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 30, 1998
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, 8,626,811 shares outstanding as of March 3, 1998.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
January 30, October 3
1998 1997
--------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash $6,706 $7,403
Short-term investments 5,969 1,331
Accounts receivable:
Billed 16,379 20,496
Unbilled 12,189 12,152
--------- ---------
Total accounts receivable 28,568 32,648
Inventory 7,531 4,821
Prepaid and other current assets 2,424 2,176
--------- ---------
Total current assets 51,198 48,379
Property and equipment, at cost:
Machinery and equipment 28,213 27,312
Furniture and fixtures 3,872 3,650
Leasehold improvements 5,402 5,310
Construction in process 608 419
--------- ---------
38,095 36,691
Accumulated depreciation and amortization (21,977) (20,980)
--------- ---------
Net property and equipment 16,118 15,711
Long-term investments -- --
Other assets 71 71
--------- ---------
Total assets $67,387 $64,161
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,678 $3,704
Accrued payroll and related benefits 4,888 6,296
Other accrued liabilities 1,864 1,877
Income taxes payable 2,667 1,567
--------- ---------
Total current liabilities 13,097 13,444
Deferred income taxes 951 951
Shareholders' equity:
Common stock, no par value: 20,000,000 shares
authorized; issued and outstanding -- 8,598,491 at
January 30, 1998 and 8,351,629 at October 31, 1997 23,527 22,197
Retained earnings 29,744 27,539
Net unrealized gain/(loss) on securities 68 30
--------- ---------
Total shareholders' equity 53,339 49,766
--------- ---------
Total liabilities and
shareholders' equity $67,387 $64,161
========= =========
</TABLE>
Note: The balance sheet at October 31, 1997 has been derived from the
audited balance sheet at that date but does not inclued all the information
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
---------------------
January 30,January 31
1998 1997
---------- ----------
<S> <C> <C>
Revenues from contracts $24,361 $20,084
Operating expenses:
Contract costs 15,095 13,136
Research and development 1,593 2,470
General and administrative 4,205 3,182
---------- ----------
Total operating expenses 20,893 18,788
---------- ----------
Operating income 3,468 1,296
Interest income(expense), net 147 60
---------- ----------
Income before provision
for income taxes 3,615 1,356
Provision for income taxes 1,410 495
---------- ----------
Net income $2,205 $861
========== ==========
Earnings per share - basic * $0.26 $0.11
Average shares - basic 8,408 7,978
Earnings per share - diluted ** $0.25 $0.11
Average shares - diluted 8,954 8,113
</TABLE>
* - 'Basic' earnings per share is calculated by dividing net income
applicable to common shares by weighted common shares outstanding.
This replaces 'primary' earnings per share which include common stock
equivalents in the calculation.
** - 'Diluted' earnings per share is calculated by dividing net
income by weighted common shares outstanding plus common shares issuable
upon exercise or conversion of outstanding options, warrants and
convertible securities.
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
January 30, January 31,
1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,205 $861
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 997 987
Changes in:
Accounts receivable 4,080 3,497
Inventory, prepaids and other assets (2,958) (1,509)
Accounts payable and accrued liabilities (347) (1,043)
---------- ----------
Net cash provided by operating activities 3,977 2,793
INVESTING ACTIVITIES:
Purchase of investments (5,000) 0
Maturity of investments 400 --
Additions to property and equipment (1,404) (906)
---------- ----------
Net cash used in investing activities (6,004) (906)
FINANCING ACTIVITIES:
Issuance of common stock 1,389 558
Repurchase of common stock (59) --
---------- ----------
Net cash provided by financing activities 1,330 558
Net increase (decrease) in cash (697) 2,445
Cash, beginning of period 7,403 1,559
---------- ----------
Cash, end of period $6,706 $4,004
========== ==========
Supplemental disclosures of cash flow information:
Interest paid $7 $4
Taxes paid $310 --
</TABLE>
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
January 30, 1998
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 only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the three month period ending January 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending October 31, 1998. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
October 31, 1997.
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 as a separate component of shareholders' equity. 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. As of
January 30, 1998, the contractual maturities of the debt securities are
staggered to mature by November 12, 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
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
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
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 128, "Earnings per Share."
Statement 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted earnings
per share. All earnings per share amounts for all periods have been presented
and, where necessary, restated to conform to Statement 128 requirements.
