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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE PERIOD ENDED APRIL 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)
<TABLE>
<CAPTION>
CALIFORNIA 77-0015491
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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, 8,935,098 shares outstanding as of June 8, 2000.
This Quarterly Report on Form 10-Q consists of 24 pages. The Exhibit Index is on
Page 24.
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INDEX
APPLIED SIGNAL TECHNOLOGY, INC.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets -- April 28, 2000 and October 31, 1999
Statements of Operations -- Three months ended April 28, 2000 and
April 30, 1999 and six months ended April 28, 2000 and April 30, 1999
Statements of Cash Flows -- Six months ended April 28, 2000 and April
30, 1999
Notes to Financial Statements -- April 28, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Index to Exhibits
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS April 28, 2000 October 31,1999
(Unaudited) (Note)
-------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $12,140 $16,680
Short term investments 8,056 --
Accounts receivable:
Billed 14,600 19,746
Unbilled 16,583 16,992
------- -------
Total accounts receivable 31,183 36,738
Inventory 11,726 6,746
Prepaid and other current assets 3,535 3,312
------- -------
Total current assets 66,640 63,476
Property and equipment, at cost:
Machinery and equipment 38,724 37,719
Furniture and fixtures 4,515 4,419
Leasehold improvements 8,415 7,316
Construction in process 564 329
------- -------
52,218 49,783
Accumulated depreciation and amortization (31,594) (29,268)
------- -------
Net property and equipment 20,624 20,515
Other assets 43 43
------- -------
Total assets $87,307 $84,034
======= =======
</TABLE>
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APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS (continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY April 28, 2000 October 31, 1999
(Unaudited) (Note)
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,416 $ 4,838
Accrued payroll and related benefits 6,794 7,506
Other accrued liabilities 2,438 2,293
Income taxes payable 4,036 3,831
------- -------
Total current liabilities 15,684 18,468
Deferred income taxes 1,133 1,133
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--8,790,562
at April 28, 2000 and 8,442,239 at
October 31, 1999 20,620 17,929
Accumulated other comprehensive income (loss) 37 --
Retained earnings 49,833 46,504
------- -------
Total shareholders' equity 70,490 64,433
------- -------
Total liabilities and shareholders' equity $87,307 $84,034
======= =======
</TABLE>
Note: The balance sheet at October 31, 1999 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.
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APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
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<CAPTION>
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
April 28, 2000 April 30, 1999 April 28, 2000 April 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues from contracts $27,287 $27,590 $53,815 $50,438
Operating expenses:
Contract costs 16,809 16,500 33,203 31,128
Research and development 3,213 3,477 5,555 6,205
General and administrative 3,769 3,247 8,472 6,648
------- ------- ------- -------
Total operating expenses 23,791 23,224 47,230 43,981
------- ------- ------- -------
Operating income 3,496 4,366 6,585 6,457
Interest income (expense), net 218 123 542 325
------- ------- ------- -------
Income before provision for
income taxes 3,714 4,489 7,127 6,782
Provision for income taxes 1,411 1,706 2,708 2,577
------- ------- ------- -------
Net income $ 2,303 $ 2,783 $ 4,419 $ 4,205
======= ======= ======= =======
Net income per common share:
Basic $ 0.26 $ 0.33 $ 0.51 $ 0.50
Diluted $ 0.25 $ 0.32 $ 0.49 $ 0.48
Number of shares used in
calculating net income per
common share:
Basic 8,747 8,439 8,649 8,460
Diluted 9,154 8,640 9,002 8,727
</TABLE>
See notes to financial statements.
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APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------
April 28, 2000 April 30, 1999
-------------- --------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 4,419 $ 4,205
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,326 2,205
Changes in:
Accounts receivable 5,555 (371)
Inventory, prepaids and other assets (5,203) (3,056)
Accounts payable and accrued liabilities (2,798) (639)
-------- --------
Net cash provided by operating activities 4,299 2,344
INVESTING ACTIVITIES:
Purchase of available-for-sale securities (10,019) --
Maturity of available-for-sale securities 2,000 1,000
Additions to property and equipment (2,435) (3,937)
-------- --------
Net cash used in investing activities (10,454) (2,937)
FINANCING ACTIVITIES:
Issuances of common stock 2,690 1,188
Repurchases of common stock -- (2,743)
Dividends paid (1,075) --
-------- --------
Net cash provided by (used in) financing activities 1,615 (1,555)
Net decrease in cash and cash equivalents (4,540) (2,148)
Cash and cash equivalents, beginning of period 16,680 14,085
-------- --------
Cash and cash equivalents, end of period $ 12,140 $ 11,937
======== ========
Supplemental disclosures of cash flow information:
Interest paid $ 14 $ 15
Income taxes paid $ 2,503 $ 1,126
======== ========
</TABLE>
See notes to financial statements.
