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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 quarterly period ended July 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)
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400 West California Avenue
Sunnyvale, California 94086
(Address of principal executive offices including zip code)
(408) 749-1888
(Registrant's telephone number, including area code)
Indicate by check mark 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 period that the registrant was required to file 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, 9,006,613 shares outstanding as of September 5,
2000.
This Quarterly Report on Form 10-Q consists of 22 pages. The Exhibit Index is on Page 22.
APPLIED SIGNAL TECHNOLOGY, INC.
Report On Form 10-Q For The
Quarter Ended July 28, 2000
INDEX
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements (unaudited): |
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Condensed Consolidated Balance Sheets as of July 28, 2000 and October 31, 1999 |
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Condensed Consolidated Statements of Operations for the Three and Nine Months ended July 28, 2000 and July 30, 1999, respectively |
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Condensed Consolidated Statements of Cash Flows for the Nine Months ended July 28, 2000 and July 30,1999 |
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| Notes to Condensed Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| PART II. Other Information |
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| Item 1. Legal Proceedings |
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| Item 2: Changes in Securities and Use of Proceeds |
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| Item 3: Defaults Upon Senior Securities |
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| Item 4: Submission of Matters to a Vote of Security Holders |
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| Item 5: Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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| Signatures |
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS
(In thousands, except share data)
July 28, October 31,
2000 1999
------------ ------------
(unaudited) (note)
ASSETS
Current assets:
Cash and cash equivalents......................... $ 13,968 $ 16,680
Short term investments............................ 6,107 --
Accounts receivable:
Billed......................................... 12,976 19,746
Unbilled....................................... 19,065 16,992
------------ ------------
Total accounts receivable.................... 32,041 36,738
Inventory......................................... 10,109 6,746
Prepaid and other current assets.................. 3,472 3,312
------------ ------------
Total current assets........................... 65,697 63,476
Property and equipment, at cost:
Machinery and equipment........................... 39,278 37,719
Furniture and fixtures............................ 4,564 4,419
Leasehold improvements............................ 8,657 7,316
Construction in process........................... 446 329
------------ ------------
52,945 49,783
Accumulated depreciation and amortization........... (32,505) (29,268)
------------ ------------
Net property and equipment..................... 20,440 20,515
Other assets........................................ 58 43
------------ ------------
Total assets........................................ $ 86,195 $ 84,034
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 2,234 $ 4,838
Accrued payroll and related benefits.............. 7,707 7,506
Other accrued liabilities......................... 2,488 2,293
Income taxes payable.............................. 2,076 3,831
------------ ------------
Total current liabilities...................... 14,505 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--8,958,613
at July 28, 2000 and 8,442,239 at
October 31, 1999............................... 21,755 17,929
Retained earnings................................. 48,724 46,504
Accumulated other comprehensive income (loss)..... 78 --
------------ ------------
Total shareholders' equity.......................... 70,557 64,433
------------ ------------
Total liabilities and shareholders' equity........ $ 86,195 $ 84,034
============ ============
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.
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except share data)
Three Months Ended Nine Months Ended
---------------------- ----------------------
July 28, July 30, July 28, July 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenues from contracts......... $ 25,173 $ 27,555 $ 78,988 $ 77,993
Operating expenses:
Contract costs............... 19,290 17,410 52,493 48,538
Research and development..... 4,133 2,554 9,688 8,759
General and administrative... 4,212 4,535 12,684 11,183
---------- ---------- ---------- ----------
Total operating expenses... 27,635 24,499 74,865 68,480
---------- ---------- ---------- ----------
Operating income (loss)......... (2,462) 3,056 4,123 9,513
Interest income (expense), net.. 233 152 775 477
---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes... (2,229) 3,208 4,898 9,990
Provision (benefit) for
income taxes................. (1,680) 1,219 1,028 3,796
---------- ---------- ---------- ----------
Net income (loss)............... $ (549) $ 1,989 $ 3,870 $ 6,194
========== ========== ========== ==========
Net income (loss) per common
share:
Basic...................... $ (0.06) $ 0.24 $ 0.44 $ 0.74
Diluted.................... $ (0.06) $ 0.23 $ 0.43 $ 0.71
Number of shares used in
calculating net income (loss)
per common share:
Basic...................... 8,889 8,446 8,730 8,424
Diluted.................... 8,889 8,707 9,028 8,689
See notes to financial statements.