A reconciliation of shares used in the calculation of basic
and diluted earnings per share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
---------------------
January 30,January 31,
1998 1997
--------- ---------
<S> <C> <C>
Net income 2,205 861
======= =======
Weighted average shares outstanding 8,480 7,978
Basic net income per share $0.26 $0.11
======= =======
Shares used in computing basic net income per share 8,480 7978
Dilutive stock options 474 136
------- -------
Adjusted weighted average shares 8,954 8,114
Diluted net income per share $0.25 $0.11
======= =======
</TABLE>
NOTE 2 -- INVENTORY
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 30, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
Raw Materials $1,270 $1,121
Work in Process 5,888 3,131
Finished Goods 270 279
------ ------
7,428 4,531
Precontract Costs 103 290
------ ------
$7,531 $4,821
====== ======
</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 operations as they become known. At January 30, 1998, the
inventoried variance was approximately $498,000 ($60,000 at January 31, 1997)
and was included in work in process. At October 31, 1997 and 1996 the
variance was zero since all revenues and costs are recorded at the actual
indirect rates for the 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.
Forward-looking statements in this report are made pursuant to the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934. In this
report, the words "anticipates," "believes," "expects," "future," "intends,"
and similar expressions identify forward-looking statements. Shareholders
are cautioned that all forward-looking statements pertaining to the Company
involve risks and uncertainties, including, without limitation, those
contained under the caption, "Summary of Business Considerations and Certain
Factors that May Affect Future Results of Operations and/or Stock Price"
and other risks detailed from time to time in the Company's periodic reports
and other information filed with the Securities and Exchange Commission.
Actual events and results may differ materially from the Company's current
expectations and beliefs.
BUSINESS ENVIRONMENT/BACKGROUND:
Applied Signal Technology, Inc. (Applied Signal Technology or the
Company) designs, develops, and manufactures signal processing
equipment to collect and process a wide range of telecommunication
signals. This equipment is used for reconnaissance of foreign
telecommunications predominantly by the United States Government and
allied foreign governments. Signal reconnaissance systems are composed
of collection equipment and processing equipment. Collection equipment
consists of sophisticated receivers that scan the radio frequency (RF)
spectrum (cellular telephone, microwave, ship-to-shore, and military
transmissions) to collect certain signals from, potentially, thousands
of signals within the RF spectrum. Signal processing equipment, using
sophisticated software and hardware, evaluates the characteristics of
the collected signals and selects signals that are likely to contain
relevant information. Since inception, the Company has focused its
efforts primarily on processing equipment, but also provides
specialized collection equipment, as well as complete signal
reconnaissance systems.
The Company's business strategy is to capitalize on the forces of
change within the U.S. Government and in the world today. As set forth
in Secretary of Defense William Cohen's message preceding the
Quadrennial Defense Review (10/97), the United States Government must
seek out opportunities to outsource and privatize non-core activities
which have been restrained by regulations and practices built up
during the Cold War. The Secretary goes on to say the United States
Government needs to deregulate much of the defense industry to reap
the cost and creativity benefits of full and open private competition.
Further, as stated in the Quadrennial Defense Review, "We must have a
globally vigilant intelligence system to provide early strategic
warning of crisis and detect threats in an environment complicated by
more actors and more sophisticated technology." It is the Company's
intent to capitalize on these forces of change and create
opportunities for continued growth for Applied Signal Technology.
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. (See "Research and
Development.")
Budgetary constraints and critical time-to-deployment requirements
have caused many United States Government 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 its products can be
readily deployed in a wide variety of circumstances to meet current
United States Government signal reconnaissance requirements. The
Company designs its products to use advanced circuitry and highly
integrated components, 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 than equipment of similar functionality
that use fewer advanced designs and materials.
SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE:
The Company's future operating results and stock price may be subject
to volatility, particularly on a quarterly basis, due to the following:
Customer Concentration: Historically, defense and intelligence
agencies of the United States Government 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. In addition, as a supplier of these
agencies, the Company must comply with numerous regulations, including
regulation governing security and contracting practices. Failure to
comply with these regulations could disqualify the Company as a
supplier of these agencies, which would have a material adverse effect
on the Company's results of operation.
Revenue Concentration: Due to the award of certain larger contracts,
the Company has experienced a significant concentration of revenues
from a single contract in recent periods. Revenue related to a single
contract comprised 19% of revenue for the first quarter of fiscal 1998
compared to 23% attributable to the same contract in the first quarter of fiscal
1997. This contract may be terminated at the convenience of the United States
Government. If this contract or other larger contracts of the Company were
terminated, this could have a material adverse effect on the Company's
results of operations.
