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 July 31, 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, 8,454,139 shares outstanding as of
September 8, 1999.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
July 30, October 31
1999 1998
---------- ----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,655 $14,085
Short-term investments -- 1,029
Accounts receivable:
Billed 13,636 14,298
Unbilled 16,860 16,282
---------- ----------
Total accounts receivable 30,496 30,580
Inventory 9,682 5,551
Prepaid and other current assets 3,004 3,035
---------- ----------
Total current assets 59,837 54,280
Property and equipment, at cost:
Machinery and equipment 36,506 31,654
Furniture and fixtures 4,356 4,011
Leasehold improvements 6,921 5,813
Construction in process 570 1,438
---------- ----------
48,353 42,916
Accumulated depreciation and amortization (28,329) (24,775)
---------- ----------
Net property and equipment 20,024 18,141
Other assets 21 42
---------- ----------
Total assets $79,882 $72,463
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,359 $3,842
Accrued payroll and related benefits 7,113 6,331
Other accrued liabilities 2,908 2,092
Income taxes payable 3,803 2,300
---------- ----------
Total current liabilities 17,183 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 -- 8,484,429 shares at
July 30, 1999 and 8,393,526 shares at October 31, 1998 18,323 19,154
Retained earnings 43,343 37,711
---------- ----------
Total shareholders' equity 61,666 56,865
---------- ----------
Total liabilities and
shareholders' equity $79,882 $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 Nine Months Ended
--------------------- -------------------
July 30, July 31, July 30, July 31,
1999 1998 1999 1998
---------- ---------- --------- ---------
<S> <C> <C>
Revenues from contracts $27,555 $27,373 $77,993 $79,466
Operating expenses:
Contract costs 17,410 16,695 48,538 49,117
Research and development 2,554 3,050 8,759 8,301
General and administrative 4,535 3,296 11,183 10,190
---------- ---------- --------- ---------
Total operating expenses 24,499 23,041 68,480 67,608
---------- ---------- --------- ---------
Operating income 3,056 4,332 9,513 11,858
Interest income(expense), net 152 140 477 432
---------- ---------- --------- ---------
Income before provision
for income taxes 3,208 4,472 9,990 12,290
Provision for income taxes 1,219 1,621 3,796 4,670
---------- ---------- --------- ---------
Net income $1,989 $2,851 $6,194 $7,620
========== ========== ========= =========
Net income per common share:
Basic $0.24 $0.34 $0.74 $0.90
Diluted $0.23 $0.32 $0.71 $0.86
Number of shares used in calculating
net income per common share:
Basic 8,446 8,429 8,424 8,495
Diluted 8,707 8,776 8,689 8,909
</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>
NINE MONTHS ENDED
----------------------
July 30, July 31,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,194 $7,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,554 3,107
Changes in:
Accounts receivable 84 2,201
Inventory, prepaids and other current assets (4,079) (2,396)
Accounts payable, income taxes payable and accrued 2,085 (640)
---------- ----------
Net cash provided by operating activities 7,838 9,892
INVESTING ACTIVITIES:
Purchase of available-for-sale securities -- (5,000)
Maturity of available-for-sale securities 1,000 4,300
Additions to property and equipment (5,437) (5,099)
---------- ----------
Net cash used in investing activities (4,437) (5,799)
FINANCING ACTIVITIES:
Issuances of common stock 2,380 2,707
Repurchases of common stock (3,211) (5,971)
---------- ----------
Net cash provided by (used in) financing activities (831) (3,264)
Net increase in cash and cash equivalents 2,570 829
Cash and cash equivalents, beginning of period 14,085 7,403
---------- ----------
Cash and cash equivalents, end of period $16,655 $8,232
========== ==========
Supplemental disclosures of cash flow information:
Interest paid $17 $23
Taxes paid $2,293 $2,084
</TABLE>
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
July 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 nine-month period ending July 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.
