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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 JANUARY 31, 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, 8,030,188 shares outstanding as of March 4, 1997.
This Quarterly Report on Form 10-Q consists of 20 pages.
The Exhibit Index is on Page 18.
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INDEX
APPLIED SIGNAL TECHNOLOGY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -- January 31, 1997 and October 31, 1996
Statements of Operations -- Three months ended January 31, 1997 and
February 2, 1996
Statements of Cash Flows -- Three months ended January 31, 1997
and February 2, 1996
Notes to Financial Statements -- January 31, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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>
ASSETS JANUARY 31, 1997 OCTOBER 31, 1996
(UNAUDITED) (NOTE)
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,004 $ 1,559
Short term investments 1,161 767
Accounts receivable:
Billed 8,405 14,491
Unbilled 18,116 15,527
-------- --------
Total accounts receivable 26,521 30,018
Inventory 4,601 3,208
Prepaid and other current assets 2,353 2,236
-------- --------
Total current assets 38,640 37,788
Property and equipment, at cost:
Machinery and equipment 23,956 23,221
Furniture and fixtures 3,404 3,301
Leasehold improvements 3,384 3,356
Construction in process 231 191
-------- --------
30,975 30,069
Accumulated depreciation and amortization (18,186) (17,198)
-------- --------
Net property and equipment 12,789 12,871
Long-term investments 934 1,326
Other assets 117 118
-------- --------
Total assets $ 52,480 $ 52,103
======== ========
</TABLE>
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APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS (continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY JANUARY 31, 1997 OCTOBER 31, 1996
(UNAUDITED) (NOTE)
---------------- ----------------
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,294 $ 3,045
Accrued payroll and related benefits 4,316 4,337
Other accrued liabilities 1,627 1,900
Income taxes payable 2,031 2,029
------- -------
Total current liabilities 10,268 11,311
Deferred income taxes 827 827
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 -- 8,030,188
at January 31, 1997 and 7,873,347 at October 31, 1996 20,657 20,099
Retained earnings 20,728 19,866
------- -------
Total shareholders' equity 41,385 39,965
------- -------
Total liabilities and shareholders' equity $52,480 $52,103
======= =======
</TABLE>
Note: The balance sheet at October 31, 1996 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 OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
JANUARY 31, 1997 FEBRUARY 2, 1996
---------------- ----------------
<S> <C> <C>
Revenues from contracts $ 20,084 $ 15,798
Operating expenses:
Contract costs 13,136 10,815
Research and development 2,470 1,912
General and administrative 3,182 2,840
-------- --------
Total operating expenses 18,788 15,567
-------- --------
Operating income 1,296 231
Interest income, net 60 19
-------- --------
Income before provision
for income taxes 1,356 250
Provision for income taxes 495 100
-------- --------
Net income $ 861 $ 150
======== ========
Net income per common share $ 0.11 $ 0.02
======== ========
Number of shares used in calculating
net income per common share 8,114 7,782
</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>
THREE MONTHS ENDED
------------------------------------
JANUARY 31, 1997 FEBRUARY 2, 1996
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 861 $ 150
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Depreciation and amortization 987 877
Accounts receivable 3,497 2,826
Inventory, prepaids and other current assets (1,510) (1,987)
Other assets 1 59
Accounts payable and accrued liabilities (1,043) (2,089)
-------- -------
Net cash provided by (used in) operating
activities 2,793 (164)
INVESTING ACTIVITIES:
Additions to property and equipment (906) (1,997)
-------- -------
Net cash used in investing activities (906) (1,997)
FINANCING ACTIVITIES:
Borrowings under bank line of credit -- 1,300
Issuance of common stock 558 493
Repurchase of common stock -- (1)
-------- -------
Net cash provided by financing activities 558 1,792
-------- -------
Net increase (decrease) in cash and
cash equivalents 2,445 (369)
Cash and cash equivalents, beginning of period 1,559 369
-------- -------
Cash and cash equivalents, end of period $ 4,004 $ --
======== =======
Supplemental disclosures of cash
flow information:
Interest paid $ 4 $ 5
</TABLE>
See notes to financial statements.
