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 APRIL 30, 1999
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, 8,524,672 shares outstanding as of June 5, 1999.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
April 30, October 31
1999 1998
---------- ----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,937 $14,085
Short-term investments -- 1,029
Accounts receivable:
Billed 13,318 14,298
Unbilled 17,633 16,282
---------- ----------
Total accounts receivable 30,951 30,580
Inventory 8,794 5,551
Prepaid and other current assets 2,850 3,035
---------- ----------
Total current assets 54,532 54,280
Property and equipment, at cost:
Machinery and equipment 33,131 31,654
Furniture and fixtures 4,345 4,011
Leasehold improvements 6,715 5,813
Construction in process 2,662 1,438
---------- ----------
46,853 42,916
Accumulated depreciation and amortization (26,980) (24,775)
---------- ----------
Net property and equipment 19,873 18,141
Other assets 40 42
---------- ----------
Total assets $74,445 $72,463
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,703 $3,842
Accrued payroll and related benefits 6,277 6,331
Other accrued liabilities 2,195 2,092
Income taxes payable 3,751 2,300
---------- ----------
Total current liabilities 13,926 14,565
Deferred income taxes 1,033 1,033
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 -- 8,346,150 at
April 30, 1999 and 8,393,526 at October 31, 1998 17,599 19,154
Retained earnings 41,887 37,711
---------- ----------
Total shareholders' equity 59,486 56,865
---------- ----------
Total liabilities and
shareholders' equity $74,445 $72,463
========== ==========
</TABLE>
Note: The balance sheet at October 31, 1998 has been derived from the audited
balance sheet at that date but does not include all of the information
required by generally accepted accounting principles for complete
financial statements.
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- -------------------
April 30, May 1, April 30, May 1,
1999 1998 1999 1998
---------- ---------- --------- ---------
<S> <C> <C>
Revenues from contracts $27,590 $27,732 $50,438 $52,093
Operating expenses:
Contract costs 16,500 17,327 31,128 32,422
Research and development 3,477 3,114 6,205 5,251
General and administrative 3,247 3,233 6,648 6,894
---------- ---------- --------- ---------
Total operating expenses 23,224 23,674 43,981 44,567
---------- ---------- --------- ---------
Operating income 4,366 4,058 6,457 7,526
Interest income(expense), net 123 145 325 292
---------- ---------- --------- ---------
Income before provision
for income taxes 4,489 4,203 6,782 7,818
Provision for income taxes 1,706 1,639 2,577 3,049
---------- ---------- --------- ---------
Net income $2,783 $2,564 $4,205 $4,769
========== ========== ========= =========
Net income per common share:
Basic $0.33 $0.30 $0.50 $0.56
Diluted $0.32 $0.28 $0.48 $0.53
Number of shares used in calculating
net income per common share:
Basic 8,439 8,580 8,460 8,529
Diluted 8,640 9,000 8,727 8,976
</TABLE>
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
April 30, May 1,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,205 $4,769
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,205 2,036
Changes in:
Accounts receivable (371) 2,841
Inventory, prepaids and other current assets (3,056) (2,294)
Accounts payable, income taxes payable and accrued (639) (501)
---------- ----------
Net cash provided by operating activities 2,344 6,851
INVESTING ACTIVITIES:
Purchase of available-for-sale securities -- (5,000)
Maturity of available-for-sale securities 1,000 1,800
Additions to property and equipment (3,937) (3,560)
---------- ----------
Net cash used in investing activities (2,937) (6,760)
FINANCING ACTIVITIES:
Issuances of common stock 1,188 1,572
Repurchases of common stock (2,743) (2,940)
---------- ----------
Net cash provided by (used in) financing activiti (1,555) (1,368)
Net increase (decrease) in cash (2,148) (1,277)
Cash and cash equivalents, beginning of period 14,085 7,403
---------- ----------
Cash and cash equivalents, end of period $11,937 $6,126
========== ==========
Supplemental disclosures of cash flow information:
Interest paid $15 $17
Taxes paid $1,126 $1,771
</TABLE>
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
April 30, 1999
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited 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 the
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included.
Operating results for the six-month period ending April 30, 1999 are
not necessarily indicative of the results that may be expected for the
year ending October 31, 1999. 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, 1998.
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.
