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 MAY 1, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from
____________________to ____________________.
Commission file number 0-21236
APPLIED SIGNAL TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0015491
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 WEST CALIFORNIA AVENUE, SUNNYVALE, CA 94086
(408) 749-1888
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by a check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days YES [X] NO [ ]
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, no par value, 8,532,162 shares outstanding as of June 5, 1998.
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
APPLIED SIGNAL TECHNOLOGY, INC.
BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
May 1, October 31
1998 1997
---------- ----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash $6,126 $7,403
Short-term investments 4,544 1,331
Accounts receivable:
Billed 14,615 20,496
Unbilled 15,192 12,152
---------- ----------
Total accounts receivable 29,807 32,648
Inventory 6,812 4,821
Prepaid and other current assets 2,480 2,176
---------- ----------
Total current assets 49,769 48,379
Property and equipment, at cost:
Machinery and equipment 29,535 27,312
Furniture and fixtures 3,940 3,650
Leasehold improvements 5,617 5,310
Construction in process 1,159 419
---------- ----------
40,251 36,691
Accumulated depreciation and amortization (23,016) (20,980)
---------- ----------
Net property and equipment 17,235 15,711
Long-term investments -- --
Other assets 69 71
---------- ----------
Total assets $67,073 $64,161
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,064 $3,705
Accrued payroll and related benefits 5,095 6,295
Other accrued liabilities 1,937 1,877
Income taxes payable 2,845 1,567
---------- ----------
Total current liabilities 12,941 13,444
Deferred income taxes 951 951
Shareholders' equity:
Common stock, no par value: 20,000,000 shares
authorized; issued and outstanding -- 8,449,562 at
May 1, 1998 and 8,351,629 at October 31, 1997 20,828 22,197
Retained earnings 32,308 27,539
Net unrealized gain on securities 45 30
---------- ----------
Total shareholders' equity 53,181 49,766
---------- ----------
Total liabilities and
shareholders' equity $67,073 $64,161
========== ==========
</TABLE>
Note: The balance sheet at October 31, 1997 has been derived from the audited
balance sheet at that date but does not include all of the information
required by generally accepted accounting principles for complete
financial statements.
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- -------------------
May 1, May 2, May 1, May 2,
1998 1997 1998 1997
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues from contracts $27,732 $23,987 $52,093 $44,071
Operating expenses:
Contract costs 17,327 15,742 32,422 28,878
Research and development 1,823 2,394 3,416 4,864
General and administrative 4,524 3,171 8,729 6,353
---------- ---------- --------- ---------
Total operating expenses 23,674 21,307 44,567 40,095
---------- ---------- --------- ---------
Operating income 4,058 2,680 7,526 3,976
Interest income(expense), net 145 38 292 98
---------- ---------- --------- ---------
Income before provision
for income taxes 4,203 2,718 7,818 4,074
Provision for income taxes 1,639 992 3,049 1,487
---------- ---------- --------- ---------
Net income $2,564 $1,726 $4,769 $2,587
========== ========== ========= =========
Earnings per share - basic $0.30 $0.21 $0.56 $0.32
Average share - basic 8,580 8,032 8,529 8,005
Earnings per share - diluted $0.28 $0.21 $0.53 $0.32
Average shares - diluted 9,000 8,156 8,976 8,135
</TABLE>
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
May 1, May 2,
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $4,769 $2,587
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,036 1,966
Changes in:
Accounts receivable 2,841 (1,552)
Inventory, prepaids and other assets (2,294) (2,531)
Accounts payable and accrued liabilities (501) 538
---------- ----------
Net cash provided by operating activities 6,851 1,008
INVESTING ACTIVITIES:
Purchase of investments (5,000) 0
Maturity of investments 1,800 --
Additions to property and equipment (3,560) (3,137)
---------- ----------
Net cash used in investing activities (6,760) (3,137)
FINANCING ACTIVITIES:
Issuance of common stock 1,572 570
Repurchase of common stock (2,940) --
---------- ----------
Net cash provided by (used in) financing activi (1,368) 570
Net decrease in cash (1,277) (1,559)
Cash, beginning of period 7,403 1,559
---------- ----------
Cash, end of period $6,126 $0
========== ==========
Supplemental disclosures of cash flow information:
Interest paid $17 $30
Income taxes paid $1,771 $1,720
</TABLE>
See notes to financial statements.