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APPLIED SIGNAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
January 31, 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 three
month period ending January 31, 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 consists 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 is included
in interest income (expense), net. At January 31, 1997, the contractual
maturities of the debt securities are staggered to mature 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. A portion of the contract
revenue, 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 revenue 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
on an individual contract basis. 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 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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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. 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.
The Company will adopt SFAS 123 during fiscal year 1997. 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 1997 and thereafter.
NOTE 2 -- INVENTORY
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
Raw Materials $ 586 $ 591
Work in Process 3,510 2,195
Finished Goods 431 322
-------- --------
4,527 3,108
Precontract Costs 74 100
-------- --------
$ 4,601 $ 3,208
======== ========
</TABLE>
The Company records contract revenues and costs for interim reporting purposes
based on annual targeted indirect cost 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 income statement as they become known. At January 31, 1997, the inventoried
unabsorbed variance was approximately $60,000 (approximately $1,110,000
unabsorbed variance at February 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.
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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 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.
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 TCI, Pacific Telesis,
service providers Southwestern Bell
Cell Phone Modem Chip Modem chip design for the Ericsson
Ericsson "Freeset 1900(TM)" PCS
cellular phone
QAM Error Detection Error detection chip for set-top VLSI Technologies
Chip converters
</TABLE>
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 equipment or future
changes in the kind of signal reconnaissance 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.
Competition: 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.
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 an
increase in its attrition rate as well as a difficulty in attracting new talent
into the Company due to increased competition for qualified personnel.
Management believes these effects are attributable to the expanding U.S.
economy and, in particular, the local California economy where the
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Company must compete for new talent in the rapidly expanding 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 qualified employees. While the Company believes progress has
been made during the most recent quarters, there can be no assurance that the
Company will be successful at attracting and retaining sufficient personnel.
Failure to do so will 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 to the Company 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.
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 cancellations to date, there can be no assurance that
such cancellations will not occur in the future.
NARROW OPERATING MARGINS: The Company has experienced 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 fiscal year and due,
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
some improvements were apparent in the operating results for the last several
quarters, there can be no assurances that these steps will result in improved
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.
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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.
EXPLORATION OF NEW MARKET OPPORTUNITIES: The Company has had numerous
discussions with companies in the commercial cable TV/video compression and
telecommunications marketplaces. 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 and have consisted primarily of product development fees.
There can be no assurance that the Company's commercial marketplace strategy
will be successful or that the Company will maintain or increase revenues from
the commercial marketplace.
QUARTER ENDED JANUARY 31, 1997 COMPARED TO QUARTER ENDED FEBRUARY 2, 1996:
RESULTS OF OPERATIONS:
Revenues and Backlog: Revenues for the first quarter of fiscal 1997 were
$20,084,000, representing a 27% increase over first quarter fiscal 1996
revenues of $15,798,000. The increase in revenues reflects the continued
demand for the Company's products and services. Further, the increase in the
quarterly activity reflects an increase in contract activity in all of the
Company's operating divisions which resulted from hiring new staff members
during the last half of fiscal 1996.
New order levels for the first quarter of fiscal 1997 were $8,694,000, down 38%
from the $14,129,000 reported for the same period of fiscal 1996. Order
activity for the first quarter of fiscal 1996 was unusually strong in
comparison to the same period of fiscal 1997. Because of the order flow
volatility historically seen between quarters, management is not concerned with
the quarter to quarter reduction in order flow in fiscal 1997.
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The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts (excluding unexercised options) was
$71,497,000 at January 31, 1997 versus $27,721,000 at February 2, 1996. This
represents a 158% increase over the Company's backlog at the end of the fiscal
quarter ended February 2, 1996. The backlog level for the first quarter of
fiscal 1997 is primarily due to the preponderance of orders received during
fiscal 1996 that have yet to be shipped.