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's ability to execute its
business plan is contingent upon successfully attracting and retaining
qualified employees. During the last two years, the Company has
experienced difficulty in attracting and retaining employees due to an
increasingly competitive market for qualified personnel. Management believes
this effect is, in part, 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 and, in part, due to the difficulty in recruiting new staff
capable of obtaining the necessary security clearance. While the Company
believes progress in attracting and retaining sufficient personnel
has been made over the last year, there can be no assurance that the
Company will continue to 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.
Risk of Fixed Price and Contract Terminations: 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.
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,
shortfalls in revenues or earnings from levels forecast by securities
analysts, changes in estimates by analysts, competition, or
announcements of extraordinary events such as acquisitions or
litigation 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.
Year 2000: Many computer systems experience problems handling dates
beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional.
The Company is assessing both the internal readiness of its computer systems
and the compliance of its computer products and software sold to customers
for handling the year 2000. The Company expects to implement successfully
the systems and programming changes necessary to address year 2000 issues,
and does not believe that the cost of such actions will have a material
effect on the Company's results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and
the Company's inability to implement such changes could have an adverse
effect on future results of operations.
The Company is also assessing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers and subcontractors.
The Company's reliance on suppliers and subcontractors, and, therefore,
on the proper functioning of their information systems and software, means
that failure to address year 2000 issues could have a material impact on
the Company's operations and financial results; however, the potential
impact and related costs are not known at this time.
THREE MONTHS ENDED JANUARY 30, 1998 COMPARED TO THREE MONTHS ENDED
JANUARY 31, 1997
RESULTS OF OPERATIONS:
REVENUES AND BACKLOG: Revenues for the first quarter of fiscal 1998 were
$24,361,000, representing a 21% increase over the first quarter of fiscal 1997
revenues of $20,084,000. The increase in the first quarter revenues of
is primarily attributable to the increased contract activity on both
development contracts as well as product sales, and due to the company's
ability to attract and retain personnel which has been difficult in recent
years because of the increasingly competitive market for qualified employees
in the expanding local California economy.
New order levels for the first quarter of fiscal 1998 were $10,001,000, up
15% from order levels of $8,694,000 reported for the first quarter of fiscal
1997. This increase in orders indicates the continued demand for the Company's
products and services.
The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts (excluding unexercised options) was
$68,586,000 at January 30, 1998, a decrease of 4% when compared to $71,497,000
at January 31, 1997.
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 62.0% for the first quarter of fiscal 1998 versus
65.4% for the same period of fiscal 1997. Contract costs as a percentage of
revenues were down primarily due to price decreases realized for component parts
as well as efficiencies related to larger production runs on certain contracts.
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 6.5% and 12.3% for the first quarter of fiscal years 1998 and 1997,
respectively. Although R&D spending was in-line with our budgeted amounts,
the amount reflected on the financial statements is lower due to the application
of overhead and G&A target rates previously noted in the "Notes to Financial
Statements; Note 2 - Inventory.")
During fiscal 1998, the Company made a decision to recover more of its R&D
spending in its billing rates. Accordingly, the Company did not fund any
investment in R&D for the first three months of fiscal 1998 as compared
to 2.1% of revenues funded for the same period during fiscal 1997. The
Company intends 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 17.3% of revenues for the first
quarter of fiscal 1998 compared to 15.8% or revenues for the same period
of fiscal 1997. The increased general and administrative expenses for the
first quarter of fiscal 1998 is due to a higher general and administrative rate
being applied to contracts during fiscal 1998 than the rate applied in fiscal
1997.
INTEREST INCOME/(EXPENSE), NET: For the first quarter of fiscal 1998,
interest income was $147,000, up from $60,000 of net interest income for the
same period of fiscal 1997. The increase in interest income for the first
quarter of fiscal 1998 is due primarily to the Company's improved cash
position due to improved profitability in contracts, thereby allowing the
Company to invest greater funds in interest bearing accounts and/or
securities.
PROVISION FOR INCOME TAXES: The provision for income taxes as a percentage of
income before income taxes was 39.0% for the first quarter of fiscal 1998,
compared to 36.5% for the same period of fiscal 1997. The increase in the
quarterly tax rate is primarily a result of the increased federal and state
tax liability as a result of the increase in profitability, partially offset
by state income tax credits.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
At January 30, 1998 cash and short-term investments totaled approximately
$12,675,000. 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.