<PAGE>
APPLIED SIGNAL TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
May 1, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed 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 only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the six month period ending May 1, 1998 are not necessarily indicative
of the results that may be expected for the year ending October 31, 1998. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
October 31, 1997.
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. As of
May 1, 1998, the contractual maturities of the debt securities are
staggered to mature by November 12, 1998.
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
revenues, 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 revenues 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.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 128, "Earnings per Share."
("Statement 128"). Statement 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutieve effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where necessary, restated to conform to Statement 128
requirements.
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
--------------------- -------------------
May 1, May 2, May 1, May 2,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income 2,564 1,725 4,769 2,587
======= ======= ======= =======
Weighted average shares outstanding 8,580 8,032 8,529 8,005
Basic net income per share $0.30 $0.21 $0.56 $0.32
======= ======= ======= =======
Shares used in computing basic net income per share 8,580 8,032 8,529 8,005
Dilutive stock options 420 124 447 130
--------- --------- --------- ---------
Adjusted weighted average shares 9,000 8,156 8,976 8,135
Diluted net income per share $0.28 $0.21 $0.53 $0.32
======= ======= ======= =======
</TABLE>
NOTE 2 -- INVENTORY
The components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
May 1, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
Raw Materials $1,190 $1,121
Work in Process 5,356 3,131
Finished Goods 259 279
------ ------
6,805 4,531
Precontract Costs 7 290
------ ------
$6,812 $4,821
====== ======
</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 May 1, 1998, the
unfavorable inventoried variance was approximately $224,000 while at May 2,
1997, the favorable inventoried variance was $70,000; each variance was
included in work in process. At October 31, 1997, the variance was zero
since all revenues and costs were recorded at the actual indirect rates for
the fiscal year end.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the attached
financial statements and notes thereto.
Forward-looking statements in this report are made pursuant to the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934. In this
report, the words "anticipates," "believes," "expects," "future," "intends,"
and similar expressions identify forward-looking statements. Shareholders
are cautioned that all forward-looking statements pertaining to the Company
involve risks and uncertainties, including, without limitation, those
contained under the caption, "Summary of Business Considerations and Certain
Factors that May Affect Future Results of Operations and/or Stock Price"
and other risks detailed from time to time in the Company's periodic reports
and other information filed with the Securities and Exchange Commission.
Actual events and results may differ materially from the Company's current
expectations and beliefs.
BUSINESS ENVIRONMENT/BACKGROUND:
Applied Signal Technology, Inc. (Applied Signal Technology or the
Company) designs, develops, and manufactures signal processing
equipment to collect and process a wide range of telecommunication
signals. This equipment is used predominantly by the United States Govern-
ment and allied foreign governments for reconnaissance of foreign tele-
communications. Signal reconnaissance systems are composed of
collection equipment and processing equipment. Collection equipment
consists of sophisticated receivers that scan the radio frequency (RF)
spectrum (cellular telephone, microwave, ship-to-shore, and military
transmissions) to collect certain signals from, potentially, thousands
of signals within the RF spectrum. Signal processing equipment, using
sophisticated software and hardware, evaluates the characteristics of
the collected signals and selects signals that are likely to contain
relevant information. Since inception, the Company has focused its
efforts primarily on processing equipment, but also provides
specialized collection equipment, as well as complete signal
reconnaissance systems.
The Company's business strategy is to capitalize on the forces of
change within the U.S. Government and in the world today. As set forth
in Secretary of Defense William Cohen's message preceding the
Quadrennial Defense Review (10/97), the United States Government must
seek out opportunities to outsource and privatize non-core activities
which have been restrained by regulations and practices built up
during the Cold War. The Secretary also stated that the United States
Government needs to deregulate much of the defense industry to reap
the cost and creativity benefits of full and open private competition.
Further, as stated in the Quadrennial Defense Review, "We must have a
globally vigilant intelligence system to provide early strategic
warning of crisis and detect threats in an environment complicated by
more actors and more sophisticated technology." It is the Company's
intent to capitalize on these forces of change and create
opportunities for continued growth for Applied Signal Technology.
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
South America, has heightened the United States Government's need to
be able to monitor overseas activities. In order to obtain information
about activities within foreign countries, the United States
Government gathers and analyzes telecommunication signals emanating
from those countries.
The Company devotes significant resources toward understanding the
United States Government's signal reconnaissance goals, capabilities
and perceived future needs. The Company obtains information about
these signal reconnaissance needs through frequent marketing contact
between its employees and technical and contracting officials of the
United States Government. The Company believes that it has more
marketing contact with customers and potential customers than is
customary among its competitors. In addition, the Company invests in
research and development (R&D) which it anticipates will enable it to
develop signal reconnaissance equipment that meets these needs. The
Company believes that it invests a greater percentage of its revenues
in R&D than is typical among its competitors. (See "Research and
Development.")
