UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE PERIOD ENDED JANUARY 28, 2000
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, 8,777,102 shares outstanding as of March 3, 2000.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
January 28, October 31
2,000 1999
----------- ----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $9,184 $16,680
Short-term investments 8,019 --
Accounts receivable:
Billed 16,781 19,746
Unbilled 17,455 16,992
----------- ----------
Total accounts receivable 34,236 36,738
Inventory 9,146 6,746
Prepaid and other current assets 3,253 3,312
----------- ----------
Total current assets 63,838 63,476
Property and equipment, at cost:
Machinery and equipment 37,703 37,719
Furniture and fixtures 4,461 4,419
Leasehold improvements 8,162 7,316
Construction in process 456 329
----------- ----------
50,782 49,783
Accumulated depreciation and amortization (30,239) (29,268)
----------- ----------
Net property and equipment 20,543 20,515
Other assets 43 43
----------- ----------
Total assets $84,424 $84,034
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,073 $4,838
Accrued payroll and related benefits 6,755 7,506
Other accrued liabilities 2,348 2,293
Income taxes payable 3,945 3,831
----------- ----------
Total current liabilities 16,121 18,468
Deferred income taxes 1,133 1,133
Shareholders' equity:
Common stock, no par value: 20,000,000 shares
authorized; issued and outstanding -- 8,598,491 at
January 28, 2000 and 8,442,239 at October 31, 1999 19,071 17,929
Retained earnings 48,099 46,504
----------- ----------
Total shareholders' equity 67,170 64,433
----------- ----------
Total liabilities and
shareholders' equity $84,424 $84,034
=========== ==========
</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 INCOME
(UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
January 28,January 29,
2000 1999
---------- ----------
<S> <C> <C>
Revenues from contracts $26,528 $22,848
Operating expenses:
Contract costs 16,394 14,628
Research and development 2,342 2,728
General and administrative 4,703 3,401
---------- ----------
Total operating expenses 23,439 20,757
---------- ----------
Operating income 3,089 2,091
Interest income(expense), net 324 202
---------- ----------
Income before provision
for income taxes 3,413 2,293
Provision for income taxes 1,297 871
---------- ----------
Net income $2,116 $1,422
========== ==========
Net incomer per common share:
Basic $0.25 $0.17
Diluted $0.24 $0.16
Number of shares used in calculating
net income per common share:
Basic 8,550 8,480
Diluted 8,832 8,793
</TABLE>
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
January 28, January 29,
2000 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,116 $1,422
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 971 1,045
Changes in:
Accounts receivable 2,502 774
Inventory, prepaids and other current assets (2,341) (2,647)
Other assets - -
Accounts payable, taxes payable and accrued liabi (2,887) (286)
---------- ----------
Net cash provided by operating activities 361 308
INVESTING ACTIVITIES:
Purchase of available-for-sale securities (8,000) -
Maturity of available-for-sale securities - 1,000
Additions to property and equipment (999) (1,756)
---------- ----------
Net cash used in investing activities (8,999) (756)
FINANCING ACTIVITIES:
Issuance of common stock 1,142 1,173
Repurchase of common stock - (2,743)
---------- ----------
Net cash provided by (used in) financing activi 1,142 (1,570)
Net decrease in cash (7,496) (2,018)
Cash, beginning of period 16,680 14,085
---------- ----------
Cash, end of period $9,184 $12,067
========== ==========
Supplemental disclosures of cash flow information:
Interest paid $13 $3
Income taxes paid $1,184 $155
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
January 28, 2000
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 three-month period ending January 28, 2000 are
not necessarily indicative of the results that may be expected for the
year ending October 31, 2000. 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, 1999.
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 stockholders by the weighted average shares
outstanding during the period. Diluted earnings per share is
calculated by dividing net income available to common shareholders 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 securities
outstanding using the treasury stock method.