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 65.4% for the first quarter of fiscal 1997 versus
68.5% for the same period of fiscal 1996. Contract costs expressed as a
percentage of revenue for the first quarter of fiscal 1997 were down primarily
due to the absense of unfavorable adjustments in estimated costs to complete
certain programs. During the first quarter of fiscal 1996, contract costs
expressed as a percentage of revenue increased due to the unfavorable
adjustments in the Company's estimated cost-to-complete in certain production
jobs.
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
12.3% and 12.1% for the first quarter of fiscal years 1997 and 1996,
respectively. Spending during the fiscal quarter ended January 31, 1997 on
research and development as a percentage of revenues increased 0.2% when
compared to the same period of fiscal 1996, primarily due to the higher
allocation of overhead costs resulting from application of a higher overhead
rate in fiscal 1997 versus 1996.
The Company-funded investment in R&D for the first three months of fiscal 1997
was 2.1% of revenues versus 2.4% 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, have less expense taken out of profit
contribution. Although a decrease in percentages occurred from year to year,
the Company intends to continue to make substantial investments in research and
development in an effort to meet the needs of customers before its competitors;
however, there can be no assurances that the Company will be able to develop
and market new products successfully in the future.
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 $3,182,000 or 15.8% of revenues for
the first quarter of fiscal 1997 compared to $2,840,000 or 18.0% of revenues
for the same period of fiscal 1996. The decreased general and administrative
expenses for the most recent quarter are due, in part, to the higher profit
volume recorded during the first quarter of fiscal 1997 (see "Contract Costs"
above) and, in part, to the lower targeted general and administrative rate
being applied to contracts for fiscall 1997 versus that applied during fiscal
1996.
INTEREST INCOME/(EXPENSE): Net interest income was $60,000 for the quarter
ended January 31, 1997, up from the $19,000 net interest income recorded for
the same period of fiscal 1996. The increase in interest
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income for the fiscal quarter ended January 31, 1997 as compared to the fiscal
quarter ended February 2, 1996 is due primarily to the Company's ability to
generate cash from operations. In addition, the Company was able to generate
interest income on investments without any offsetting interest expense from the
use of bank lines of credit. During the same period of fiscal 1996, less
interest income was realized because interest income from investments was
netted against interest expense incurred from borrowing funds on the bank lines
of credit.
Provision for Income Taxes: The provision for income taxes as a percentage of
net income before income taxes was 36.5% for the first quarter of fiscal 1997,
compared to 40.0% for the same period of fiscal 1996. The decrease in the
quarterly effective tax rate is primarily the result of increased state income
tax credits.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
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 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
(8.25% as of January 31, 1997). The line of credit for use in purchasing
capital investments bears interest at the bank's reference rate plus one-half
percent (8.75% as of January 31, 1997). Outstanding amounts on the unsecured,
revolving line of credit were zero at January 31, 1997 and October 31, 1996.
Outstanding amounts on the line of credit for use in purchasing capital
investments were zero at January 31, 1997 and October 31, 1996. Both lines
expire March 1, 1998.
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 net income,
changes in the rate of investment in accounts receivable and the change in
inventories held by the Company. During the first three months of fiscal 1997,
$2,793,000 was provided by operating activities versus $164,000 used in
operating activities during the comparable period of fiscal 1996. The
improvement in the year-to- year change in cash from operating activities is
primarily due to the improved profitability recorded on contracts and the
reduction in the rate of investment in inventories, prepaids, and other assets
and accounts payable experienced during the first quarter of fiscal 1997. Cash
generated from accounts receivable activity for the first three months of
fiscal 1997 amounted to $3,497,000 compared to $2,826,000 for the same period
of fiscal 1996; in the first quarter of fiscal 1997, cash was not readily
coming in because of the slow down in the U.S. Government's administrative
activities resulting from the budget impasse. Cash used in the investment in
inventories, prepaids and other current assets during the first quarter of
fiscal 1997 was $1.510,000, compared to $1,987,000 cash used during the
comparable period of fiscal 1996. This reduction is due to the reduction of
timing-related targeted indirect rate variances (See "Notes to Financial
Statements; Note 2 - Inventory") and, in part, to a management initiative to
more aggressively manage the Company's investment in inventory. During the
first quarter of fiscal 1997, cash used in accounts payable and other accrued
liabilities was $1,043.000. This is down from the cash used during the
comparable period of fiscal 1996.