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APPLIED SIGNAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
April 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 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 April 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 consolidated 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 shareholders 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
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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 Six Months Ended
-------------------------------- --------------------------------
April 28, 2000 April 30, 1999 April 28, 2000 April 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NUMERATOR
Net income: $2,303 $2,783 $4,419 $4,205
====== ====== ====== ======
DEMONINATOR
Shares used to compute net
income per common
share--basic 8,747 8,439 8,649 8,460
Effect of dilutive stock
options 407 201 353 267
------ ------ ------ ------
Shares used to compute net
income per common
share--diluted 9,154 8,640 9,002 8,727
====== ====== ====== ======
Net income per
common share--basic $ 0.26 $ 0.33 0.51 0.50
Net income per common
share--diluted $ 0.25 $ 0.32 0.49 0.48
</TABLE>
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COMPREHENSIVE INCOME
As of October 31, 1999, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 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,
which 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 Six Months Ended
April 28, 2000 April 30, 1999 April 28, 2000 April 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Income $2,302,469 $2,783,125 $4,418,903 $4,204,627
Unrealized gain (loss) 18,178 (119) 37,044 (29,342)
on available-for-sale
securities
Comprehensive income $2,320,647 $2,783,006 $4,455,947 $4,175,285
========== ========== ========== ==========
</TABLE>
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NOTE 2 -- INVENTORY
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
April 28, 2000 October 31, 1999
-------------- ----------------
<S> <C> <C>
Raw materials $ 1,067 $1,262
Work in process 10,092 4,328
Finished goods 429 927
------- ------
11,588 6,517
Precontract costs 138 229
------- ------
$11,726 $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 April 28, 2000, the unfavorable
inventoried variance was approximately $3,758,000, while at April 30, 1999 the
unfavorable inventoried variance was approximately $1,629,000 and was included
in work in process. At October 31, 1999 and 1998, the variance was zero since
all revenues and costs were recorded at the actual indirect rates for each
fiscal year end.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the attached
financial statements and notes thereto.
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, evaluate the characteristics of the collected signals and selects
signals that are likely to contain relevant information. 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
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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.
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 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
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telecommunication signals enables 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.
SUBSIDIARIES:
On March 9, 2000, the Board of Directors of Applied Signal Technology, Inc.
announced the formation of two new wholly owned subsidiaries, Transcendent
Technologies, Inc. and eNetSecure, Inc. and voted to fund each subsidiary
$1,000,000 effective the beginning of May 2000. The Board also decided to
transfer intellectual property developed by the parent company and capital
equipment to each subsidiary, as appropriate. The Board also decided that no
additional funding would be granted the subsidiaries until after the May 11,
2000 Board Meeting.
During the May 11, 2000 Board Meeting, the Board of Directors voted to fund the
subsidiaries an additional $2,000,000 each for a total investment of $6,000,000.
Applied Signal Technology, Inc. anticipates that each subsidiary will incur
start-up operational costs that will materially reduce third and fourth quarter
fiscal year 2000 net income and earnings per share relative to the respective
periods in 1999.
TRANSCENDENT TECHNOLOGIES, INC.:
The volume of data transferred and made available to individuals is growing
exponentially worldwide. Given the increasing constraints on satellite bandwidth
and wireless spectrum availability, the service providers are confronted with
the constant demands of finding more sophisticated ways to provide reliable
signal quality to their customers while meeting increasing capacity demands. As
wireless transport becomes an important part of the global information network
by providing "last mile" connectivity, the need to provide bandwidth efficient
communications techniques as well as effectively managing these networks only
becomes more critical to the service providers' success. This trend dictates
maximum efficiency of frequency spectrum usage by the commercial
telecommunications companies. The spectrum usage is especially critical in the
band-limited radio frequency (RF) environment that personal communications
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 had led the Company to believe that there will be a demand for
sophisticated network management and spectrum monitoring systems designed to
enhance the quality of satellite and terrestrial wireless communications.
Applied Signal Technology, Inc. believes that its signal processing prowess in
non-intrusive signal reconnaissance, developed over the years, will position
Transcendent Technologies, Inc. to capitalize on these expectations. Applied
Signal Technology, Inc. believes its knowledge and experience will
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position Transcendent Technologies, Inc. to understand the data transfer
techniques that will require these network management and spectrum monitoring
systems in the future.
ENETSECURE, INC.:
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 need for data system
intrusion detection. This intrusion detection must be performed without impact
upon the data transfer.
