 1996 as
compared to the same period of fiscal 1995.
PROVISION FOR INCOME TAXES: The provision for income taxes as a percentage of
income before income taxes was 23.3% for the second quarter of fiscal 1996 as
compared to 40.0% for the second quarter of fiscal 1995. The effective tax rate
for the six months ended May 3, 1996 and April 28, 1995 was 35.0% and 40.0%,
respectively. The decrease in the quarter and year-to-date tax rate is primarily
a result of the lower profit margins experienced by the Company during the first
half of this fiscal year.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
The Company's primary source of liquidity has been the cash flow generated from
operations, short-term bank borrowings, equipment leases and equity and debt
financings.
The Company has a bank credit agreement to augment cash flow needs and to
provide term financing for capital investments. The Company maintains a
$6,000,000 unsecured, revolving line of credit for short-term cash requirement
and a $1,000,000 line of credit for use in purchasing capital investments. The
unsecured, revolving line of credit bears interest at the bank's reference rate
(8.75% as of May 3, 1996). The line of credit for use in purchasing capital
investments bears interest at the bank's reference rate plus one-half percent
(9.25% at May 3, 1996). Outstanding amounts on the unsecured, revolving line of
credit were $500,000 at May 3, 1996 and zero at October 31, 1995. Outstanding
amounts on the line of credit for use in purchasing capital investments were
zero at May 3, 1996 and October 31, 1995. Both lines expire March 1, 1997.
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES: Net cash provided by
operating activities has varied significantly from quarter to quarter. These
quarter-to-quarter variances are primarily the result of changes in the rate of
investment in accounts receivable and the change in inventories held by the
Company. During the first six months of fiscal 1996, $1,717,000 was provided by
operating activities versus $230,000 provided by operating activities during the
comparable period of fiscal 1995. The increase in net cash provided by operating
activities during the first six months of fiscal 1996 is primarily attributable
to changes in the rate of investment in inventories as compared to the same
period of fiscal 1995. During the first six months of fiscal 1996, cash used in
the investment in inventories was $3,801,000 due, in part, to the anticipation
of future contract awards for the Company's products and due, in part, to
timing-related, targeted indirect rate variances. (See "Notes to Financial
Statements, Note 2 -- Inventory.) This is lower than the $6,037,000 used in the
investment of inventory during the first six months of fiscal 1995.
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NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES: Net cash used in investing
activities was $3,170,000 for the first six months of fiscal 1996 versus
$527,000 used in investing activities during the same period of fiscal 1995.
Additions to property and equipment were $3,170,000 in the first six months of
fiscal 1996 compared to $2,527,000 in the first six months of fiscal 1995. The
$2,527,000 additions to property and equipment in fiscal 1995 were offset by the
maturity of investments of $2,004,000. The increase in capital investment in the
current quarter continues to be driven by an increase in the number of contracts
awarded during the current fiscal year, and due to the increased level of
development-type contracts that have a tendency to require higher-priced test
and computing equipment.
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES: Cash provided by financing
activities during the first six months of fiscal 1996 was $1,084,000 versus
$395,000 used in financing activities during the first six months of fiscal
1995. The change in cash provided by financing activities during the first six
months of fiscal 1996 is attributable, in part, to the increase in bank
borrowings of $500,000 and due, in part, to the Company not repurchasing common
stock in the current fiscal year.
The Company believes that the funds generated from operations, existing working
capital and amounts available under existing lines of credit will be sufficient
to meet its cash needs through the middle of fiscal 1997.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In April 1994, the Company was served with a subpoena by the Department
of Defense Office of Inspector General (OIG) in connection with approximately
six contracts, several of which had been audited by the Defense Contract Audit
Agency (DCAA) the previous year. As is routine in such matters involving
government contracts, the OIG referred the matter to another government agency
which also had contracts with the Company. Shortly thereafter, this second
agency issued a request for information related to nine additional contracts. To
date, the Company has not received any allegations of wrong-doing from the OIG
or the other agency. At the request of the Board of Directors, the Company
initiated its own review of the contracts in conjunction with its legal counsel.
Further review of the contracts in question and related contracts
through April 1995 indicates the Company was not compliant with Public Law
87-653, Truth in Negotiations Act, which requires disclosure of all actual costs
available on the date of cost certification on certain contracts performed
during the 1989 and 1990 timeframe. These findings have resulted in a voluntary
disclosure to the government which is expected to result in a downward price
adjustment on certain contracts. In June 1995, the Company announced it was
taking a charge against the fiscal 1995 third quarter operating results in
anticipation of a settlement with the government on the subject contracts. The
charge resulted in a reduction of the fiscal 1995 third quarter's operating
income of $1.2 million.
In April 1996, the Company was served with a second subpoena by the OIG
in connection with all contracts entered into between 1990 and the present
related to three products: the Model 102P Voice Channel Demodulator, the Model
120 Multichannel Processor, and the Model 150 FAX Scanner. The Company is
presently in discussions with the OIG to determine the scope of the subpoena and
intends to fully comply with the request.
While management believes the fiscal 1995 third quarter charge is
adequate to cover all related risks, the government has not concluded its
investigation or agreed to a settlement with the Company. There can be no
assurances the Company will not be required to take additional charges in
connection with this matter in future periods. However, management believes that
any such charges would not have a material effect on the operating results and
financial condition of the Company.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders held on March 7, 1996,
the Company's shareholders voted on the election of three Class II
directors, and a proposal to ratify the appointment of Ernst & Young
LLP as the independent auditors for the Company for the fiscal year
ending October 31, 1996.
