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 AUGUST 1, 1997
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, 8,312,396 shares outstanding as of August 29, 1997.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
August 1, Oct. 31,
1997 1996
---------- ----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,001 $1,559
Short-term investments 1,718 767
Accounts receivable:
Billed 13,116 14,491
Unbilled 18,310 15,527
---------- ----------
Total accounts receivable 31,426 30,018
Inventory 7,104 3,208
Prepaid and other current assets 2,574 2,236
---------- ----------
Total current assets 45,823 37,788
Property and equipment, at cost:
Machinery and equipment 26,070 23,221
Furniture and fixtures 3,601 3,301
Leasehold improvements 4,521 3,356
Construction in process 411 191
---------- ----------
34,603 30,069
Accumulated depreciation and amortization (20,163) (17,198)
---------- ----------
Net property and equipment 14,440 12,871
Long-term investments -- 1,326
Other assets 67 118
---------- ----------
Total assets $60,330 $52,103
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,360 $3,045
Accrued payroll and related benefits 5,329 4,337
Other accrued liabilities 2,730 1,900
Income taxes payable 1,847 2,029
---------- ----------
Total current liabilities 13,266 11,311
Deferred income taxes 827 827
Shareholders' equity:
Common stock, no par value: 20,000,000 shares
authorized; issued and outstanding -- 8,282,576 at
August 1, 1997 and 7,873,347 at October 31, 1996 21,617 20,099
Retained earnings 24,601 19,872
Net unrealized gain/(loss) on securities 19 (6)
---------- ----------
Total shareholders' equity 46,237 39,965
---------- ----------
Total liabilities and
shareholders' equity $60,330 $52,103
========== ==========
</TABLE>
Note: The balance sheet at October 31, 1996 has been derived from the audited
financial statements 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.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -------------------
August 1, August 2, August 1, August 2,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from contracts $22,600 $19,504 $66,671 $52,272
Operating expenses:
Contract costs 13,793 12,624 42,672 35,619
Research and development 2,269 2,281 7,133 6,348
General and administrative 3,062 2,877 9,415 8,245
--------- --------- --------- ---------
Total operating expenses 19,124 17,782 59,220 50,212
--------- --------- --------- ---------
Operating income 3,476 1,722 7,451 2,060
Interest income/(expense), net 18 23 116 38
--------- --------- --------- ---------
Income before provision
for income taxes 3,494 1,745 7,567 2,098
Provision for income taxes 1,351 610 2,838 734
--------- --------- --------- ---------
Net income $2,143 $1,135 $4,729 $1,364
========= ========= ========= =========
Net income per common share $0.25 $0.14 $0.57 $0.17
========= ========= ========= =========
Number of shares used in calculating
net income per common share 8,517 8,062 8,286 7,901
========= ========= ========= =========
</TABLE>
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------
August 1, August 2,
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,729 $1,364
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,965 2,732
Accounts receivable (1,408) 3,552
Inventory, prepaids and other current assets (4,234) (3,958)
Other assets 51 55
Accounts payable and accrued liabilities 1,955 (1,241)
--------- ---------
Net cash provided by operating activities 4,058 2,504
INVESTING ACTIVITIES:
Maturity of investments 400 --
Additions to property and equipment (4,534) (4,575)
--------- ---------
Net cash used in investing activities (4,134) (4,575)
FINANCING ACTIVITIES:
Borrowings under bank line of credit -- 600
Issuance of common stock 1,518 1,102
Repurchase of common stock -- --
--------- ---------
Net cash provided by financing activities 1,518 1,702
Net increase (decrease) in cash and cash equivalents 1,442 (369)
Cash and cash equivalents, beginning of period 1,559 369
--------- ---------
Cash and cash equivalents, end of period $3,001 $0
========= =========
Supplemental disclosures of cash flow information:
Interest paid $36 $59
</TABLE>
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
August 1, 1997
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 nine month period ending August 1, 1997 are not
necessarily indicative of the results that may be expected for the year
ending October 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended October 31, 1996.