Budgetary constraints and critical time-to-deployment requirements
have caused many United States Government agencies to search for more
flexible and cost-effective signal reconnaissance solutions that can
be deployed promptly. The Company's signal reconnaissance products can
be used, with or without further modification, to satisfy requirements
of a variety of customers. The Company believes its products can be
readily deployed in a wide variety of circumstances to meet current
United States Government signal reconnaissance requirements. The
Company designs its products to use advanced circuitry and highly
integrated components, including Company-designed application-specific
integrated circuits (ASICs). This enables the Company to offer
products that are smaller, consume less power, and cost customers less
when multiple units are built than equipment of similar functionality
that use fewer advanced designs and materials.
QUARTER AND SIX MONTHS ENDED MAY 1, 1998 COMPARED TO
QUARTER AND SIX MONTHS ENDED MAY 2, 1997:
RESULTS OF OPERATIONS:
REVENUES AND BACKLOG: Revenues for the second quarter
of fiscal 1998 were approximately $27,732,000,
representing a 16% increase over the second quarter of
fiscal 1997 revenues of approximately $23,987,000.
Revenues for the six months ended May 1, 1998 were approximately
$52,093,000, up 18% from $44,071,000 for the first six
months of fiscal 1997. The increase in the second
quarter and year-to-date revenues is primarily
attributable to the increased contract activity on both
development contracts as well as product sales, and due
to the Company's ability to attract and retain personnel.
New order levels for the second quarter were
approximately $16,351,000, down 32% from record order
levels of approximately $24,181,000 reported for the
second quarter of fiscal 1997. New orders for the first
six months of fiscal 1998 were approximately
$26,352,000, down 20% compared to the $32,875,000
reported for the same period of fiscal 1997. The
decrease in order levels seen during the second quarter
of fiscal 1998 is due in part to what management
believes has been uncertainty among its customer
regarding budget allocations and, in part, due to a
delay of certain contract awards.
The Company's backlog, which consists of anticipated
revenues from the uncompleted portions of existing
contracts (excluding unexercised options) was
approximately $57,526,000 at May 1, 1998, a decrease of
20% when compared to the backlog of approximately
$71,923,000 at May 2, 1997. The decrease in backlog as
of May 1, 1998 is due in part to the low order levels
experienced in the first six months of fiscal 1998 and,
in part, due to completion of certain multi-year contracts.
CONTRACT COSTS: Contract costs consist of direct costs
on contracts, including materials and labor, and
manufacturing overhead costs. Contract costs as a
percentage of revenue were 62.6% for the second quarter
of fiscal 1998 versus 65.6% for the same period of
fiscal 1997. Contract costs as a percentage of revenues
for the six months ended May 1, 1998 were 62.2% versus
65.5% for the first six months of fiscal 1997. Contract
costs as a percentage of revenue for the second quarter
and first six months of fiscal 1998 were down primarily
due to price decreases realized for component parts as
well as efficiency gains related to larger production runs
on certain contracts. Further, contract costs as a
percentage of revenue for the first six months of fiscal 1997
were abnormally high due primarily to recording a
reserve in the second quarter in anticipation of
unfavorable indirect spending variances.
RESEARCH AND DEVELOPMENT (R&D): Company-directed
investment in research and development consists of
expenditures recoverable from customers through the
Company's billing rates and expenditures funded by the
Company from earnings. It is the Company's accounting
practice to record R&D expenses based on annual targeted
indirect rates. (See "Notes to Financial Statements;
Note 2 - Inventory.") Research and development expenses
as a percentage of revenues were 6.0% and 10.0% for the
second quarter of fiscal years 1998 and 1997,
respectively. For the first six months of fiscal years
1998 and 1997 research and development expenses as a
percentage of revenues were 6.5% and 11.0%,
respectively. Although R&D spending was in-line with
the Company's budgeted amounts, the amount reflected on the
financial statements is lower than the first six months of
fiscal 1997 due to the application of a lower overhead
and G&A target rates previously noted in the
"Notes to Financial Statements; Note 2 - Inventory."
During fiscal 1998, the Company made a decision to
recover more of its R&D spending in its billing rates.