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
Basic earnings per share is based on the weighted effect of all
common shares issued and outstanding, and is calculated by dividing net
income available to common shareholders by the weighted average shares
outstanding during the period. Diluted earnings per share is calculated
by dividing net income available to common shareholders, adjusted for the
effect, if any, from assumed conversion of all potentially dilutive common
shares outstanding, by the weighted average number of common shares used
in the basic earnings per share calculation, plus the number of common
shares that would be issued assuming conversion of all potentially
dilutive common shares outstanding. All historical earnings per share
amounts have been restated to conform to the provisions of this statement.
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 Six Months Ended
--------------------- ----------------------
April 30, May 1, April 30, May 1,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $2,783 $2,564 $4,205 $4,769
======= ======= ======= =======
Shares used to compute net income per
common share - basic 8,439 8,580 8,460 8,529
Effect of dilutive stock options 313 420 267 447
------- ------- ------- -------
Shares used to compute net income per
common share - diluted 8,752 9,000 8,727 8,976
======= ======= ======= =======
Net income per common share - basic $0.33 $0.30 $0.50 $0.56
======= ======= ======= =======
Net income per common share - diluted $0.32 $0.28 $0.48 $0.53
======= ======= ======= =======
</TABLE>
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to the current
year presentation.
NOTE 2 -- INVENTORY
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 30, 1999 OCTOBER 31, 1998
---------------- ----------------
<S> <C> <C>
Raw Materials $1,113 $1,102
Work in Process 7,065 4,114
Finished Goods 446 245
------ ------
8,624 5,461
Precontract Costs 170 90
------ ------
$8,794 $5,551
====== ======
</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 April 30, 1999, the unfavorable
inventoried variance was approximately $1,600,000 while at May 1, 1998 the
unfavorable inventoried variance was $224,000; each variance
was included in work in process. At October 31, 1998 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.
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.
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, for certain industrial applications and for defense
communications systems. 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. Industrial applications include commercial communication
system quality monitoring and data network intrusion detection. Defense
communication equipment provides reliable, high-speed data transfer for
military applications. Since inception, the Company has focused its
efforts primarily on processing equipment, but also provides specialized
collection equipment, as well as complete systems.
Signal Reconnaissance
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 Central 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.
Industrial Applications
The volume of data transferred and made available to individuals is
growing exponentially worldwide. This trend dictates maximum efficiency of
frequency spectrum usage by the commercial telecommunication companies.
Spectrum usage is especially critical in the band-limited radio
frequency (RF) environment that personal communication systems (e.g.,
cellular systems) and communication satellite systems (e.g., PanAmSat,
Intelsat, InMarSat) utilize. As these systems attempt to maximize this
spectrum usage, data transfer will be impaired. This creates demand
for sophisticated data quality monitoring.
The Company believes that its signal processing prowess in non-
intrusive signal reconnaissance, developed over the years, positions the
Company to capitalize on this quality monitoring requirement. In addition,
as the Company continues to stay abreast of the United States Government's
future signal reconnaissance needs, it should stay abreast of trends in
telecommunication technology. The Company believes its knowledge and
experience will permit the Company to develop quality monitoring equipment.
As the world becomes more reliant upon data transfer and data access
for its day-to-day activities (i.e., e-commerce), it also becomes more
vulnerable to unauthorized data access or manipulation. This creates a
requirement for data system intrusion detection. This intrusion detection
must be performed without impact upon the data transfer.
The Company believes that the technological expertise it has developed for
signal reconnaissance, positions the Company to develop and commercialize
intrusion detection technology. In particular, the Company's signal
processing prowess provides the fundamentals for the development of
intrusion detection equipment.
Defense Communications
Just as the civilian world is becoming increasingly dependent upon
data transfer and access, so is the military. The military branches
utilize data transfer for guidance, computer-to-computer battlefield
planning, high quality communications, and other applications. Many times
this data transfer must occur under non-ideal transport modes. The
transport invariably is in the radio frequency spectrum and must occur
under sub-optimum conditions such as minimal frequency planning for
interference mitigation, inaccurate antenna pointing, and moving
platforms. These defense communication systems must be able to mitigate
these data transfer anomalies in an automated or semi-automated manner in
order to provide reliable, rapidly deployed communications.