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 August 1, 1997, the contractual maturities of the
debt securities will occur by 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 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 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
Earnings per share (EPS) are based on the weighted average number
of common and common equivalent shares outstanding. Common equivalent
shares result from the assumed exercise of outstanding stock options that
have a dilutive effect when applying the treasury stock method. Earnings
per share is calculated using the weighted average number of common
shares outstanding during the period.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earning per Share." This Statement is
effective for periods ending after December 15, 1997, at which time the
Company will be required to change the method currently used to compute
EPS. SFAS 128 will require entities to report "basic" and "diluted"
earnings per share. For the Company, the "basic" earnings per share
calculation is equivalent to its present EPS calculation, excluding the
effect of dilutive stock options. The "diluted" earnings per share
calculation is equivalent to the existing "fully diluted" EPS
calculation. The Company has determined that, on a pro forma basis,
"basic" earnings per share would have been $0.27 and $0.15 for the three
months ended August 1, 1997 and August 2, 1996 respectively, and $0.61
and $0.18 for the nine month period ending on those respective dates.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS 123), "Accounting for Stock Based Compensation."
SFAS 123 encourages entities to adopt a fair value based method of
accounting for employee stock compensation plans, however, it also allows
an entity to continue to measure compensation cost for those plans using
the intrinsic value method of accounting as prescribed in Accounting
Principle Board Opinion No. 25. Under the intrinsic value based method,
many companies, including Applied Signal Technology, Inc., have not
recognized compensation cost for stock options granted to their
employees.
During fiscal year 1997, the Company will adopt the disclosure
provisions as outlined in SFAS. While the Company has not yet determined
the total effect of adopting SFAS 123, it believes that the adoption of
the standard will not result in material charges to operations in fiscal
1997 and thereafter.
NOTE 2 -- INVENTORY
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 1, 1997 OCTOBER 31, 1996
-------------- ----------------
<S> <C> <C>
Raw Materials $ 1,227 $ 591
Work in Process 2,424 2,195
Finished Goods 3,348 322
------ ------
6,999 3,108
Precontract Costs 105 100
------ ------
$7,104 $3,208
====== ======
</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 variances may accumulate between the actual
indirect rates and the annual targeted rates. All timing-related 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 statement of income as they
become known. At August 1, 1997, the inventoried variance was
approximately $1,227,000 ($2,043,000 at August 2, 1996) and was included
in work in process. At October 31, 1996 the variance was zero since all
revenues and costs were recorded at the actual indirect rates for each
fiscal year end.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 the "Summary of Business
Considerations and Certain Factors that May Affect Future Results of
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. This equipment is purchased by the U.S.
Government as well as allied foreign governments and, to a lesser extent,
the commercial sector. Equipment is purchased by the U.S. Government is
used for both signal reconnaissance and tactical communication systems.
Equipment purchased by the commercial sector is used in both cable and
wireless applications as described below.
Accurate and comprehensive information regarding foreign affairs and
developments continues to be important to the United States Government. The
reduction of United States military tactical forces overseas and the end of
the Cold War, compounded with political instability in certain regions such
as the Middle East, Eastern Europe, Africa and South America, have
heightened the United States Government's need to be able to rapidly deploy
and 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.
Further, the rapidly changing global environment coupled with the explosion
in telecommunication technologies has necessitated an upgrade in the
communications systems used by the armed services. These new systems must
also be capable of rapid deployment and, in some cases, must be capable of
on-the-move-communications.
It is within this background that the Company pursues its business model.
The Company devotes significant resources toward understanding the United
States Government's signal reconnaissance and communication systems goals,
capabilities and perceived future needs. The Company obtains information
about 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 believes its significant investment in research and development
(R&D) 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 and communication systems needs with custom signal processing
solutions which tend to be both expensive and have long delivery times.
These factors, combined with budgetary constraints and the changing
political and economic landscape since the end of the Cold War, have caused
many agencies to search for more flexible and cost-effective solutions that
can be deployed promptly. It is this trend which is compelling the United
States Government to make maximum use of commercial, off-the-shelf (COTS)
technology.
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 (ASICs). This
enables the Company to offer products that are smaller, consume less power
and cost customers less when multiple units are built.
Over the last two years through a combination of customer and internally
funded development, the Company has sought opportunities to expand its
market reach by moving into the commercial sector. This was 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 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 TCI,
service providers Southwestern Bell
Cell Phone Modem Modem chip design for the Ericsson
"Freeset 1900(TM)" PCS cellular phone Ericsson
</TABLE>
To date, this strategy has provided limited success. Further, the Company
is finding greater opportunities in its core business. As a result, the
Company anticipates making a more limited investment of its research and
development resources into this area in the future. The Company will
continue to pursue its existing commercial initiatives and, where
appropriate, will also perform customer funded development in this area.