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NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES: Net cash used in investing
activities was $900,000 for the first quarter of fiscal 1997 versus $1,987,000
used in investing activities during the same period of fiscal 1996, all
attributable to additions to property and equipment. The increase in capital
investment in the first three months of fiscal 1996 was due to an investment of
approximately $1,000,000 for leasehold improvements made to a newly leased
building located at the Company's headquarters. The Company plans to continue
to expand its facilities to accommodate the growth of the Company's business.
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES: Cash provided by financing
activities during the first three months of fiscal 1997 was $558,000 versus
$1,792,000 provided during the same period of fiscal 1996. The reduction in
cash provided by financing activities during the first three months of fiscal
1997 is primarily attributable to the decrease in borrowings under the bank
line of credit.
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.
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 6. Exhibits and Reports on Form 8-K
Exhibits -- See Index to Exhibits on page 18
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended January 31, 1997.
16
<PAGE> 17
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 March 14, 1997
------------------------------------------- --------------
Brian M. Offi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer
17
<PAGE> 18
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
10.13* Amendments to Commercial Credit Agreements dated March 1, 1996 with Sanwa Bank California
10.14* Certified Corporate Resolution to borrow dated March 6, 1996 with Sanwa Bank California
11.1 Statement regarding computation of net income per share
13.1 (4) Proxy Statement and Annual Report to Shareholders for fiscal year ended October 31, 1995
13.2 (5) Proxy Statement and Annual Report to Shareholders for fiscal year ended October 31, 1996
23.1 (4) Consent of Independent Auditors for fiscal year ended October 31, 1995
23.2 (5) Consent of Independent Auditors for fiscal year ended October 31, 1996
27.1 Financial Data Schedule
*previously filed
</TABLE>
18
<PAGE> 19
(1) Incorporated by reference to corresponding Exhibit filed as an Exhibit
to Registrant's Registration Statement on Forms S-1 filed January 29,
1993 (File No. 33-58168).
(2) Incorporated by reference to corresponding Exhibit filed with the
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 Form 10-K for fiscal year 1995 dated January 26, 1995.
(5) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-K for fiscal year 1996 dated January 29, 1997.
19
<PAGE> 1
APPLIED SIGNAL TECHNOLOGY, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
JANUARY FEBRUARY
31, 1997 2, 1997
-------- --------
<S> <C> <C>
Number of shares:
Weighted average outstanding common 7,978 7,628
Dilutive common stock equivalents of:
Stock options (treasury stock method)(1) 136 154
-------- -------
8,114 7,782
======== =======
Net income (loss) $ 861 $ 150
Net income (loss) per common share $ .11 $ .02
</TABLE>
(1) Effect of assumed exercise of all dilutive stock options and assumed
repurchase of shares from proceeds. Common equivalent shares from
stock options are excluded from the computation for the three months
ended July 28, 1996 as their effect is anti-dilutive.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED
IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JANUARY 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 4,004
<SECURITIES> 1,161
<RECEIVABLES> 26,521
<ALLOWANCES> 0
<INVENTORY> 4,601
<CURRENT-ASSETS> 38,640
<PP&E> 30,975
<DEPRECIATION> 18,186
<TOTAL-ASSETS> 52,480
<CURRENT-LIABILITIES> 10,268
<BONDS> 0
0
0
<COMMON> 20,657
<OTHER-SE> (5)
<TOTAL-LIABILITY-AND-EQUITY> 52,480
<SALES> 20,084
<TOTAL-REVENUES> 20,084
<CGS> 13,136
<TOTAL-COSTS> 18,788
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (60)
<INCOME-PRETAX> 1,356
<INCOME-TAX> 495
<INCOME-CONTINUING> 861
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 861
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