Accordingly, the Company did not fund any investment in
R&D for the first six months of fiscal 1998 as compared
to 2.2% of revenues for the first six months of fiscal
1997. In future periods, the Company intends to fund
investments in research and development in an effort to
meet customers' needs before its competitors; however,
there can be no assurances that the Company will be able
to develop and market new products successfully in the
future.
GENERAL AND ADMINISTRATIVE: General and administrative
expenses include administrative salaries, costs related
to the Company's marketing and proposal activities and
other administrative costs. It is the Company's
accounting practice to record general and administrative
expenses based on annual targeted indirect rates. (See
"Notes to Financial Statements; Note 2 - Inventory.")
General and administrative expenses were approximately
$4,524,000 or 16.3% of revenues for the second
quarter of fiscal 1998 compared to approximately
$3,171,000 or 13.2% of revenues for the second quarter of
fiscal 1997. General and administrative expenses were
approximately $8,729,000 or 16.8% of revenues and approximately
$6,353,000 or 14.4% of revenues for the six months ended
May 1, 1998 and May 2, 1997, respectively. Consistent with
government contracting methodology, the Company considers both
general and administrative expenses and research and development
expenses part of its general and administrative indirect expense
pool. Combined, R&D and general and administrative expenses were
23.3% of revenues for the first six months of fiscal 1998
compared to 25.4% for the same period of fiscal 1997. General
and administrative expenses as a percentage of revenues were
down for the quarter and year-to-date periods in fiscal 1998 due,
in part, to higher profits recorded during the second quarter and
six months of fiscal 1998 compared to the same periods of
fiscal 1997 and, in part, due to the lower targeted general and
administrative rate being applied to contracts during the
fiscal year.
INTEREST INCOME/(EXPENSE): For the quarter ended May 1,
1998, interest income was approximately $147,000 up from
approximately $37,000 of interest income for the same
period of fiscal 1997. Interest income for the first
six months of fiscal 1998 was approximately $292,000
compared to interest income of approximately $98,000 for
the same period of fiscal 1997. The increase in
interest income for the second quarter and for the first
six months of fiscal 1998 is due primarily to the
Company's ability to generate cash from operations due
to improved profitability.
PROVISION FOR INCOME TAXES: The provision for income
taxes as a percentage of net income before income taxes
was 39.0% for the second quarter and for the first six
months of fiscal 1998, compared to 36.5% for the same
periods of fiscal 1997. The increase in the quarter and
year-to-date tax rate for fiscal 1998 is primarily a
result of the increase in estimated federal and state
tax liability as a result of the increase in
profitability.
ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES:
At May 1, 1998 cash and short-term investments
totaled approximately $10,670,000. Historically, the
Company's primary source of liquidity has been the cash
flow generated from operations as well as issuance of
common stock through its employee stock plans.
NET CASH FROM OPERATING ACTIVITIES:
Net cash provided by operating activities has varied
significantly from quarter to quarter. These 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 1998, approximately $6,851,000
was provided by operating activities versus approximately $1,008,000
during the comparable period of fiscal 1997. Net income of
approximately $4,789,000 and was considerably higher for the
first six months of fiscal 1998 as compared to the net
income of approximately $2,587,000 reported for the same period
of fiscal 1997. As explained earlier, this improved profitablility
is primarily due to higher contract fees and lower R&D costs as a
percentage of revenues. During the first six months of
fiscal 1998, accounts receivable decreased by
approximately $2,841,000 when compared to an increase
of approximately $1,552,000 in accounts receivable during the
same period of fiscal 1997. The cash generated by
accounts receivable is due, in part, to collections related to
greater contract activity and, in part, due to increased collections
received from a one-time billing modification allowed by
the U.S. Government in the fourth quarter of fiscal
1997. Cash used in the investment in inventories,
prepaids and other current assets during the first six
months of fiscal 1998 was approximately $2,294,000,
compared to approximately $2,531,000 of cash used during
the comparable period of fiscal 1997. This reduction is
due primarily to the reduction of timing-related
targeted indirect rate variances (See "Notes to
Financial Statements; Note 2 - Inventory").
NET CASH FROM INVESTING ACTIVITIES: Cash used in
investing activities during the first six months of
fiscal 1998 was approximately $6,760,000 compared to
approximately $3,137,000 used in investing activities
during the same period of fiscal 1997. The primary
activities for the first six months of fiscal 1998 were
due to the purchase and the maturity of short-term
investments, as well as acquiring property and
equipment. The Company's capital investment continues
to be driven by an increase in the number of new
employees and the increase in the number of contracts
awarded and by the level of development-type contracts
that have required test and computing equipment.