Summary of Business Considerations and Certain Factors that May Affect
Future Results of Operations and/or Stock Price:
The Company's future earnings and stock price may be subject to volatility,
particularly on a quarterly basis, due to the following:
Customer Concentration: Historically, defense and intelligence agencies
have accounted for almost all of the Company's revenues. Future reductions
in United States government spending on signal reconnaissance and
communications equipment or future changes in the kind of signal
reconnaissance and communications products or services required by the
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.
Revenue Concentration: Due to the award of certain larger contracts, the
Company is experiencing a higher concentration of revenues from a single
contract. Revenue related to a single contract comprised 23.5% of revenue
for both the quarter ending August 1, 1997 and the first nine months of
fiscal 1997. This compares to 21.5% attributable to the single contract in
fiscal 1996.
Competition: The signal reconnaissance and communications 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.
Dependence Upon Personnel: The Company believes its employees are its
most valuable resource and, accordingly, focuses much of its attention on
attracting and retaining staff members. During the last year, the Company
experienced difficulty in attracting new talent due to an increasingly
competitive market for qualified personnel. 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
in the rapidly expanding telecommunications sector. In response, the
Company has implemented a more aggressive recruiting program. The Company's
ability to execute its business plan is contingent upon attracting and
retaining qualified employees. While the Company believes progress has been
made over the last year, there can be no assurance that the Company will be
successful at attracting and retaining sufficient personnel. Failure to do
so could have a material adverse effect on the Company's future operating
results and financial condition.
Dependence Upon Government Contracts and Contractual Relationships: 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 resulted in losses on certain 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.
In addition, 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 contract terminations to date,
there can be no assurance that such terminations will not occur in the
future.
Varying Operating Margins: The Company has experienced some constraint in
earnings resulting from lower average profitability on its production jobs.
This was due, in part, to the unfavorable adjustments in estimated costs-to-
complete on production jobs recorded during the prior fiscal year and, in
part, to absorbing unrecoverable indirect costs at a rate higher than was
provided for in the contract prices of these contracts. The Company has
taken several steps aimed at improving its contract margins. These steps
include revising prices of its products and services, reviewing operational
processes for efficiency and examining cost structures. Although the
Company believes improvements are apparent in the operating results for the
recent three quarters, there can be no assurances with regard to future
margins.
Potential Fluctuations in Quarterly Results and Market Volatility: 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, among other
factors, conditions 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. In addition, there can be no
assurance that an active trading market will be sustained for the Company's
common stock. 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
disproportionately related 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.
Rapid Technological Change: 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,
such as data encryption technology and others, or that new products
introduced by others will not render the Company's products or technologies
noncompetitive or obsolete.
Dependence Upon Certain Suppliers: Although the Company procures most of
its parts and components from multiple sources or believes that these
components are readily available from numerous other sources, certain
components are available only from sole sources or from a limited number of
sources. A number of the Company's products contain critical components
like single board computers available solely from Motorola and Force
Computers and digital signal processing integrated circuits available
solely from Texas Instruments. While the Company believes that substitute
components or assemblies could be obtained, use of substitutes would require
development of new suppliers or would require the Company to re-engineer its
products, or both, which could delay the Company's shipment of its products
and could have a material adverse effect on the Company's operating results.
Quarter and Nine Months Ended August 1, 1997 Compared to Quarter and
Nine Months Ended August 2, 1996:
Results of Operations:
Revenues and Backlog: Revenues for the third quarter of fiscal 1997 were
$22,600,000, representing a 16% increase over the third quarter of fiscal
1996 revenues of $19,504,000. Revenues for the nine months ended August 1,
1997 were $66,671,000, up 28% from $52,272,000 for the first nine months of
fiscal 1996. The increase in the third quarter and year-to-date revenues
reflects an increase in both development contract sales and in product
sales and in part due to an increase in average fees being recorded on
production contracts.
New order levels for the third quarter were $27,889,000, up 102% from order
levels of $13,609,000 reported for the third quarter of fiscal 1996.
Included in the third quarter orders for fiscal 1997 is an award totaling
$7,200,000 from the Department of Defense, which represents the largest
production contract award in the Company's history. New orders for the
first nine months of fiscal 1997 were $60,764,000 compared to $91,781,000
reported for the same period of fiscal 1996. For comparison purposes, the
Company recorded the Scalpel Program multi-year competitive award of
$51,035,000 - the largest in the Company's history - during the second
quarter of fiscal 1996. Due to the multi-year nature of the Scalpel Program
award in fiscal 96, management is not concerned regarding the reduction in
order level experienced in fiscal 97 versus fiscal 96.