PER SHARE DATA
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 Nine Months Ended
--------------------- ----------------------
July 30, July 31, July 30, July 31,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $2,851 $2,851 $6,194 $7,620
======= ======= ======= =======
Shares used to compute net income per
common share - basic 8,446 8,429 8,424 8,495
Effect of dilutive stock options 261 347 265 414
------- ------- ------- -------
Shares used to compute net income per
common share - diluted 8,707 8,776 8,689 8,909
======= ======= ======= =======
Net income per common share - basic $0.24 $0.34 $0.74 $0.90
======= ======= ======= =======
Net income per common share - diluted $0.23 $0.32 $0.71 $0.86
======= ======= ======= =======
</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>
JULY 30, 1999 OCTOBER 31, 1998
---------------- ----------------
<S> <C> <C>
Raw Materials $1,327 $1,102
Work in Process 7,960 4,114
Finished Goods 392 245
------ ------
9,679 5,461
Precontract Costs 3 90
------ ------
$9,682 $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 July 30, 1999, the unfavorable
inventoried variance was approximately $1,932,000 while at July 31, 1998 the
unfavorable inventoried variance was $337,000; 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 NINE MONTHS ENDED JULY 30, 1999 COMPARED TO THREE
MONTHS AND NINE MONTHS ENDED JULY 31, 1998
RESULTS OF OPERATIONS:
REVENUES AND BACKLOG: Revenues for the third quarter of fiscal year
1999 were approximately $27,555,000, relatively unchanged from the
third quarter of fiscal year 1998 revenues of approximately
$27,373,000. Revenues for the nine months ended July 30, 1999 were
approximately $77,993,000, down 2% of revenues from approximately
$79,466,000 for the first nine months of fiscal 1998. While third
quarter revenue is materially unchanged between the periods, the
decrease in year-to-date revenues is attributable to a decrease in
firm-fixed price contracts in Operations and is partially offset by
an increase in engineering contract revenues.
New order levels for the third quarter of fiscal 1999 were
approximately $32,305,000, up 29% from order levels of approximately
$25,079,000 reported for the third quarter of fiscal 1998. New orders
for the first nine months of fiscal 1999 were approximately
$84,722,000, an increase of approximately 65% compared to new order
levels of approximately $51,430,000 reported for the same period of
fiscal 1998. Increases in new orders for the third quarter continue to
be strong in both the strategic and the tactical signal reconnaissance
markets. The increase in year-to-date new order levels is due in part
to booking orders that the Company believes were delayed in the prior
year, and, in part due to a higher volume of orders for off-the-shelf
products when compared to the first nine months of the prior fiscal
year.
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 $56,109,000 at July
30, 1999, an increase of 2% when compared to $55,106,000 at July 31,
1998. The increase in year to year backlog is primarily due to the
higher ordering levels in the current fiscal year as compared to the
ordering levels in fiscal 1998.
CONTRACT COSTS: Contract costs consist of direct costs on contracts,
including labor, materials and manufacturing overhead costs. Contract
costs for the third quarter of fiscal 1999 were approximately
$17,410,000 or 63.2% of revenues; contract costs for the same period of
fiscal 1998 were approximately $16,695,000 or 61.0% of revenues. The
increase in contract costs for the current quarter is due to an
increase in engineering development contracts which have lower margins
compared to the volume of operation production contracts in the third
quarter of fiscal year 1998. Year-to-date contract costs were
approximately $48,538,000 or 62.2% of revenues for fiscal 1999 as
compared to approximately $49,117,000 or 61.8% for the first nine
months of fiscal 1998. Year-to-date contract costs as a percentage of
revenue for both fiscal years 1999 and 1998 are consistent with the
Company's business model.
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 were approximately $2,554,000 or 9.3%
of revenues and approximately $3,050,000 or 11.1% of revenues for the
third quarter of fiscal years 1999 and 1998, respectively. For the
first nine months of fiscal years 1999 and 1998 research and
development were approximately $8,759,000 or 11.2% of revenues and
approximately $8,301,000 or 10.4% of revenues, respectively. R&D as a
percentage of revenues for the third quarter and year-to-date are
currently in line with the Company's business model and reflect the
Company's strategy of funding future products in an effort to meet
customers' needs before its competitors.
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 $4,535,000 or
16.5% of revenues for the third quarter of fiscal 1999 and were 37.6%
higher when compared to approximately $3,296,000 or 12.0% of revenues
for the same period of fiscal 1998. General and administrative
expenses were approximately $11,183,000 or 14.3% of revenues for the
nine months ended July 30, 1999 and were higher than the approximately
$10,190,000 or 12.8% of revenues in general and administrative expenses
for the same period ended July 31, 1998. Before applying the target
G&A rate, general and administrative spending levels were comparable
for the quarter and for the first nine months of fiscal 1999 when
compared to the same periods of fiscal 1998. However, the applied
target G&A rate for fiscal year 1999 is 3.6% greater than the rate used
in fiscal year 1998, and, resulted in reporting higher G&A expenses.
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 $19,942,000 were 25.6% of revenues for the first nine
months of fiscal 1999 compared to approximately $18,491,000 or 23.3% of
revenues for the same period of fiscal 1998.
INTEREST INCOME/(EXPENSE), NET: Net interest income in the three and
nine month periods of fiscal year 1999 was relatively consistent with
the same periods in fiscal year 1998. The increase in net interest
income in both 1999 periods is primarily due to the higher average cash
balances on hand.
PROVISION FOR INCOME TAXES: The provision for income taxes as a
percentage of income before income taxes was 38% and 36% for the third
quarter of fiscal years 1999 and 1998, respectively. The effective tax
rate was 38% for the nine months ended July 31, 1999 and July 30, 1998.