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(UNAUDITED)
(in thousands)
Nine Months Ended
------------------------
July 28, July 30,
2000 1999
----------- -----------
OPERATING ACTIVITIES:
Net income........................................... $ $3,870 $ $6,194
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization..................... 3,236 3,554
Changes in:
Accounts receivable............................... 4,697 84
Inventory, prepaids and other assets.............. (3,537) (4,079)
Accounts payable, taxes payable and
accrued expenses................................ (3,988) 2,085
----------- -----------
Net cash provided by operating activities......... 4,278 7,838
----------- -----------
INVESTING ACTIVITIES:
Purchase of available-for-sale securities............ (15,058) --
Maturity of available-for-sale securities............ 9,029 1,000
Additions to property and equipment.................. (3,162) (5,437)
----------- -----------
Net cash used in investing activities............. (9,191) (4,437)
----------- -----------
FINANCING ACTIVITIES:
Issuances of common stock............................ 3,826 2,380
Repurchases of common stock.......................... -- (3,211)
Dividends paid....................................... (1,625) --
----------- -----------
Net cash provided by (used in) financing
activities.................................... 2,201 (831)
----------- -----------
Net decrease in cash and cash equivalents............ (2,712) 2,570
Cash and cash equivalents, beginning of period....... 16,680 14,085
----------- -----------
Cash and cash equivalents, end of period............. $ 13,968 $ 16,655
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid..................................... $ 19 $ 17
Income taxes paid................................. $ 2,783 $ 2,293
See notes to financial statements.
APPLIED SIGNAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
July 28, 2000
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 nine-month period ending July 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 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):
Three Months Ended Nine Months Ended
---------------------- ----------------------
July 28, July 30, July 28, July 30,
2000 1999 2000 1999
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NUMERATOR
Net income (loss)............... $ (549) $ 1,989 $ 3,870 $ 6,194
========== ========== ========== ==========
DEMONINATOR
Shares used to compute net
income (loss) per common
share--basic................. 8,889 8,446 8,730 8,424
Effect of dilutive stock
options...................... -- 261 298 265
---------- ---------- ---------- ----------
Shares used to compute net
income (loss) per common
share--diluted............... 8,889 8,707 9,028 8,689
========== ========== ========== ==========
Net income (loss) per
common share--basic.......... $ (0.06) $ 0.24 $ 0.44 $ 0.74
Net income (loss) per
common share--diluted........ $ (0.06) $ 0.23 $ 0.43 $ 0.71
For the three months ended July 28, 2000, 185,000 stock options were excluded from the number of shares used to compute diluted net loss per common share as their effect would be antidilutive.
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 (in thousands):
Three Months Ended Nine Months Ended
---------------------- ----------------------
July 28, July 30, July 28, July 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income (loss)............... $ (549) $ 1,989 $ 3,870 $ 6,194
Unrealized gain (loss)
on available-for-sale
securities................... 41 -- 78 --
---------- ---------- ---------- ----------
Comprehensive income (loss)..... $ (508) $ 1,989 $ 3,948 $ 6,194
========== ========== ========== ==========
NOTE 2 -- INVENTORY
The components of inventory consist of the following (in thousands):
July 28, October 31,
2000 1999
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Raw materials........................ $ 1,214 $ 1,262
Work in process...................... 8,225 4,328
Finished goods....................... 458 927
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9,897 6,517
Precontract costs.................... 212 229
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$ 10,109 $ 6,746
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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 28, 2000 and July 30, 1999 the inventoried variance was approximately $1,978,000 (unfavorable) and $1,932,000 (unfavorable), respectively, 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.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standard No.133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which will be effective for the year ending October 31, 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either and asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. Applied Signal Technology, Inc. believes the adoption of SFAS 133 will not have a material effect on the financial statements, since it currently does not invest in derivative instruments and engage in hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", or SAB 101. SAB 101 summarizes certain of the SEC Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes the anticipated impact of adoption of SAB 101 will not be material to the operating results and financial position of the Company.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation" ("FIN 44"), which contains rules designed to clarify the application of APB 25. FIN 44 will be effective on July 1, 2000 and the Company will adopt it at that time. At this time, the Company believes the anticipated impact of adoption of FIN 44 will not be material to the operating results and financial position of the Company.
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 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 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 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 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.