NET CASH FROM FINANCING ACTIVITIES: Cash used in
financing activities during the first six months of
fiscal 1998 was approximately $1,368,000 versus
approximately $570,000 provided by financing
activities during the same period of fiscal 1997. The
use of cash for financing activities during the six
months of fiscal 1998 is primarily attributable to the
repurchase of the Company's common stock.
In November 1997, the Company approved a
discretionary program to repurchase up to $3,300,000 of
the Company's common stock to offset potential dilutive
effects to earnings per share from the issuance of stock
options. In May 1998, the Company authorized the repuchase
of an additional 250,000 shares. The Company intends
to use existing cash and short-term investments to
finance any stock repurchases. At the end of the second
quarter of fiscal 1998, 200,000 shares had been repurchased
under both programs at an aggregate cost of approximately
$2,881,000.
The Company has a bank credit agreement to augment
cash flow needs and to provide term financing for
capital investments. The Company maintains a $3,000,000
unsecured, revolving line of credit for short-term cash
requirements which expires March 15, 1999. The
unsecured, revolving line of credit bears interest at
the bank's reference rate (8.5% as of May 1, 1998).
Outstanding amounts on the unsecured, revolving line of
credit were zero at May 1, 1998 and October 31, 1997.
The Company believes that the funds generated from
operations, existing working capital and amounts
available under its existing line 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
regulation 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 results of operation.
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 20% of revenue for the first six months of fiscal 1998
compared to 24% attributable to the same contract in the first six months of
fiscal 1997. This contract may be terminated at the convenience 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
results of operations.
Competition: The signal reconnaissance and communications equipment
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 results of operations and financial condition.
Dependence Upon Personnel: The Company's ability to execute its
business plan is contingent upon successfully attracting and retaining
qualified employees. During the last two years, the Company has
experienced difficulty in attracting and retaining employees due to an
increasingly competitive market for qualified personnel. Management believes
this effect is, in part, 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, in part, due to the difficulty in recruiting new staff
capable of obtaining the necessary security clearance. While the Company
believes progress in attracting and retaining sufficient personnel
has been made over the last year, there can be no assurance that the
Company will continue to be successful at attracting and retaining
sufficient personnel. Failure to do so could have a material adverse effect
on the Company's future operating results and financial condition.
Risk of Fixed Price and Contract Terminations: A significant portion
of the Company's revenues are derived from fixed-price contracts.
Under fixed-price contracts, unexpected increases in the cost to
develop or manufacture a product, whether due to inaccurate estimates
in the bidding process, unanticipated increases in materials costs,
inefficiencies or other factors, are borne by the Company. The Company
has experienced cost overruns in the past that have resulted in losses
on certain contracts. There can be no assurance that the Company will
not experience cost overruns in the future or that such overruns will
not have a material adverse effect on the Company's operating results.
In addition, almost all of the Company's contracts contain termination
clauses which permit contract termination upon the Company's default
or for the convenience of the other contracting party. In either case,
termination could adversely affect the Company's operating results.
Although the Company has not experienced any material contract
terminations to date, there can be no assurance that such terminations
will not occur in the future.
Potential Fluctuations in Quarterly Results and Market Volatility: The
Company has experienced significant fluctuations in operating results
from quarter to quarter and expects that it will continue to
experience such fluctuations in the future. These fluctuations are
caused by, among other factors, conditions inherent in government
contracting and the Company's business, such as the timing of cost and
expense recognition for contracts and the United States Government
contracting and budget cycles. Fluctuations in quarterly results,
shortfalls in revenues or earnings from levels forecast by securities
analysts, changes in estimates by analysts, competition, or
announcements of extraordinary events such as acquisitions or
litigation may cause the price of the Company's common stock to
fluctuate substantially. In addition, there can be no assurance that
an active trading market will be sustained for the Company's common
stock. The stock market in recent years has experienced extreme price
and volume fluctuations that have particularly affected the market
prices of many technology companies and that have been unrelated or
disproportionately related to the operating performance of such
companies. These fluctuations, as well as general economic and market
conditions, may adversely affect the future market price of the
Company's common stock.