The lower tax rate for the third quarter of fiscal year 1998 was the
result of a year-to-date adjustment made during the quarter to reflect
a cumulative 38% effective tax rate projected for fiscal year 1998.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
At July 30, 1999 cash and short-term investments totaled approximately
$16,655,000. Historically, the Company's primary source of liquidity
has been the cash flow generated from operations as well as the
issuances 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 (8% as of July 30, 1999). Outstanding amounts on the line of
credit were zero at July 30, 1999 and October 31, 1998. The line
expires on March 15, 2001.
CASH FROM OPERATING ACTIVITIES: Net cash from operating activities has
varied significantly from quarter to quarter. These quarter-to-quarter
fluctuations 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 nine months of fiscal 1999, approximately $7,838,000
was provided by operating activities versus approximately $9,892,000
provided during the comparable period of fiscal 1998. The year-to-year
decline in cash from operating activities is primarily due to the
decline in net income in fiscal 1999 compared to fiscal 1998 of
approximately $1,426,000. During the first nine months of fiscal 1999,
cash generated from accounts receivable decreased by approximately
$2,117,000, when compared to the first nine months of fiscal 1998.
This decrease is primarily due to the high collections received in the
first nine months of fiscal 1998 resulting from a one-time billing
modification allowed by the United States Government in the last
quarter of fiscal 1997. During the first nine months of fiscal 1999,
the Company increased its rate of investment in inventories, prepaids
and other current assets by approximately $1,683,000 over the fiscal
1998 period. Actual inventory increased by approximately $4,131,000,
due in part by building inventory for on-the-shelf products and in part
by the unfavorable variance carried in inventory of approximately
$1,900,000. In comparison, inventories increased approximately
$2,165,000 during the same period for fiscal 1998 and the unfavorable
variance was approximately $300,000. Cash generated by accounts payable
and other accrued liabilities during the first nine months of fiscal
1999 was approximately $2,085,000, and was primarily due to the
increase in income tax accruals as well as to the timing of quarter-end
accruals. During the first nine months of fiscal 1998, cash used in
accounts payable and other accrued liabilities was approximately
$640,000.
CASH FROM INVESTING ACTIVITIES: Cash used in investing activities
during the first nine months of fiscal 1999 and 1998 was $4,437,000 and
$5,799,000, respectively. The $1,362,000 decrease in cash used in
investing activities in fiscal 1999 is primarily the result of the sale
of $1,000,000 in investments as compared to the net purchases of
$700,000 of U.S. Treasury securities during fiscal 1998 partially
offset by an increase in purchases of property and equipment.
CASH FROM FINANCING ACTIVITIES: Net cash used in financing activities
during the first nine months of fiscal years 1999 and 1998 were
approximately $831,000 and approximately $3,264,000, respectively. The
decrease in cash used in financing activities for fiscal 1999 as
compared to fiscal 1998 is primarily due to the result of fewer shares
repurchased by the Company during fiscal 1999 less proceeds from the
issuances of common stock to employees under the employee stock option
and purchase plans.
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
regulations 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 23% of revenue for the first nine months of
fiscal 1999 compared to 20% attributable to the same contract in the
first nine months of fiscal 1998. This contract may be terminated at
the convenience of the United States Government. If this contract or
other large 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 in an increasingly
competitive market for qualified personnel. Management believes this
is, in part, attributable to the expanding U.S. economy and, in
particular, to the local California economy where the Company competes
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
recently, 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.
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. 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 that 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 Certification 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 Certification 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 testing criteria for Y2K compliance.
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 the end of the 1999 fiscal year.
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.
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.
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 401(k) 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
expects to incur total costs of less than $150,000 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.
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 those 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 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 July 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/ September 14, 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 JULY 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-30-1999
<CASH> 16,655
<SECURITIES> 0
<RECEIVABLES> 30,496
<ALLOWANCES> 0
<INVENTORY> 9,682
<CURRENT-ASSETS> 59,837
<PP&E> 48,353
<DEPRECIATION> 28,329
<TOTAL-ASSETS> 79,882
<CURRENT-LIABILITIES> 17,183
<BONDS> 0
0
0
<COMMON> 18,323
<OTHER-SE> 43,343
<TOTAL-LIABILITY-AND-EQUITY> 79,882
<SALES> 77,993
<TOTAL-REVENUES> 77,993
<CGS> 48,538
<TOTAL-COSTS> 68,480
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 477
<INCOME-PRETAX> 9,990
<INCOME-TAX> 3,796
<INCOME-CONTINUING> 6,194
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> $0.74
<EPS-DILUTED> $0.71
</TABLE>