A reconciliation of shares used in the calculation of basic and
diluted earnings per share follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
---------------------
January 28,January 29,
2000 1999
--------- ---------
<S> <C> <C>
Numerator
Net income $2,116 $1,422
======= =======
Denominator:
Share used to compute net income per
common share - basic 8,550 8,480
Effect of dilutive stock options 282 313
------- -------
Share used to compute net income per
common share - diluted 8,832 8,793
======= =======
Net income per common share - basic $0.25 $0.17
------- -------
Net income per common share - diluted $0.24 $0.16
</TABLE>
COMPREHENSIVE INCOME
As of October 31, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." FAS 130
establishes new rules for the reporting and display of comprehensive income and
its' components, however, it has no material impact on the Company's net income
or shareholders' equity. SFAS 130 requires changes in fair value for
available-for-sale securities and foreign currency translation adjustments, whic
prior to adoption were reported in shareholders' equity, to be included in
comprehensive income.
The components of comprehensive income, net of tax, are as follows:
<TABLE>
<CAPTION> Three Months Ended:
January 28, January 29,
2000 1999
----- -----
<S> <C> <C>
Net income $2,116,434 $1,421,502
Unrealized gain (loss) on securities 18,866 (29,223)
------------------------
Comprehensive income $2,135,300 $1,392,279
========================
</TABLE>
NOTE 2 -- INVENTORY
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 28, 2000 OCTOBER 31, 1999
---------------- ----------------
<S> <C> <C>
Raw Materials $1,188 $1,262
Work in Process 7,460 4,328
Finished Goods 397 927
------ ------
9,045 6,517
Precontract Costs 101 229
------ ------
$9,146 $6,746
====== ======
</TABLE>
The Company records contract revenues and costs for interim reporting purposes
based on annual targeted indirect rates. At year end, the revenues and costs are
adjusted for actual indirect rates. During the interim reporting periods
variances may accumulate between the actual indirect rates and the annual
targeted rates. All timing-related indirect spending variances are inventoried
as part of work in process during these interim reporting periods. These rates
are reviewed regularly and any permanent variances are reflected in the
statement of operations as they become known. At January 28, 2000, the
inventoried variance was approximately $1,690,000 ($1,340,000 at January 29,
1999) and was included in work in process. At October 31, 1999 and 1998 the
variance was zero since all revenues and costs are recorded at the actual
indirect rates for the fiscal year end.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the attached
financial statements and notes thereto.
Forward-looking statements in this report are made pursuant to the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934. In this
report, the words "anticipates," "believes," "expects," "future," "intends,"
and similar expressions identify forward-looking statements. Shareholders
are cautioned that all forward-looking statements pertaining to the Company
involve risks and uncertainties, including, without limitation, those
contained under the caption, "Summary of Business Considerations and Certain
Factors that May Affect Future Results of Operations and/or Stock Price"
and other risks detailed from time to time in the Company's periodic reports
and other information filed with the Securities and Exchange Commission.
Actual events and results may differ materially from the Company's current
expectations and beliefs.
DESCRIPTION OF THE BUSINESS:
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.
Additionally, the use of established telecommunication
technologies has increased throughout the world and new
telecommunication technologies, supplementing rather than replacing
prior technologies, have been developed and commercialized. These
trends have led to a significant increase in the overall volume of
information communicated and an increase in the density of signals
transmitted throughout the radio frequency spectrum. This increase can
be seen in the proliferation of facsimile, cellular, and digital
signal telecommunications equipment and the global information network
(e.g., the Internet) in the last decade, resulting in a significant
increase in the amount of information being communicated. These trends
have required the development of signal reconnaissance equipment
capable of collecting and processing an increased volume of signals as
well as new types of signals.