The Company believes that the technological expertise it has
developed for signal reconnaissance systems to adequately process data
collected in non-ideal situations positions the Company to develop
products satisfying these defense communication system requirements. In
particular, the Company's experience in adaptive equalization/demodulation
of sophisticated data telecommunication signals enable the Company to
develop equipment that overcomes these data transport anomalies.
Strategy
Applied Signal Technology's objective is to anticipate the needs of
the telecommunication processing marketplace and to invest in research and
development in an effort to provide solutions before the Company's
competitors. In some cases, this involves the development of equipment to
address new telecommunications technologies. In other cases, it involves
the development of equipment that offers smaller size, lower power
consumption, and lower cost than potentially competitive products. The
Company's strategy is to aggressively pursue these objectives in each of
the market areas described above.
THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 1999 COMPARED TO THREE MONTHS AND
SIX MONTHS ENDED MAY 1, 1998
RESULTS OF OPERATIONS:
REVENUES AND BACKLOG: Revenues for the second quarter of fiscal 1999
were approximately $27,590,000, relatively unchanged from the second
quarter of fiscal 1998 revenues of approximately $27,732,000. Revenues
for the six months ended April 30, 1999 were approximately $50,438,000,
down 3% from approximately $52,093,000 for the first six months of
fiscal 1998. The decreases in fiscal 1999 quarter and year-to-date
revenues are primarily attributable to a decrease in the sale of off-
the-shelf products. The decrease is partially offset by an increase in
engineering contract revenues.
New order levels for the second quarter of fiscal 1999 were
approximately $44,591,000, up 173% from order levels of approximately
$16,351,000 for the second quarter of fiscal 1998. New orders for the
first six months of fiscal 1999 were approximately $52,417,000, up 99%
compared to approximately $26,352,000 reported for the same period of
fiscal 1998. The increases in first quarter and year-to-date new order
levels are due in part to booking orders that the Company believes were
delayed from earlier quarters and, in part due to new contracts
initiated by the government resulting in increased demand for the
company's products and services.
The Company's backlog, which consists of anticipated revenues from new
contracts and from the uncompleted portions of existing contracts
(excluding unexercised options) was approximately $51,123,000 at April
30, 1999, a decrease of 11% when compared to $57,526,000 at May 1,
1998. The decrease in year to year backlog is primarily due to the
lower ending backlog at October 31, 1998 as compared to October 31,
1997.
CONTRACT COSTS: Contract costs consist of direct costs on contracts,
including labor, materials and manufacturing overhead costs. Contract
costs as a percentage of revenues were 59.8% for the second quarter of
fiscal 1999 versus 62.5% for the same period of fiscal 1998. Contract
costs as a percentage of revenues for the six months ended April 30,
1999 were 61.7% versus 62.2% for the first six months of fiscal 1998.
Contract costs as a percentage of revenue for the second quarter and
for the first six months of fiscal 1999 were lower primarily due to the
recognition of fee rates in excess of estimates upon completion or near
completion of certain contracts (see "Notes to Financial Statements -
Revenues from 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.
Research and development expenses as a percentage of revenues were
12.6% and 11.2% for the second quarter of fiscal years 1999 and 1998,
respectively. For the first six months of fiscal years 1999 and 1998
research and development expenses as a percentage of revenues were
12.3% and 10.1%, respectively. The year-to-year increases in R&D
expenses in both absolute dollars and as a percentage of revenues
reflect the Company's strategy of funding future products in an effort
to meet customers' needs before its competitors.
costs as a percentage of revenues were higher due to the application of
higher indirect expenses.
GENERAL AND ADMINISTRATIVE: General and administrative expenses
include administrative salaries, related costs for 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.
General and administrative expenses were approximately $3,247,000 or
11.8% of revenues for the second quarter of fiscal 1999 and were
relatively unchanged when compared to approximately $3,233,000 or 11.7%
of revenues for the same period of fiscal 1998. Although general and
administrative expenses of approximately $6,648,000 for the six months
ended April 30, 1999 were slightly less in absolute dollars than the
approximately $6,894,000 in general and administrative expenses for the
same period ended May 1, 1998, general and administrative expenses in
both periods were 13.2% of revenues.