Rapid Technological Change: The market for the Company's products is
characterized by rapidly changing technology. The Company believes
that it has been successful to date in identifying United States
Government signal reconnaissance needs early, investing in research
and development to meet these needs and delivering products before the
Company's competitors. The Company believes that its future success
will depend upon continuing to develop and introduce, in a timely
manner, products capable of collecting or processing new types of
telecommunications signals. There can be no assurance that the Company
will be able to develop and market new products successfully in the
future or respond effectively to technological changes, such as data
encryption technology and others, or that new products introduced by
others will not render the Company's products or technologies
noncompetitive or obsolete.
Dependence Upon Certain Suppliers: Although the Company procures most
of its parts and components from multiple sources or believes that
these components are readily available from numerous other sources,
certain components are available only from sole sources or from a
limited number of sources. A number of the Company's products contain
critical components like single board computers available solely from
Motorola and Force Computers and digital signal processing integrated
circuits available solely from Texas Instruments. While the Company
believes that substitute components or assemblies could be obtained,
use of substitutes would require development of new suppliers or would
require the Company to re-engineer its products, or both, which could
delay the Company's shipment of its products and could have a material
adverse effect on the Company's operating results.
Year 2000: Many computer systems experience problems handling dates
beyond the year 1999. Therefore, some computer hardware and software will
need to be modified prior to the year 2000 in order to remain functional.
The Company is assessing both the internal readiness of its computer systems
and the compliance of its computer products and software sold to customers
for handling the year 2000. The Company expects to implement successfully
the systems and programming changes necessary to address year 2000 issues,
and does not believe that the cost of such actions will have a material
effect on the Company's results of operations or financial condition.
There can be no assurance, however, that there will not be a delay in, or
increased costs associated with, the implementation of such changes, and
the Company's inability to implement such changes could have an adverse
effect on future results of operations.
The Company is also assessing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers and subcontractors.
The Company's reliance on suppliers and subcontractors, and, therefore,
on the proper functioning of their information systems and software, means
that failure to address year 2000 issues could have a material impact on
the Company's operations and financial results; however, the potential
impact and related costs are not known at this time.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In April 1994, the Company was served with a subpoena by the
Department of Defense Office of Inspector General (OIG) in connection with
approximately six contracts, several of which had been audited by the Defense
Contract Audit Agency (DCAA) the previous year. As is routine in such matters
involving government contracts, the OIG referred the matter to another
government agency which also had contracts with the Company. Shortly thereafter,
this second agency issued a request for information related to nine additional
contracts. To date, the Company has not received any allegations of wrong-doing
from the OIG or the other agency. At the request of the Board of Directors, the
Company initiated its own review of the contracts in conjunction with its legal
counsel.
Further review of the contracts in question and related contracts
through April 1995 indicates the Company was not compliant with Public Law
87-653, Truth in Negotiations Act, which requires disclosure of all actual costs
available on the date of cost certification on certain contracts performed
during the 1989 and 1990 timeframe. These findings have resulted in a voluntary
disclosure to the government which is expected to result in a downward price
adjustment on certain contracts. In June 1995, the Company announced it was
taking a charge against the fiscal 1995 third quarter operating results in
anticipation of a settlement with the government on the subject contracts. The
charge resulted in a reduction of the fiscal 1995 third quarter's operating
income of $1.2 million.
In April 1996, the Company was served with a second subpoena by
the OIG in connection with all contracts entered into between 1990 and the
present related to three products: the Model 102P Voice Channel Demodulator, the
Model 120 Multichannel Processor, and the Model 150 FAX Scanner. The Company is
presently in discussions with the OIG to determine the scope of the subpoena and
intends to fully comply with the request.
In February 1998, the Company was contacted by one of its primary
customers to negotiate an administrative settlement regarding the voluntary
disclosure discussed above. The Company has provided the necessary information
to the Government and intends to enter into good faith negotiations during
fiscal 1998 regarding the voluntary disclosure.
While management believes the fiscal 1995 third quarter charge is
adequate to cover all related risks, the government has not concluded its
investigation or agreed to a settlement with the Company. There can be no
assurances the Company will not be required to take additional charges in
connection with this matter in future periods. However, management believes that
any such charges would not have a material effect on the operating results and
financial condition of the Company.
Item 4. SUMISSION OF MATTERS TO A VOTE OF SECURTIY HOLDERS
The annual meeting of shareholders of the Company was held
March 12, 1998.