Applied Signal Technology, Inc. believes that the technological expertise it has
developed for signal reconnaissance positions eNetSecure, Inc. to develop and
market intrusion detection technology. In particular, Applied Signal
Technology's signal processing prowess provides the fundamentals for the further
development of intrusion detection equipment.
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THREE MONTHS AND SIX MONTHS ENDED APRIL 28, 2000 COMPARED TO THREE MONTHS AND
SIX MONTHS ENDED APRIL 30, 1999
RESULTS OF OPERATIONS:
REVENUES AND BACKLOG: Revenues for the second quarter of fiscal 2000 were
approximately $27,287,000, relatively unchanged from the second quarter of
fiscal 1999 revenues of approximately $27,590,000. Revenues for the six months
ended April 28, 2000 were approximately $53,815,000, up 7% from approximately
$50,438,000 for the first six months of fiscal 1999. The increase in fiscal 2000
year-to-date revenues were due, in part, to increased contract activity
resulting from a continued demand for the Company's products and services as
well as favorable adjustments in the estimated costs at completion on certain
contracts. These favorable adjustments resulted in higher average fees being
recognized on certain contracts for the Company's standard products.
New order levels for the second quarter of fiscal 2000 were approximately
$18,558,000, down 58% from order levels of approximately $44,591,000 for the
second quarter of fiscal 1999. New orders for the first six months of fiscal
2000 were approximately $33,978,000, down 35% compared to approximately
$52,417,000 reported for the same period of fiscal 1999. The year-to-date
decrease in fiscal 2000 order levels is due, in part, to delays of certain
contracts and, in part, due to the fact that a very large volume of orders were
recorded during the second quarter of fiscal year 1999.
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 $40,114,000 at April 28, 2000, a decrease of 22%
when compared to $51,123,000 at April 30, 1999. The decrease in backlog is due,
in part, to increased contractual activity required to meet contractual
commitments and, in part, due to delays in anticipated second quarter bookings.
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 61.6% for the second quarter of fiscal 2000 compared
to 59.8% for the same period of fiscal 1999. Contract costs as a percentage of
revenues for both the six months ended April 28, 2000 and April 30, 1999 were
61.7%. Contract costs as a percentage of revenue for the second quarter of
fiscal 2000 compared to second quarter of fiscal 1999 were higher primarily due
to an unfavorable cost overrun of approximately $1,284,000 on a major fixed
price development program. Contract costs as a percentage of revenue for the
first six months of fiscal 2000 were essentially unchanged from 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
target indirect rates. Research and development expenses as a percentage of
revenues were 11.8% and 12.6% for the second quarter of fiscal years 2000 and
1999, respectively. For the first six months of fiscal years 2000 and 1999
research and development expenses as a percentage of revenues were 10.3% and
12.3%, respectively. The quarter-to-quarter and year-to-year decline in R&D
expenses as a percentage of revenue is due to the Company concentrating its
efforts toward contract activity in favor of planned R&D spending because of a
lack of qualified staff.
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
$3,769,000 or 13.8%
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of revenues for the second quarter of fiscal 2000 compared to approximately
$3,247,000 or 11.8% of revenues for the same period of fiscal 1999. General and
administrative expenses for the first six months ended April 28, 2000 were
approximately $8,472,000 or 15.7% of revenues compared to approximately
$6,648,000 or 13.2% of revenues for the same period ended April 30, 1999.
General and administrative expenses as a percentage of revenues were higher
quarter-to-quarter and year-to-year due, in part, to higher marketing
expenditures and, in part, due to a higher indirect rate application estimated
for fiscal 2000 compared to the rate application estimated for fiscal 1999.
Consistent with government contracting requirements, the Company considers both
general and administrative and research and development expenses part of its
general and administrative indirect expense pool. Combined R&D and general and
administrative expenses of approximately $14,027,000 were 26.1% of revenues for
the first six months of fiscal 2000 compared to approximately $12,853,000 or
25.5% of revenues for the same period of fiscal 1999.