Consistent with government contracting requirements, the Company
considers both general and administrative expenses and research and
development expenses part of its general and administrative indirect
expense pool. Combined R&D and general and administrative expenses of
approximately $12,853,000 were 25.5% of revenues for the first six
months of fiscal 1999 compared to approximately $12,145,000 or 23.3% of
revenues for the same period of fiscal 1998.
higher in the first quarter of fiscal 1999 when compared to the same
period of fiscal 1998, total general and administrative expenses were
lower after the application of the targeted indirect rates.
INTEREST INCOME/(EXPENSE), NET: Net interest income remained
relatively consistent in the three and six month period of fiscal 1999
compared to the same periods in fiscal 1998. For the quarter ended
April 30, 1999, net interest income was approximately $123,000, down
from approximately $145,000 of net interest income for the same period
of fiscal 1998. Net interest income for the first six months of fiscal
1999 was approximately $325,000 compared to net interest income of
approximately $292,000 for the same period of fiscal 1998.
PROVISION FOR INCOME TAXES: The provision for income taxes as a
percentage of income before income taxes was 38% for the second quarter
and for the first six months of fiscal 1999, compared to 39% for the
same periods of fiscal 1998. The decrease in the quarterly and year-
to-date tax rate is primarily the result of federal and state tax
credits.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
At April 30, 1999 cash and short-term investments totaled approximately
$11,937,000. Historically, the Company's primary source of liquidity
has been the cash flow generated from operations as well as the
issuance of common stock through its employee stock plans.
The Company has a $3,000,000 unsecured, revolving line of credit for
short-term cash requirements bearing interest at the bank's reference
rate (7.75% as of April 30, 1999). Outstanding amounts on the line of
credit were zero at April 30, 1999 and October 31, 1998. The line
expires on March 15, 2001.
NET CASH FROM OPERATING ACTIVITIES: Net cash from 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
changes in inventories held by the Company.
During the first six months of fiscal 1999, approximately $2,344,000
was provided by operating activities versus approximately $6,851,000
provided during the comparable period of fiscal 1998. The year-to-year
decline in cash from operating activities is primarily due to the
changes in net income, accounts receivable and inventories. The
decline in net income in fiscal 1999 compared to fiscal 1998 is
primarily due to lower operating income as a result of higher research
and development costs both in aggregate dollars and as a percentage of
revenues. During the first half of fiscal 1999, cash used by accounts
receivable was approximately $371,000 as compared to approximately
$2,841,000 provided by accounts receivable during the same period of
fiscal 1998. The cash generated by accounts receivable in the first
half of fiscal 1998 was primarily due to greater collections received
from a one-time billing modification allowed by the United States
Government in the fourth quarter of fiscal 1997. During the first six
months of fiscal 1999, the Company increased its rate of investment in
inventories, prepaids and other current assets by approximately
$3,056,000; actual inventory increased by approximately $1,643,000, the
unfavorable variance carried in inventory was approximately $1,600,000,
and prepaids and other current assets decreased by approximately
$185,000. In comparison inventories, prepaids and other current assets
increased approximately $2,294,000 during the same period for fiscal
1998. For the first six months of fiscal 1998, actual inventory
increased by $2,214,000, there was an unfavorable variance carried in
inventory of approximately $223,000 and other current assets increased
by approximately $304,000. Cash used in accounts payable and other
accrued liabilities during the first half of fiscal 1999 was
approximately $639,000, slightly lower than the cash used in accounts
payable and other accrued liabilities of approximately $501,000 during
the first half of fiscal 1998.
NET CASH FROM INVESTING ACTIVITIES: Cash used in investing activities
during the first six months of fiscal 1999 was approximately $2,937,000
compared to approximately $6,760,000 used in investing activities
during the same period of fiscal 1998. The purchase of $5,000,000
worth of U.S. Treasury securities in the first half of fiscal 1998 is
the primary reason for the decrease when comparing investing activities
with the first half of fiscal 1999. Additions to property and
equipment were approximately $3,937,000 for the first half of 1999 and
comparable to the approximately $3,560,000 for the first half of fiscal
1998.
NET CASH FROM FINANCING ACTIVITIES: Net cash used in financing
activities during the first six months of fiscal 1999 was approximately
$1,555,000 and is comparable to the cash used in financing activities
during the first six months of fiscal 1998 of approximately $1,368,000.