The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts (excluding unexercised contract
options) was $76,980,000 at August 1, 1997, an increase of 11% when compared
to $69,214,000 at August 2, 1996.
Contract Costs: Contract costs consist of direct costs on contracts,
including materials and labor, and manufacturing overhead costs. Contract
costs as a percentage of revenue were 61.0% for the third quarter of fiscal
1997 versus 64.7% for the same period of fiscal 1996. Contract costs for
the nine months ended August 1, 1997 were 64.0% versus 68.1% for the first
nine months of fiscal 1996. Contract costs expressed as a percentage of
revenue for the third quarter and first nine months of fiscal 1997 were down
primarily due to price decreases realized for component parts as well as
economic gains related to larger production runs on certain contracts.
Further, contract costs expressed as a percentage of revenues for the same
periods of fiscal 1996 were abnormally high due primarily to unfavorable
adjustments in estimated costs-to-complete on production jobs that occurred
in the first half of that 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 10.0% and 11.7% for the third quarter of fiscal
years 1997 and 1996, respectively. For the first nine months of fiscal
years 1997 and 1996, research and development expenses as a percentage of
revenues were 10.7% and 12.1%, respectively. The lower R&D spending for
the third quarter and the first nine months of fiscal 1997 compared to the
same periods of fiscal 1996 reflect a shift of labor resources toward the
Company's increased contract activity, in part due to the inability to
increase staff.
The Company-funded investment in R&D for the most recent nine months was
2.2% of revenues versus 4.0% for the same period during fiscal 1996. During
fiscal 1997, the Company made a decision to recover more of its R&D
spending in its billing rates, and therefore, has less expense taken out of
profit contribution.
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 $3,062,000 or
13.5% of revenues for the third quarter of fiscal 1997 compared to
$2,877,000 or 14.8% of revenues for the third quarter of fiscal 1996.
General and administrative expenses were $9,415,000 or 14.1% of revenues and
$8,245,000 or 15.8% of revenues for the nine months ended August 1, 1997 and
August 2, 1996, respectively.
The decrease in general and administrative expenses as a percentage of
revenue for the third quarter and for the first nine months of fiscal 1997
as compared to the corresponding periods of fiscal 1996 are due primarily
to the higher profit volume recorded during the respective time periods (see
"Contract Costs" above).
Interest Income/(Expense): Net interest income for the first nine months
of fiscal 1997 was $116,000 compared to $38,000 for the same period of
fiscal 1996. The increase in interest income for the first nine months of
fiscal 1997 is due primarily to the Company's ability to generate cash from
operations due to improved margins. During the first nine months of fiscal
1996, less interest income was realized due to offsetting interest expense
incurred from borrowing funds on bank lines of credit.
Provision for Income Taxes: The provision for income taxes as a percentage
of net income before income taxes was 38.7% for the third quarter of fiscal
1997, compared to 35.0% for the same period of fiscal 1996. The effective
tax rates for the nine months ended August 1, 1997 and August 2, 1996 was
37.5% and 35.0%, respectively. The increase in the quarter and year-to-date
effective tax rate is primarily a result of the increase of federal and
state tax liabilities as a result of the increase in profitability.
Analysis of Liquidity and Capital Resources:
Historically, the Company's primary source of liquidity has been the
cash flow generated from operations as well as issuance of common stock
through its employee stock plans.
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
requirements 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 (8.5% as of August 1, 1997). The line of credit for
use in purchasing capital investments bears interest at the bank's reference
rate plus one-half percent (9.0% as of August 1, 1997). Outstanding
amounts on the unsecured, revolving line of credit were zero at August 1,
1997 and October 31, 1996. Outstanding amounts on the line of credit for use
in purchasing capital investments were zero at August 1, 1997 and October
31, 1996. Both lines expire March 1, 1998.