16
<PAGE> 17
Election of Directors. All of the Company's incumbent Class II
directors were subject to re-election at the meeting; all three were
re-elected with the following votes:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD ABSTAIN
<S> <C> <C> <C> <C>
James F. Collins 6,289,561 0 27,313 0
John R. Treichler 6,288,981 0 27,893 0
Stuart Whittelsey 6,285,595 0 31,279 0
</TABLE>
Appointment of Ernst & Young LLP. The shareholders ratified the
appointment of Ernst & Young LLP as the Company's independent auditors
for the fiscal year ending October 31, 1996. The votes for this
proposal were as follows:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD ABSTAIN
<S> <C> <C> <C>
6,270,049 23,490 0 23,335
</TABLE>
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits -- See Index to Exhibits on page 19
Item 7. Reports on Form 8-K
Not applicable.
17
<PAGE> 18
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 thereinto duly authorized.
Applied Signal Technology, Inc.
/s/ Brian M. Offi June 15, 1996
- - -------------------------------------------- -------------------------
Brian M. Offi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE> 19
APPLIED SIGNAL TECHNOLOGY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- - ------- -----------------------
<S> <C>
3.1 (1) Second Amended and Restated Articles of Incorporation
3.2 (1) Amended and Restated Bylaws
4.1 (1) Specimen Common Stock Certificate
4.2 (1) Rights Agreement dated January 25, 1991
10.1 (1) Form of Indemnification Agreement for directors and officers
10.2 (1) 1984 Stock Purchase Plan and form of agreement thereunder
10.3 (1) 1991 Stock Option Plan and forms of agreements thereunder
10.4 (1) 1993 Employee Stock Purchase Plan
10.5 (1) Profit Sharing Policy
10.6 (1) Summary Plan Description of 401(k) Retirement Plan
10.7 (1) Warrant to Purchase Common Stock dated June 27, 1990 issued to
Owenoake Partners, L.P. ("Owenoake"), Letter Agreement with Owenoake
dated September 20, 1990, and Amendment Number One to Warrants to
Purchase Common Stock with Owenoake and certain warrant holders dated
February 8, 1993
10.8 (1) Warrants to Purchase Common Stock dated September 25, 1990 issued to
certain warrant holders
10.9 (2) Line of Credit Agreement dated June 10, 1993 with Sanwa Bank
California and related Equipment Purchase Line of Credit Agreement
dated June 10, 1993
10.10 (1) Lease Agreement dated August 21, 1985 with Lincoln Mathilda
Associates, Ltd. and Patrician Associates, Inc., and amendments
thereto
10.11 (3) Lease agreements dated November 23, 1994 with Lincoln Property Company
Management Services, Inc. for Buildings H and I
10.12 (4) Amendment to Commercial Credit Agreement dated March 7, 1995 with
Sanwa Bank California and related Equipment Purchase Line Agreement
dated March 10, 1995
11.1 Statement regarding computation of net income per share
13.1 (4) Annual Report to Shareholders for fiscal year ended October 31, 1995
23.1 (4) Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to corresponding Exhibit filed as an Exhibit to
Registrant's Registration Statement on From S-1 filed January 29, 1993
(File No. 33-58168).
(2) Incorporated by reference to corresponding Exhibit filed as an Exhibit to
Registrant's Form 10-K for fiscal year 1993 dated January 22, 1994
(3) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-K for fiscal year 1994 dated January 27, 1995.
(4) Incorporated by reference to corresponding Exhibit filed with the
Registrant's From 10-K for fiscal year 1994 dated January 26, 1996.
19
<PAGE> 1
EXHIBIT 11.1
APPLIED SIGNAL TECHNOLOGY, INC.
COMPUTATION OF NET INCOME PER SHARE
(In thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
MAY 3, APRIL 28, MAY 3, APRIL 28,
1996 1995 1996 1995
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Number of shares:
Weighted average outstanding common $7,168 $7,152 $7,256 $7,178
Dilutive common stock equivalents of:
Stock options (treasury stock
method)(1) 737 425 584 436
------ ------ ------ ------
7,905 7,577 7,840 7,614
====== ====== ====== ======
Net income $ 79 $ 270 $ 229 $1,290
Net income per common share $ .01 $ .04 $ .03 $ .17
</TABLE>
(1) Effect of assumed exercise of all dilutive stock option and assumed
repurchase of shares from proceeds.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> MAY-03-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 24,686
<ALLOWANCES> 0
<INVENTORY> 6,874
<CURRENT-ASSETS> 34,058
<PP&E> 27,917
<DEPRECIATION> 15,263
<TOTAL-ASSETS> 48,908
<CURRENT-LIABILITIES> 10,310
<BONDS> 0
0
0
<COMMON> 19,479
<OTHER-SE> 14
<TOTAL-LIABILITY-AND-EQUITY> 48,908
<SALES> 32,768
<TOTAL-REVENUES> 32,768
<CGS> 22,995
<TOTAL-COSTS> 32,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15)
<INCOME-PRETAX> 353
<INCOME-TAX> 124
<INCOME-CONTINUING> 229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 229
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