The shareholders approved a proposal to elect three Class II
Directors of the Board of Directors of the Company to serve until the
2000 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
<S> <C> <C>
John P. Devine 6,653,338 504,116
David D. Elliman 6,654,667 502,787
Gary L. Yancey 6,647,910 509,544
</TABLE>
The shareholders ratified the appointment of Ernst & Young LLP
as independent public accountants of the Company for the fiscal year
ending October 31, 1998. The proposal received the following votes:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
<S> <C> <C> <C>
6,839,959 311,015 6,480 0
</TABLE>
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 six months ended May 1, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned therewith duly authorized.
Applied Signal Technology, Inc.
/s/ Brian M. Offi/ June 9, 1998
- ------------------------------ ---------------------------
Brian M. Offi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
APPLIED SIGNAL TECHNOLOGY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
<S> <C>
10.18 Commercial Crdit Agreement dated March 30, 1998 with Sanwa Bank California
27.1 Financial Data Schedule
</TABLE>
LINE OF CREDIT AGREEMENT
This Line of Credit Agreement ("Agreement") is made and entered into
this 30th day of March 1998 by and between SANWA BANK CALIFORNIA (the
"Bank") and APPLIED SIGNAL TECHNOLOGY, INC. (the "Borrower").
SECTION I
DEFINITIONS
1.01. Certain Defined Terms. Unless elsewhere defined in this
Agreement the following terms shall have the following meanings (such
meanings to be generally applicable to the singular and plural forms of
the terms defined):
A. "Advance" shall mean an advance to the Borrower under any line
of credit facility or similar facility provided for in Section II of
this Agreement which provides for draws by the Borrower against an
established credit line.
B. "Business Day" shall mean a day, other than a Saturday or
Sunday, on which commercial banks are open for business in
California.
C. "Collateral" shall mean any personal or real property in which
the Bank may be granted a lien or security interest to secure
payment of the Obligations.
D. "Debt" shall mean all liabilities of the Borrower less
Subordinated Debt.
E. "Effective Tangible Net Worth" shall mean the Borrower's stated
net worth plus Subordinated Debt but less all intangible assets of
the Borrower (i.e., goodwill, trademarks, patents, copyrights,
organization expense and similar intangible items).
F. "Environmental Claims" shall mean all claims, however asserted,
by any governmental authority or other person alleging potential
liability or responsibility for violation of any Environmental Law
or for release or injury to the environment or threat to public
health, personal injury (including sickness, disease or death),
property damage, natural resources damage, or otherwise alleging
liability or responsibility for damages (punitive or otherwise),
cleanup, removal, remedial or response costs, restitution, civil or
criminal penalties, injunctive relief, or other type of relief,
resulting from or based upon (i) the presence, placement, discharge,
emission or release (including intentional and unintentional,
negligent and non-negligent, sudden or non-sudden, accidental or
non-accidental placement, spills, leaks, discharges, emissions or
releases) of any Hazardous Materials at, in, or from property owned,
operated or controlled by the Borrower, or (ii) any other
circumstances forming the basis of any violation, or alleged
violation, of any Environmental Law.
G. "Environmental Laws" shall mean all federal, state or local
laws, statutes, common law duties, rules, regulations, ordinances
and codes, together with all administrative orders, directed duties,
requests, licenses, authorizations and permits of, and agreements
with, any governmental authorities, in each case relating to
environmental, health, safety and land use matters; including the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), the Clean Air Act, the Federal Water Pollution
Control Act of 1972, the Solid Waste Disposal Act, the Federal
Resource Conservation and Recovery Act, the Toxic Substances Control
Act, the Emergency Planning and Community Right-to-Know Act, the
California Hazardous Waste Control Law, the California Solid Waste
Management, Resource, Recovery and Recycling Act, the California
Water Code and the California Health and Safety Code.
H. "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time, including (unless the context
otherwise requires) any rules or regulations promulgated thereunder.
I. "Event of Default" shall have the meaning set forth in the
section herein entitled "Events of Default".
J. "Hazardous Materials" shall mean all those substances which are
regulated by, or which may form the basis of liability under any
Environmental Law, including all substances identified under any
Environmental Law as a pollutant, contaminant, hazardous waste,
hazardous constituent, special waste, hazardous substance, hazardous
material, or toxic substance, or petroleum or petroleum derived
substance or waste.
K. "Indebtedness" shall mean, with respect to the Borrower, (i) all
indebtedness for borrowed money or for the deferred purchase price
of property or services in respect of which the Borrower is liable,
contingently or otherwise, as obligor, guarantor or otherwise, or in
respect of which the Borrower otherwise assures a creditor against
loss and (ii) obligations under leases which shall have been or
should be, in accordance with generally accepted accounting
principles, reported as capital leases in respect of which the
Borrower is liable, contingently or otherwise, or in respect of
which the Borrower otherwise assures a creditor against loss.