Net cash from operating activities: Net cash provided by operating
activities varies significantly from quarter to quarter. These quarter-to-
quarter variances are primarily the result of changes in net income, changes
in the rate of investment in accounts receivable and the change in
inventories held by the Company. During the first nine months of fiscal
1997, $4,058,000 was provided by operating activities versus $2,504,000
during the comparable period of fiscal 1996. Net income of $4,729,000 was
considerably higher for the first nine months of fiscal 1997 as compared to
the net income of $1,364,000 reported for the same period of fiscal 1996,
and contributed significantly to the increase in year-to-year change in cash
from operating activities. This is primarily due to greater contract
margins being realized in fiscal 1997 because of lower material acquisition
costs. During the first nine months of fiscal 1997, accounts receivable
increased by $1,408,000 as compared to a decrease in accounts receivable of
$3,552,000 for the first nine months of fiscal 1996. The increase in
accounts receivable is due, in part, to greater contract activity and, in
part, to certain limitations and terms stipulated in certain engineering and
production contracts. Cash used in the investment in inventories, prepaids
and other current assets during the first nine months of fiscal 1997 was
$4,234,000, compared to $3,958,000 cash used during the comparable period of
fiscal 1996. This slight increase in inventories, prepaids and other current
assists is primarily due to the impact of facility lease payments on the
balance sheet in the prepaid section. During the first nine months of
fiscal 1997, $1,955,000 was provided by the increase in accounts payable and
accrued expenses as compared to $1,241,000 being used in accounts payable
and accrued expenses in fiscal 1996. The change in this line item between
the two periods is primarily due to quarter-end timing differences related
to the payment of payroll and related expenses.
Net cash from investing activities: Cash used in investing activities
during the first nine months of fiscal 1997 was $4,134,000 compared to
$4,575,000 used in investing activities during the same period of fiscal
1996. Cash used in investing activities during the first nine months of
fiscal 1997 is primarily attributed to additions to property and equipment
in both periods. Capital investment continues to be driven by an increase
in the number of contracts awarded and due to the level of development-type
contracts that typically to require higher-priced test and computing
equipment. During the first nine months of fiscal 1997, a U.S. Treasury
security matured and contributed $400,000 to the Company's cash flow.
Net cash from financing activities: Cash provided by financing activities
during the first nine months of fiscal 1997 was $1,518,000 versus $1,702,000
provided during the same period of fiscal 1996. The reduction in cash
provided by financing activities during the first nine months of fiscal 1997
is, attributable to the decrease in borrowings under the bank line of credit
and, offset by an increase in stock purchased by employees via the Employee
Stock Purchase Plan and Employee Stock Option programs.
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 for the next twelve months.
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 6. Exhibits and Reports on Form 8-K
Exhibits -- See Index to Exhibits
Reports on Form 8-K -- The Company did not file any reports on
Form 8-K during the nine months ended August 1, 1997.
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 therewith duly authorized.
Applied Signal Technology, Inc.
/s/ Brian M. Offi/ September 11, 1997
- ------------------------------ ---------------------------
Brian M. Offi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
APPLIED SIGNAL TECHNOLOGY
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
[ARTICLE] 5
[MULTIPLIER] 1,000
Part II. Other information, Item 6a.
APPLIED SIGNAL TECHNOLOGY, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -------------------
August 1, August 2, August 1, August 2,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 7,995 7,815 7,714 7,715
Common equivalent shares issuable under
dilutive stock options after applying
treasury stock method, net of tax benefits 522 247 572 186
--------- --------- --------- ---------
Common and common equivalent shares used
in computing net income per share 8,517 8,062 8,286 7,901
========= ========= ========= =========
Net income $2,143 $1,135 $4,729 $1,364
Net income (loss) per share $0.25 $0.14 $0.57 $0.17
</TABLE>
(1) Effect of assumed exercise of all dilutive stock options and assumed
repurchase of shares from proceeds.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED AUGUST 1, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> AUG-01-1997
<CASH> 3,001
<SECURITIES> 1,718
<RECEIVABLES> 31,426
<ALLOWANCES> 0
<INVENTORY> 7,104
<CURRENT-ASSETS> 45,823
<PP&E> 34,603
<DEPRECIATION> 20,163
<TOTAL-ASSETS> 60,330
<CURRENT-LIABILITIES> 13,266
<BONDS> 0
0
0
<COMMON> 21,617
<OTHER-SE> 24,620
<TOTAL-LIABILITY-AND-EQUITY> 60,330
<SALES> 66,671
<TOTAL-REVENUES> 66,671
<CGS> 42,672
<TOTAL-COSTS> 42,672
<OTHER-EXPENSES> 16,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,567
<INCOME-TAX> 2,838
<INCOME-CONTINUING> 4,729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,729
<EPS-PRIMARY> $0.57
<EPS-DILUTED> $0.57
</TABLE>