THREE MONTHS AND NINE MONTHS ENDED JULY 28, 2000 COMPARED TO THREE MONTHS AND NINE MONTHS ENDED JULY 30, 1999
RESULTS OF OPERATIONS:
REVENUES AND BACKLOG: Revenues for the third quarter of fiscal 2000 were approximately $25,173,000, which represents a 9% decrease over the third quarter of fiscal 1999 revenues of approximately $27,555,000. Revenues for the first nine months of fiscal 2000 were approximately $78,988,000, materially unchanged from the third quarter of fiscal 1999 revenues of approximately $77,993,000. The reduction in third quarter revenues is due to a decrease in demand for the Company's products and services. A net loss of approximately $549,000 was recognized for the third quarter of fiscal 2000 compared to net income of approximately $1,989,000 for the third quarter of fiscal 1999. The net loss for the quarter is due primarily to absorbing approximately $3,000,000 of anticipated unrecoverable indirect costs resulting from slower than expected revenue growth and losses of approximately $1,098,000 incurred by the Company's subsidiaries. These losses were favorably impacted by a reduction in the Company's effective tax rate.
Order levels for the third quarter of fiscal 2000 were approximately $19,033,000, down 41% from approximately $32,305,000 reported for the same period of fiscal 1999. Order levels for the first nine months of fiscal 2000 were approximately $53,010,000, down 37% compared to approximately $84,722,000 reported for the same period of fiscal 1999. The decrease in orders for third quarter and year-to-date is due to delays of certain engineering development contracts and to fewer product orders. For comparative purposes, it should be noted that a very large volume of orders were recorded in 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 $38,963,000 at July 28, 2000, a decrease of 31% when compared to approximately $56,109,000 at July 30, 1999. The decrease in backlog is due primarily to delays of certain engineering development contracts and to fewer product orders.
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 76.6% for the third quarter of fiscal 2000 compared to 63.2% for the same period of fiscal 1999. Contract costs, as a percentage of revenues, for the nine months ended July 28, 2000 and July 30, 1999 were 66.5% and 62.2%, respectively. Contract costs, as a percentage of revenue, for the third quarter of fiscal 2000 and year-to-date compared to the same periods of fiscal 1999 were higher primarily due to absorbing approximately $3,000,000 and approximately $4,200,000, respectively, of anticipated unrecoverable indirect costs resulting from slower than expected revenue growth.
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 16.4% and 9.3% for the third quarter of fiscal years 2000 and 1999, respectively. For the first nine months of fiscal years 2000 and 1999, research and development expenses as a percentage of revenues were 12.3% and 11.2%, respectively. The quarter-to- quarter increase in R&D expenses as a percentage of revenue is due, in part, to the parent Company's increased R&D spending caused by delays in engineering contracts during the third quarter and, in part, to R&D spending by the Company's subsidiaries. Year-to-date R&D expense increased as a percentage of revenue primarily because of higher indirect overhead rates applied to R&D labor.
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 $4,212,000 or 16.7% of revenues for the third quarter of fiscal 2000 compared to approximately $4,535,000 or 16.5% of revenues for the same period of fiscal 1999. General and administrative expenses for the first nine months ended July 28, 2000 were approximately $12,684,000 or 16.1% of revenues compared to approximately $11,183,000 or 14.3% of revenues for the same period ended July 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, a higher indirect rate application estimated for fiscal 2000 compared to the rate application estimated for fiscal 1999.
Consistent with government contracting requirements, the parent Company considers both general and administrative and research and development expenses part of its general and administrative indirect expense pool. Consolidated and combined R&D and general and administrative expenses of approximately $22,372,000 were 28.3% of revenues for the first nine months of fiscal 2000 compared to approximately $19,942,000 or 25.6% of revenues for the same period of fiscal 1999.
INTEREST INCOME/(EXPENSE), NET: Net interest income for the third quarter of fiscal 2000 was approximately $233,000, up 53.3% from net interest income of approximately $152,000 for the third quarter of fiscal 1999. Net interest income for the first nine months of fiscal 2000 was approximately $775,000, up 62.5% compared to approximately $477,000 reported for the same period of fiscal 1999. The increase in net interest income for the third quarter and the first nine 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 the prior year into interest bearing accounts as well as interest income received on a state income tax receivable.
PROVISION FOR INCOME TAXES: The provision for income taxes as a percentage of income before income taxes was 21% for the first nine months of fiscal year 2000 compared to 38% for the first six months of fiscal year 1999. The Company changed its estimated tax rate during the third quarter of fiscal 2000 because of lower projected net income in fiscal year 2000 caused by expected losses from anticipated unabsorbed indirect costs and losses from the Company's subsidiaries.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
At April 28, 2000, cash and cash equivalents 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 July 28, 2000). At both July 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 or prior to its expiration.