Cash from financing activities is primarily the difference between cash
used to repurchase the Company's common stock and cash generated from
the issuances of common stock under the Employee Stock Purchase and the
Company's Employee Stock Option Plans. Cash used to repurchase the
Company's commons stock in accordance with its repurchase plans for the
first half of fiscal 1999 and 1998 was approximately $2,743,000 and
approximately $2,940,000, respectively. Cash generated from the
issuances of common stock under the Company's Employee Stock Purchase
and Employee Stock Option Plans was approximately $1,188,000 and
approximately $1,572,000 for the first half of fiscal 1999 and 1998,
respectively.
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 future results of operations and
financial condition.
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 20% of revenue for the first three months of fiscal 1999
compared to 19% attributable to the same contract in the first three
months of fiscal 1998. 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 future results of operations and financial
condition.
Competition: The telecommunication signal processing 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 future 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 new talent 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 future operating results and financial
condition.
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 future operating results and financial condition.
Year 2000(Y2K) Risks:
The Company has been implementing a program over the last two years to
define and minimize risks related to transitioning into the Year 2000 and
beyond. The program and associated risk assessment is segregated into the
following three main areas: 1)Product Readiness Program, 2)Internal
Infrastructure Readiness Program and 3)Business Partners Readiness
Program. For each readiness area, the Company is systematically
performing risk assessment and conducting tests and remediation as well as
developing contingency plans to mitigate risk. Further, the Company is
communicating with its employees, suppliers and customers regarding the
Year 2000 issue in an effort to raise awareness and further mitigate risk
by requesting compliance letters from its key business partners. The
specific status of each area is as follows:
Product Readiness Program
Prior to January 1, 1997 (the "Certification Date"), the Company had no
contractual obligation to provide Y2K compliant products/systems. As is
the nature with most government contractors, the Company either developed
or delivered a product to customer-defined acceptance criteria. Until
the above referenced date, the Company had no obligation to provide Y2K
compliant products or services. As the United States Government became more
concerned regarding the impact of Y2K on their systems, they began requiring
contractors, as part of the contractual terms and conditions, to certify
all deliveries are Y2K compliant. The risk assessment for products and
systems delivered prior to and after the certification date is as follows:
Products and Systems Delivered Prior to the Certifications Date:
The Company will bring all products delivered under contracts
entered into prior to the certification date into compliance upon
the customer's request. The Company has performed a risk assessment
for the United States Government so they have an understanding of
what previously delivered products have Y2K exposure. Since the
Company's products and systems met the original contract acceptance
criteria, it is generally expected that the customers would pay for
the necessary upgrades.
Products and Systems Delivered After to the Certifications Date:
Company personnel have worked with customers to develop a
comprehensive test plan and are now certifying that Company products
meet a mutually agreed upon set of criteria for testing Y2K.
Internal Infrastructure Readiness Program
The Company has embarked on a comprehensive inventory,
evaluation, remediation and/or replacement of all internal
applications and hardware used to run its business. The
Company expects a fully compliant internal infrastructure by
September 1999. The compliance matrix the Company is using
includes all network switches, hubs, routers, servers,
critical business systems software and hardware, engineering
support applications and tools, desktop systems, and
telephone/voicemail systems.
Business Partners Readiness Program
The Company is working with its suppliers and service providers to
minimize risk and provide uninterrupted service including unimpeded flow
of materials to programs. Specific status is as follows:
Suppliers (Hardware and Software for Programs):
The Company has investigated all purchased items which may
have an impact on its products resulting from the suppliers'
hardware/software not being Y2K compliant. The risk in this
area has been reduced to two areas: 1) key software providers
and 2) providers of the single board computers.
1) Key software providers include Sun Microsystems and
Wind River Systems. Wind River has provided a
certification of their Y2K compliance. Sun
Microsystems is implementing a Y2K compliance
program.
2) The manufacturers of the Company's single board
computers used in certain products include Force,
Ariel, Actel and Motorola. All of these
manufacturers have provided certification of Y2K
compliance.
Suppliers (Operational Controls):
The Company's goal is to insure the unimpeded flow of
materials to its programs. A review of all other components
than those described above indicates that there are multiple
sources available from which the Company could procure the
items in the event one of the Company's suppliers has an
internal control problem related to Y2K.