INTEREST INCOME/(EXPENSE), NET: Net interest income for the second quarter of
fiscal 2000 was approximately $218,000, up 77.2% from net interest income of
approximately $123,000 for the second quarter of fiscal 1999. Net interest
income for the first six months of fiscal 2000 was approximately $542,000, up
66.8% compared to approximately $325,000 reported for the same period of fiscal
1999. The increase in net interest income for the second quarter and the first
six months of fiscal 2000 compared to the prior year is due to the Company's
improved cash position at the beginning of the fiscal year, which allowed the
Company to place more funds than prior years into interest bearing accounts as
well as interest income recevied 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 six months of fiscal
years 2000 and 1999. The Company continues to recognize a consistent tax rate as
a result of estimated federal and state taxes.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
At April 28, 2000, cash and short-term investments totaled approximately
$20,196,000. 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 (8.5% as of
April 28, 2000). At both April 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
significantly varied 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 2000, approximately $4,299,000 was
provided by operating activities compared to approximately $2,344,000 provided
during the comparable period of fiscal 1999. The year-to-year increase in cash
from operating activities is primarily due to an increase in accounts receivable
of approximately $5,555,000 during the first six months of fiscal 2000 compared
to cash used of approximately $371,000 during the first six months of fiscal
1999. The cash provided by accounts receivable in the first six months of fiscal
2000 is primarily due to increased progress billings. During the first six
months of fiscal 2000, the Company increased its rate of investment in
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<PAGE> 17
inventories, prepaids and other current assets by approximately $2,147,000;
actual inventory decreased by approximately $527,000, the unfavorable variance
carried in inventory was approximately $3,758,000, and prepaids and other
current assets increased by approximately $408,000. In comparison, inventories,
prepaids and other current assets increased by approximately $762,000 during the
same period for fiscal 1999. Cash used in accrued payroll and related benefits
increased by approximately $657,000 for the first six months of fiscal 2000
compared to the same period in fiscal 1999 primarily because of profit sharing
bonuses paid to employees. Cash provided in income taxes payable decreased by
approximately $1,246,000 primarily due to more taxes paid in 1999 than 1998.
NET CASH FROM INVESTING ACTIVITIES: Cash used in investing activities during the
first six months of fiscal 2000 was approximately $10,454,000 compared to
approximately $2,937,000 used in investing activities during the same period of
fiscal 1999. The purchase of approximately $10,019,000 worth of U.S. Treasury
securities in the first six months of fiscal 2000 is the primary reason for the
increase in cash used. Additions to property and equipment were approximately
$2,435,000 and approximately $3,937,000 in the first six months of fiscal 2000
and 1999, respectively.
NET CASH FROM FINANCING ACTIVITIES: Cash provided by financing activities during
the first six months of fiscal 2000 was approximately $1,615,000 compared to
cash used of approximately $1,555,000 during the same period of fiscal 1999. The
increase in cash provided was due, in part, to fact that the Company did not
repurchase any shares of its common stock during the first six months of fiscal
2000 and in part, to the issuance of common stock under the Employee Stock
Purchase and Employee Stock Option Plans. The Company had no stock repurchase
activity during the first six months of fiscal 2000 compared to approximately
$2,743,000 repurchased during the same period of fiscal 1999. Cash was also
provided through the issuance of common stock under the Company's Employee Stock
Purchase and Employee Stock Option Plans of approximately $2,690,000 for the
first six months of fiscal 2000 compared to approximately $1,188,000 during the
comparable period in fiscal 1999. Cash of approximately $1,075,000 was used for
dividend payments to common stockholders during the first six months of fiscal
2000. The Company did not pay dividends during the first six months of fiscal
1999.
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
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<PAGE> 18
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 13.8% of
revenue for the first six months of fiscal 2000 compared to 26% attributable to
the same contract for the first six 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 future 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 future 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 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. The Company has taken steps 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 and 2000, 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 future results of
operations 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
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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 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 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 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.
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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.
INVESTMENT IN SUBSIDIARIES
As of May 11, 2000, Applied Signal Technology, Inc. will invest $3,000,000 into
each of its two subsidiaries, Transcendent Technologies, Inc. and eNetSecure,
Inc. for a total investment of $6,000,000. There are inherent risks with
investing in start-up businesses, however, Applied Signal Technology, Inc.
believes in the viability of each subsidiary and that a market does exist for
the products offered by these companies. There can be no assurances, however,
that such markets exist, if they do exist, and failure to develop the correct
products for the appropriate markets could have a material effect on Applied
Signal Technology's operating results and financial condition.
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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 affect on the operating results or 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 9, 2000.
The shareholders approved a proposal to elect three Class II 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 BROKER NON-VOTES
--- -------- ----------------
<S> <C> <C> <C>
James F. Collins 7,468,607 86,549
John R. Treichler 7,469,310 85,846
Stuart G. Whittelsey, Jr 7,535,751 19,405
</TABLE>
The shareholders ratified the appointment of Ernst & Young LLP as independent
public accountants of the Company for the fiscal year ending October 31, 2000.
The proposal received the following votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
--- ------- ----------- ----------------
<S> <C> <C> <C>
7,541,729 10,645 2,782
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Item 6. Exhibits and Reports on Form 8-K
Exhibits -- See Index to Exhibits
</TABLE>
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended April 28, 2000.
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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/ JAMES E. DOYLE JUNE 9, 2000
------------------------------------------ -----------------------
James E. Doyle
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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APPLIED SIGNAL TECHNOLOGY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