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 nine months of fiscal 2000, approximately $4,278,000 was provided by operating activities compared to approximately $7,838,000 provided during the comparable period of fiscal 1999. The year-to-year decline in cash provided from operating activities is due primarily to the decline in net income as a result of the third quarter fiscal 2000 net losses. Cash generated from net income decreased approximately $2,324,000 during the first nine months of fiscal 2000 compared to the comparable period of fiscal 1999. The decrease in net income is primarily attributable to absorbing approximately $4,200,000 of anticipated unrecoverable indirect costs resulting from slower than expected revenue growth. The cash provided by accounts receivable in the first nine months of fiscal 2000 of approximately $4,697,000 compared to cash provided of approximately $84,000 during the first nine months of fiscal 1999 is due primarily to greater cash receipts as a result of improved progress billings during the first and second quarter of fiscal 2000. During the first nine months of fiscal 2000, the Company decreased its rate of investment in inventories, prepaids and other current assets by approximately $542,000; actual inventory decreased by approximately $911,000, the unfavorable variance carried in inventory was approximately $1,978,000, and prepaids and other current assets increased by approximately $226,000. In comparison, inventories, prepaids and other current assets increased by approximately $1,683,000 during the same period for fiscal 1999 and the unfavorable variance was approximately $1,932,000. Cash used in accounts payable, taxes payable and accrued expenses of approximately $3,988,000 increased during the first nine months of fiscal 2000 compared to cash provided of $2,085,000 during the comparable period of fiscal 1999 due, in part, to greater income taxes paid and, in part, to increased direct material payments. Cash provided in accrued payroll and related benefits decreased by approximately $580,000 for the first nine months of fiscal 2000 compared to the same period in fiscal 1999 primarily due to a loss of qualified staff from the Company's payroll.
NET CASH FROM INVESTING ACTIVITIES: Cash used in investing activities during the first nine months of fiscal 2000 was approximately $9,191,000 compared to approximately $4,437,000 used in investing activities during the same period of fiscal 1999. The purchase of approximately $15,058,000 worth of U.S. Treasury securities in the first nine months of fiscal 2000 is the primary reason for the increase in cash used. The maturity of approximately $9,029,000 worth of U.S. Treasury securities in the first nine months of fiscal 2000 compared to the sale of approximately $1,000,000 in investments during the comparable period in fiscal 1999 is the primary reason for the increase in cash provided from investing activities. Additions to property and equipment were approximately $3,162,000 and approximately $5,437,000 in the first nine months of fiscal 2000 and 1999, respectively.
NET CASH FROM FINANCING ACTIVITIES: Cash provided by financing activities during the first nine months of fiscal 2000 was approximately $2,201,000 compared to cash used of approximately $831,000 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 nine 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 nine months of fiscal 2000 compared to approximately $3,211,000 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 $3,826,000 for the first nine months of fiscal 2000 compared to approximately $2,380,000 during the comparable period in fiscal 1999. Cash of approximately $1,625,000 was used for dividend payments to common stockholders during the first nine months of fiscal 2000. The Company did not pay dividends during the first nine 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 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% of revenue for the first nine months of fiscal 2000 compared to 23% attributable to the same contract for the first nine 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 help in attracting and retaining 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 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.
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. invested $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.
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 5. Other Information
2000 INCENTIVE STOCK OPTION PLAN: During the May 11, 2000 Board Meeting, the Directors adopted a new incentive stock option plan in order to attract and retain employees. A total of 500,000 shares of common stock are available for grant under the plan. If the plan is not approved by shareholders, the options granted to employees will become non-qualified options. Directors and officers are excluded from participation in the plan until it is approved by shareholders.
SUBSIDIARY CAPITAL STRUCTURE: As of August 31, 2000, Applied Signal Technology, Inc. had purchased 30,000,000 shares of common stock in eNetSecure, Inc., and 30,000,000 shares of common stock in Transcendent Technologies, Inc. Each subsidiary has authorized 7,000,000 shares of common stock as incentive stock options for its employees. As of July 28, 2000, eNetSecure, Inc. and Transcendent Technologies, Inc. had granted incentive stock options of 1,430,000 and 2,185,000, respectively, to its employees.
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 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.
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Applied Signal Technology, Inc. |
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(Registrant) |
Dated: September 8, 2000
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By: |
/s/ JAMES E. DOYLE |
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James E. Doyle |
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Vice President and Chief Financial Officer |
APPLIED SIGNAL TECHNOLOGY
INDEX TO EXHIBITS
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Exhibit Number |
Description |
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27.1 |
Financial Data Schedule |
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