Traditionally, organizations within the United States Government
have satisfied their signal reconnaissance needs by first identifying
their specific requirements and then contracting with government
contractors to provide equipment. Contractors typically designed and
built custom signal processing systems optimized to satisfy the
particular needs of various agencies. Development of custom systems
usually required many years of effort and involved great expense. The
time required to develop these systems often meant that when a system
was delivered, it did not address new telecommunications technologies
that had evolved during the development process. These factors,
combined with growing budgetary constraints, have caused many agencies
to search for more flexible and cost-effective signal reconnaissance
solutions that can be deployed promptly.
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.")
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. 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. The 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, and InMarSat) utilize. As
these systems attempt to maximize this usage, there is an increasingly
higher probability that data transfer will be impaired. This creates
demand for sophisticated data quality monitoring.
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.
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 market 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 military branches are committed to adopting to advancing
state-of-the-art data transfer technologies. As they adopt these new
technologies, they are faced with added complexities not confronted in
commercial applications. Accordingly, the United States Government is
investing in research and development to overcome these complexities,
with the goal of providing a reliable all-digital battlefield by 2010.
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 capitalize
in developing products that satisfy 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 to agressively
pursue these objectives in each of the market areas described above.
THREE MONTHS ENDED JANUARY 28, 2000 COMPARED TO THREE
MONTHS ENDED JANUARY 29, 1999
RESULTS OF OPERATIONS:
REVENUES AND BACKLOG: Revenues for the first quarter of fiscal
2000 were approximately $26,568,000, up 16% from the first
quarter of fiscal 1999 revenues of approximately $22,848,000.
The increase in first quarter revenues is attributable to
increased activity resulting from a continued demand for the
Company's products and services and in part, due to the profit
margin mix as a result of higher off-the-shelf product sales.
Additionally, the Company believes that first quarter revenue for
fiscal 1999 was low due to a delay in off-the-shelf awards during
the first quarter of that year which impacted revenue growth.
New order levels for the first quarter of fiscal 2000 were
approximately $15,419,000, up 97% from approximately $7,826,000
for the first quarter of fiscal 1999. The increase in first
quarter new order levels reflects the government's continued
demand for the Company's products and services.
The Company's backlog, which consists of anticipated revenues
from the uncompleted portions of existing contracts (excluding
unexercised options) was approximately $53,824,000 at January 28,
2000, an increase of approximately 30% when compared to
$37,937,000 at January 29, 1999. The increase in backlog is
attributable to the record award levels received during fiscal
1999.
CONTRACT COSTS: Contract costs consist of direct costs on
contracts, including materials, labor and manufacturing overhead
costs. Contract costs as a percentage of revenues were 61.8% for
the first quarter of fiscal 2000 versus 64.0% for the same period
of fiscal 1999. Contract costs as a percentage of revenues
decreased primarily due to favorable adjustments in estimated
costs to complete on certain contracts during the first quarter
of fiscal 2000 compared the the same period of fiscal 1999.
RESEARCH AND DEVELOPMENT (R&D): Company-directed investment in
research and development consists of expenditures recoverable
from customers through the Company's billing rates and
expenditures funded by the Company from earnings. It is the
Company's accounting practice to record R&D expenses based on
annual targeted indirect rates. (See "Notes to Financial
Statements; Note 2 - Inventory.") Research and development
expenses as a percentage of revenues were 8.8% and 11.9% for the
first quarter of fiscal years 2000 and 1999, respectively. The
decrease in R&D expenses as a percentage of revenues for the
first quarter of fiscal 2000 is primarily due to the Company
concentrating its efforts toward contract activity.
GENERAL AND ADMINISTRATIVE: General and administrative expenses
include administrative salaries, cost related to the Company's
marketing and proposal activities and other administrative costs.
It is the Company's accounting practice to record general and
administrative expenses based on annual targeted indirect rates.
(See "Notes to Financial Statements; Note 2 - Inventory.")