NET CASH FROM OPERATING ACTIVITIES: Net cash from operating activities has
varied significantly from quarter to quarter. These 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 quarter of fiscal 1998, $3,977,000 was provided
by operating activities versus $2,793,000 provided during the comparable period
of fiscal 1997. Net income of $2,205,000 was considerably higher for the first
quarter of fiscal 1998 as compared to the net income of $861,000 reported
for the same period of fiscal 1997. The year-to-year improvement in
net income is primarily due to higher contract fees and lower R&D costs
as a percentage of revenues. During the first quarter of fiscal 1998, cash
provided by accounts receivable was $4,080,000 as compared to $3,497,000
provided by accounts receivable during the same period of fiscal 1997. The
improvement in cash generated by accounts receivable is primarily due to
greater collections received from a one-time billing modification allowed by
the U.S. Government in the fourth quarter of fiscal 1997. During the first
quarter of fiscal 1998, the Company increased its rate of investment in
inventories, prepaid expenses and other current assets by $2,958,000 in
anticipation of future contract awards; this compares to an increased
investment of $1,509,000 during the same period for fiscal 1997. Cash used in
accounts payable and other accrued liabilities during the first quarter of
fiscal 1998 was $347,000, a decrease of $696,000 from the cash used during
the comparable period of fiscal 1997.
NET CASH FROM INVESTING ACTIVITIES: Cash used in investing activities during the
first three months of fiscal 1998 was $6,004,000 compared to $906,000 used in
investing activities during the same period of fiscal 1997. The increase
in investments is primarily due to the Company purchasing U.S. Treasury
Securities as well as purchasing additional fixed assets necessary to support
the increased level of contract activity.
NET CASH FROM FINANCING ACTIVITIES: Cash provided by financing activities during
the first quarter of fiscal 1998 was $1,330,000 versus $558,000 provided
during the same period of fiscal 1997. The increase in cash provided by
financing activities during the first quarter of fiscal 1998 is primarily
due to the issuances of common stock under the Company's employee stock
purchase plan and stock options plans.
The Company is currently negotiating a bank credit agreement to augment cash
flow needs to provide term financing for capital investments. The Company has
maintained a $6,000,000 unsecured, revolving line of credit for short-term cash
cash requirements and a $1,000,000 line of credit for use in purchasing capital
investments. The unsecured, revolving line of credit carried interest at the
banks' reference rate (8.5% as of March 1, 1998). The line of credit for use
in purchasing capital investments carried interest at the bank's reference
rate plus one-half percent (9.0% as of March 1, 1998). Outstanding amounts
on both lines of credit were zero at March 1, 1998 and October 31, 1997.
While both lines of credit expired March 1, 1998, management is negotiating
to renew the unsecured, revolving line of credit at a lower amount for the
Company's short-term cash requirements and does not intend to renew the
line of credit for use in purchasing capital investments.
The Company believes that the funds generated from operations, existing working
capital and amounts available under anticipated lines of credit will be
sufficient to meet its cash needs for at least 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 February 1998, the Company was contacted by one of its primary
customers to negotiate an administrative settlement regarding the voluntary
disclosure discussed above. The Company intends to enter into good faith
negotiations during the second quarter of fiscal 1998.
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 three months ended January 30, 1998.
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 12, 1998
- ------------------------------ ---------------------------
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
------ -----------------------
27.1 Financial Data Schedule
<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 JANUARY 30, 1998
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-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-30-1998
<CASH> 6,706
<SECURITIES> 5,969
<RECEIVABLES> 28,568
<ALLOWANCES> 0
<INVENTORY> 7,531
<CURRENT-ASSETS> 51,198
<PP&E> 38,095
<DEPRECIATION> 21,977
<TOTAL-ASSETS> 67,387
<CURRENT-LIABILITIES> 13,097
<BONDS> 0
0
0
<COMMON> 23,527
<OTHER-SE> 29,812
<TOTAL-LIABILITY-AND-EQUITY> 67,387
<SALES> 24,361
<TOTAL-REVENUES> 24,361
<CGS> 15,095
<TOTAL-COSTS> 20,893
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147
<INCOME-PRETAX> 3,615
<INCOME-TAX> 1,410
<INCOME-CONTINUING> 2,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,205
<EPS-PRIMARY> $0.26
<EPS-DILUTED> $0.25
</TABLE>
