Item 1: Business (Continued)
Signal Reconnaissance
Applied Signal Technology's objective is to anticipate the signal reconnaissance needs of the United States government and to invest in research and development in an effort to provide solutions before the Company's competitors. In some cases, this involves the development of equipment to address new telecommunications technologies. In other cases, it involves the development of equipment that offers smaller size, lower power consumption and lower cost than potentially competitive products. The Company's strategy to accomplish its objective includes the following elements:
- Anticipate Government Needs. The Company devotes significant resources in order to understand the United States government's signal reconnaissance goals, capabilities, and perceived future needs. The Company monitors technological and commercial advances in telecommunications to identify advances it believes may have an impact on the United States government's signal reconnaissance programs. The Company obtains information about the United States government's signal reconnaissance needs through frequent contact with employees and technical and contracting officials of the United Stated government. In contrast, the Company believes that its competitors often wait until the United States government requests competitive proposals for equipment to satisfy specific requirements and then respond to these requests.
Sole source contracts are let by the United States government when a single contractor is deemed to have an expertise or technology that is superior to that of competing contractors. Since the Company's inception, almost all of its revenues have been from sole source contracts. The Company believes that the large number of sole source contracts it obtains demonstrates that it often anticipates the signal reconnaissance needs of the United States government correctly. There can be no assurance, however, that the Company will anticipate correctly the signal reconnaissance needs of the United States government in the future.
- Invest in Research and Development. The Company invests in research and development (R&D) it believes will enable it to develop signal reconnaissance equipment that will satisfy the needs of the United States government. The Company believes that it invests a greater percentage of its revenues in R&D than is typical among its competitors. The Company believes that it is unusual for its competitors to invest in R&D at this high level. The Company believes its R&D investments often enable it to offer superior products before its competitors once the United States government identifies a need.
- Develop Flexible Products. The Company develops signal reconnaissance products that can be used, with or without further modification, to satisfy the needs of a variety of customers. The Company uses its prior product development efforts to offer customers cost-effective solutions and to offer these solutions promptly. The Company believes that custom equipment developed by many of the Company's competitors, generally, cannot be as readily deployed in as wide a variety of circumstances as the Company's products.
- Develop Highly Integrated Products. 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. The lower cost of many of the Company's products appeals to customers with budget constraints and the smaller size and low power consumption of many of the Company's products appeal to customers with physical installation constraints.
- Focus on Signal Processing. Since inception, the Company has focused much of its attention on developing signal processing equipment. The Company believes that there have been and will continue to be more opportunities to develop specialized signal processing equipment than collection equipment as new types of signals can often be collected with available collection equipment but cannot be processed by available processing equipment.
- Increase Penetration and Broaden Customer Base. The Company believes that its current customers offer significant additional opportunities for sales growth both in terms of additional units of developed products and the development of new products and, accordingly, directs much of its marketing efforts toward these customers. The Company attempts to broaden its customer base through marketing efforts directed at United States government agencies that are not now customers (that is, certain military and law enforcement agencies) as well as at offices within its agency customers that have not contracted with the Company previously.
Commercial Telecommunication Products
The Company's strategy for commercial marketplace penetration is to take full advantage of the R&D funded by government contracts over the years. This R&D is the result of government development contracts and the Company's independent R&D (IR&D). As a result of these investments, the Company believes it has developed technology that commercial companies require and the Company attempts to seek strategic partnering relationships with certain of these commercial companies to infuse this technology.
The Company's products consist of signal collection and processing equipment that use software and hardware developed over many years by the Company in the course of performing hundreds of development contracts to provide signal reconnaissance equipment to the United States government. This software and hardware enables the Company's processing equipment to evaluate large numbers of radio frequency signals and to select the relatively small proportion which contain information likely to be useful in the signal reconnaissance programs of the United States government. Further, the Company has recently begun developing a line of products using existing technology for use in the commercial telecommunications market.
The Company offers a variety of signal reconnaissance products, which can be categorized as follows:
- Voice Grade Channel Processors. These processors are designed to process voice grade channels (VGCs) which carry audio and other signals. The standard telecommunication systems used throughout the world put a large number of VGCs on a single carrier channel to increase the number of signals that can be transmitted at a particular frequency. VGC processors can scan thousands of signals in less than one second and use sophisticated processing technology to detect and record relevant data which is then analyzed by United States government personnel. These processors evaluate the characteristics of collected signals and select signals that are likely to contain relevant information. The Company's VGC processors currently range in price from approximately $40,000 to approximately $200,000.
- Wideband Processors. These processors "clean" telecommunication signals for further processing by VGC processors by adjusting for signal distortions that commonly occur during transmission. The two primary types of distortion these processors correct are multipath interference (caused by the reception of a signal and its reflections) and cochannel interference (caused by the reception of multiple interfering signals). Commercial telecommunications companies overcome these distortions with careful alignment and tuning which requires interruption of the telecommunication signals. The Company's wideband processors perform this alignment independently and automatically by adjusting processing parameters using proprietary adaptive algorithms that let the processors "learn" how to process the incoming signals. One of the Company's wideband processors processes signals that carry thousands of VGCs in a digital format which is rapidly being proliferated through the world and is particularly susceptible to distortions. The Company's wideband processors currently range in price from approximately $80,000 to approximately $150,000.
- Processing Systems. Although the Company has emphasized subsystem or "product" development, since its inception it has also developed and delivered six major signal processing systems in situations where the capabilities of its products have enabled it to obtain a system development contract on a sole source basis from the United States government. The Company's two largest system installations, for which the Company developed custom systems software, integrated a number of the Company's standard VGC processors and were developed to exacting United States government software and documentation standards. These systems accounted for approximately $11.0 million of revenue earned over a three-year period ending in fiscal year 1994. The Company's systems vary in price depending upon the configuration of the system.
- Collection Products. The Company offers a limited number of signal collection products designed to complement certain of the Company's processing products. The Company's collection products include a low-cost, small-size receiver that collects very complex signaling formats and a receiver that overcomes cochannel interference and certain forms of multipath interference by optimizing multiple antenna inputs. The Company's collection products currently range in price from approximately $20,000 to approximately $60,000.
In addition to its line of signal reconnaissance products, the Company has recently started development of commercial products. The types of commercial products that the Company is developing can be categorized as follows:
- Digital Video Processing Equipment. The market for this category of equipment will take the form of a complete television set-top converter. For its part, the Company is developing a key processing function of digital demodulation in one ASIC to be marketed to set-top converter manufacturers.
- Cellular Radio Processing Equipment. This equipment is developed to improve the economics of cellular networks for operating companies. Fraud detection equipment helps identify and eliminate fraudulent (non-revenue bearing) usage of cellular systems. Adaptive processing equipment for basestations can increase the number of cellular radio channels available to increase the economic value of a cellular system.
- Telecommunication Quality Monitoring Equipment. This equipment provides non-invasive test capability to ensure toll quality data transmission on all portions of a telecommunication system.