General and administrative expenses were approximately
$4,703,000 or 17.7% of revenues for the first quarter of fiscal
2000 compared to approximately $3,401,000 or 14.9% of revenues
for the same period of fiscal 1999. General and administrative
expenses expressed as a percent of revenues were higher during
the first quarter of fiscal 2000 versus the same period of fiscal
1999 due to a higher indirect rate application estimated for
fiscal 2000 compared to the rate application estimated for fiscal
1999. (See "Notes to Financial Statement; Note 2 - Inventory".)
INTEREST INCOME/(EXPENSE), NET: For the first quarter ended
January 28, 2000, net interest income was approximately $324,000,
up from $202,000 net interest income for the same period of
fiscal 1999. The increase in net interest income for the first
quarter of fiscal 2000 continues to relate to the Company's
improved cash position at the beginning of the fiscal year which
allowed the Company to place more fund in interest bearing
accounts as well as interest income received on a state tax
receivable.
PROVISION FOR INCOME TAXES: The provision for income taxes as a
percentage of income before income taxes was 38% for each of the
first quarters of fiscal years 2000 and 1999. The Company
continues to recognize a consistent tax rate as a result of
estimated federal and state tax credits.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
The Company's primary source of liquidity during the first
quarter of fiscal 2000 and fiscal 1999 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 (8.5% as of January 28, 2000). At both January
28, 2000 and October 31, 1999 this facility had not been
utilized. The line of credit expires on March 15, 2001; the
Company intends to renew the line at that time.
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 change in inventories held by the
Company. During the first three months of fiscal 2000,
approximately $361,000 was provided by operating activities
versus approximately $308,000 provided during the comparable
period of fiscal 1999. In addition to the increase in net income
of approximately $694,000 in the first quarter of fiscal 2000,
cash provided by accounts receivable was approximately $2,502,000
as compared to approximately $774,000 provided by accounts
receivable during the same period of fiscal 1999. During the
first quarter of fiscal 2000, the Company increased its rate of
investment in inventories, prepaid expenses and other assets by
approximately $2,991,000 in anticipation of future contract
awards; this compares to an increase of approximately $2,647,000
during the same period for fiscal 1999. Cash used in accounts
payable and other accrued liabilities during the first quarter of
and other accrued liabilities during the first quarter of fiscal
2000 was approximately $2,237,000, considerably higher than cash
used of approximately $286,000 during the comparable period of
fiscal 1999.
NET CASH FROM INVESTING ACTIVITIES: Cash used in
financing activities during the first three months of fiscal 2000
was approximately $8,999,000 compared to approximately $756,000
used in investing activities during the same period of fiscal
1999. The purchase of $8,000,000 worth of U.S. Treasury
securities in the first quarter of fiscal 2000 is the primary
reason for the increase in cash used. Additions to property and
equipment were approximately $999,000 and $1,756,000 in the first
three months of fiscal 2000 and 1999, respectively.
NET CASH FROM FINANCING ACTIVITIES: Cash provided by
financing activities during the first three months of fiscal 2000
was approximately $1,142,000 compared to cash used in financing
activities of approximately $1,570,000 during the same period of
fiscal 1999. The use of cash for financing activities during the
first quarter of fiscal 1999 is primarily attributable to the
repurchasing activity of the Company's common stock of
approximately $2,743,000.
The Company believes that the funds generated from operations,
existing working capital and amounts available under existing
lines of credit will be sufficient to meet its cash needs for the
next twelve months.
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 operating results 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 of 17% of revenue for the first three months
of fiscal 2000 compared to 20% attributable to the same contract for the
three months of fiscal 1999. This contract may be terminated at the
sole discretion 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 operating results 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
operating results 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 few years, the Company has
experienced difficulty in attracting new talent due to an increasingly
competitive market for qualified personnel. Management believes this
effect continues to be 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 due to the difficulty in recruiting new staff capable of
obtaining the necessary security clearance. (See "Employees.") The
Company has taken step to bolster its ability to attract and retain
staff by opening additional offices in Salt Lake City, Utah and in
Hillsboro, Oregon. The Company believes these new offices, in addition
to the increased investment made in the Company's human resources
activities during fiscal 1999, should allow it to successfully attract
and retain qualified employees. Failure to do so could have a material
adverse effect on the Company's operating results and financial
condition.