Other Business Partners:
The Company has been in contact with its other critical
business partners (such as its 401K plan carrier and insurance
provider) to insure there will be uninterrupted availability
of services. All critical business partners have provided
compliance letters to the Company.
Summary
The Company expects to implement successfully the systems and programming
changes necessary to insure continued operations as a normal part of the
Company's activities (upgrades, maintenance, normal communications, etc.).
Additionally, since the programs described in this section are ongoing,
all potential Year 2000 issues may have not been identified. Therefore,
the potential impact of these issues on the Company's financial condition
are not determinable at this time.
Costs related to the Year 2000 compliance program are either borne by
certain contracts which are paid directly by the customer or
administrative costs which are reimbursed indirectly through the Company's
billing rates. While the Year 2000 administrative costs incurred to date
have not been material, the Company anticipates incurring additional costs
as the phases are completed. The Company has set aside $140,000 for
investigating and remedying issues directly related to Year 2000
compliance. The Company has not included Year 2000 costs activities which
are accomplished as part of normal system upgrades and/or improvements
since other factors are driving these requirements.
However, the Company 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 has not developed extensive formal contingency plans as backup
to that discussed above. The Company expects the plans discussed above to
be successful and not limit the ability of the Company to develop and sell
its products and services.
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 its Board of Directors, the Company initiated its own
review of the contract in conjunction with its legal counsel.
Further review of the contracts in question and related contracts
through April 1995 indicated 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 operating results
in anticipation of a settlement with the government on the subject
contracts. The charge resulted in a reduction for the fiscal 1995
operating income by $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
date of the subpoena related to three products: the Model 102P Voice
Channel Demodulator, the Model 120 Multichannel Processor, and the Model
150 FAX Scanner.
In February 1998, the company was contacted by one of its primary
customers to negotiate an administrative settlement regarding voluntary
disclosure discussed above. The Company has provided the necessary
information to the Government.
While management believes the fiscal year 1995 charge is adequate to
cover all potential liabilities associated with this investigation by the
United States Government, the United States 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held March 11, 1999.
The shareholders approved a proposal to elect three Class 1 Directors
of the Board of Directors of the Company to serve until the next Annual Meeting
of Shareholders and/or until their respective successors are duly elected
and qualified. The proposal received the following votes:
<TABLE>
<CAPTION>
FOR WITHHELD ABSTENTIONS BROKER NON-VOTES
<S> <C> <C>
John P. Devine 6,510,043 569,498
David D. Elliman 6,516,043 563,498
Gary L. Yancey 6,476,922 602,619
</TABLE>
The shareholders ratified the appointment of Ernst & Young LLP as
independent public accountants of the Company for the fiscal year ending
October 31, 1999. The proposal received the following votes:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD ABSTENTIONS BROKER NON-VOTES
<S> <C> <C>
7,052,970 11,543 15,028
</TABLE>
The shareholders also approved a proposal to amend the Company's
1993 Employee Stock Purchas Plan (the "Stock Purchase Plan") to increase by
600,000 shares the number of shares of Common Stock reserved for issuance
under the Stock Purchase Plan. The proposal received the following votes:
<TABLE>
<CAPTION>
FOR AGAINST WITHHELD ABSTENTIONS
<S> <C> <C>
4,402,873 597,949 29,129
</TABLE>
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 April 30, 1999.
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/ June 12, 1999
- ------------------------------ ---------------------------
Brian M. Offi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer), and
Coproate Secretary
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 APRIL 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<CASH> 11,937
<SECURITIES> 0
<RECEIVABLES> 30,951
<ALLOWANCES> 0
<INVENTORY> 8,794
<CURRENT-ASSETS> 54,532
<PP&E> 46,853
<DEPRECIATION> 26,980
<TOTAL-ASSETS> 74,445
<CURRENT-LIABILITIES> 13,926
<BONDS> 0
0
0
<COMMON> 17,599
<OTHER-SE> 41,887
<TOTAL-LIABILITY-AND-EQUITY> 74,445
<SALES> 50,438
<TOTAL-REVENUES> 50,438
<CGS> 31,128
<TOTAL-COSTS> 43,981
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 325
<INCOME-PRETAX> 6,782
<INCOME-TAX> 2,577
<INCOME-CONTINUING> 4,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> $0.50
<EPS-DILUTED> $0.48
</TABLE>