Risk of Fixed Price and Contract Terminations: A significant
portion of the Company's revenues are derived from fixed-price
contracts. Under fixed-price contracts, unexpected increases in the
cost to develop or manufacture a product, whether due to inaccurate
estimates in the bidding process, unanticipated increases in materials
costs, inefficiencies or other factors, are borne by the Company. The
Company has experienced cost overruns in the past that have resulted in
losses on certain contracts. There can be no assurance that the
Company will not experience cost overruns in the future or that such
overruns will not have a material adverse effect on the Company's
operating results 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 assurance that an
active trading market will be sustained for the Company's common stock.
The sock market in recent years has experienced extreme price and
volume fluctuations that have particularly affected the market prices
of many technology 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 certain
signal reconnaissance and industrial marketplace 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 develop and market new products
successfully in the future or respond effectively to technological
changes, such as data encryption technology, network intrusion
detection 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 product contain
critical components like single board computers available solely from
Motorola and Force Computers and field programmable gate arrays
available solely from Xilinx, Inc. While the Company believes that
substitute components or assemblies could be obtained, use of
substitutes would require development of new suppliers or would require
the Company to re-engineer its products, or both, which could delay the
Company's shipment of its products and could have a material adverse
effect on the Company's operating results and financial condition.
Business Disruption: The Company's corporate headquarters,
including most of its research and development operations and
production facilities, are located in the Silicon Valley area of
Northern California, a region known for seismic activity. A
significant earthquake could materially affect operating results. The
Company is not insured for most losses and business interruptions of
this kind.
Impact of Year 2000
In prior years, the Company discussed the nature and progress
of its plans to become Year 2000 ready. In late 1999, the Company
completed its remediation and testing of systems. As a result of
those planning and implementation efforts, the Company experienced
no significant disruptions in mission critical information
technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change.
The Company is not aware of any material problems resulting
from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company
will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are promptly
addressed.
All costs related to Year 2000 readiness were borne by the
Company and recovered in the product prices and therefore did not
have a material impact on its operating results.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company from time to time is engaged in various legal actions
including but not limited to wrongful termination allegations,
governmental agency investigations and employee discrimination
allegations. The Company, believes that these legal actions will not,
either individually or in aggregate, have a material adverse effect on
the operating results or financial condition of the Company.
Item6. Exhibits and Reports on Form 8-K
Exhibits - See Index to Exhibits
REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three
months ended January 28, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned therewith duly authorized.
Applied Signal Technology, Inc.
/s/ Brian M. Offi/ March 13, 2000
- ------------------------------ ---------------------------
Brian M. Offi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
APPLIED SIGNAL TECHNOLOGY
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JANUARY 28, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-28-2000
<CASH> 6,706
<SECURITIES> 5,969
<RECEIVABLES> 28,568
<ALLOWANCES> 0
<INVENTORY> 7,531
<CURRENT-ASSETS> 51,198
<PP&E> 38,095
<DEPRECIATION> 21,977
<TOTAL-ASSETS> 67,387
<CURRENT-LIABILITIES> 13,097
<BONDS> 0
0
0
<COMMON> 23,527
<OTHER-SE> 29,812
<TOTAL-LIABILITY-AND-EQUITY> 67,387
<SALES> 24,361
<TOTAL-REVENUES> 24,361
<CGS> 15,095
<TOTAL-COSTS> 20,893
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 147
<INCOME-PRETAX> 3,615
<INCOME-TAX> 1,410
<INCOME-CONTINUING> 2,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,205
<EPS-BASIC> $0.26
<EPS-DILUTED> $0.25
</TABLE>