L. "Obligations" shall mean all amounts owing by the Borrower to
the Bank pursuant to this Agreement including, but not limited to,
the unpaid principal amount of Advances.
M. "Permitted Liens" shall mean: (i) liens and security interests
securing indebtedness owed by the Borrower to the Bank; (ii) liens
for taxes, assessments or similar charges either not yet due or
being contested in good faith, provided proper reserves are
maintained therefor in accordance with generally accepted accounting
procedure; (iii) liens of materialmen, mechanics, warehousemen, or
carriers or other like liens arising in the ordinary course of
business and securing obligations which are not yet delinquent;
(iv) purchase money liens or purchase money security interests upon
or in any property acquired or held by the Borrower in the ordinary
course of business to secure Indebtedness outstanding on the date
hereof or permitted to be incurred pursuant to this Agreement; (v)
liens and security interests which, as of the date hereof, have been
disclosed to and approved by the Bank in writing; and (vi) those
liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the net
value of the Borrower's assets.
N. "Reference Rate" shall mean an index for a variable interest
rate which is quoted, published or announced from time to time by
the Bank as its reference rate and as to which loans may be made by
the Bank at, below or above such reference rate.
O. "Subordinated Debt" shall mean such liabilities of the Borrower
which have been subordinated to those owed to the Bank in a manner
acceptable to the Bank.
1.02. Accounting Terms. All references to financial statements,
assets, liabilities, and similar accounting items not specifically
defined herein shall mean such financial statements or such items
prepared or determined in accordance with generally accepted accounting
principles consistently applied and, except where otherwise specified,
all financial data submitted pursuant to this Agreement shall be
prepared in accordance with such principles.
1.03. Other Terms. Other terms not otherwise defined shall have the
meanings attributed to such terms in the California Uniform Commercial
Code.
SECTION II
CREDIT FACILITIES
2.01. Commitment to Lend. Subject to the terms and conditions of this
Agreement and so long as no Event of Default occurs, the Bank agrees to
extend to the Borrower the credit accommodations that follow.
2.02. Line of Credit Facility. The Bank agrees to make loans and
Advances to the Borrower, upon the Borrower's request therefor made
prior to the Expiration Date (as defined below in this Section 2.02), up
to a total principal amount from time to time outstanding of not more
than $3,000,000.00. Within the foregoing limits, the Borrower may
borrow, partially or wholly prepay, and reborrow under this Line of
Credit facility.
A. Purpose. Advances made under this Line of Credit shall be used
for working capital purposes.
B. Interest Rate. Interest shall accrue on the outstanding
principal balance of Advances under this Line of Credit at a
variable rate equal to the Bank's Reference Rate, per annum, as it
may change from time to time. (Such rate is referred to in this
Section 2.02 as the "Variable Rate".) The Variable Rate shall be
adjusted concurrently with any change in the Reference Rate.
Interest shall be calculated on the basis of 360 days per year but
charged on the actual number of days elapsed.
C. Payment of Interest. The Borrower hereby promises and agrees to
pay interest monthly on the first day of each month, commencing on
April 1, 1998.
D. Repayment of Principal. Unless sooner due in accordance with
the terms of this Agreement, on March 15, 1999 the Borrower hereby
promises and agrees to pay to the Bank in full the aggregate unpaid
principal balance of all Advances then outstanding, together with
all accrued and unpaid interest thereon.
Any payment received by the Bank shall, at the Bank's option, first
be applied to pay any late fees or other fees then due and unpaid,
and then to interest then due and unpaid and the remainder thereof
(if any) shall be applied to reduce principal.
E. Late Fee. If any regularly scheduled payment of principal
and/or interest (exclusive of the final payment upon maturity), or
any portion thereof, under this Line of Credit is not paid within
ten (10) calendar days after it is due, a late payment charge equal
to five percent (5%) of such past due payment may be assessed and
shall be immediately payable.
F. Making Line Advances/Notice of Borrowing. Each Advance made
hereunder shall be conclusively deemed to have been made at the
request of and for the benefit of the Borrower (i) when credited to
any deposit account of the Borrower maintained with the Bank or (ii)
when paid in accordance with the Borrower's written instructions.
Subject to any other requirements set forth in this Agreement,
Advances shall be made by the Bank upon telephonic or written notice
received from the Borrower in form acceptable to the Bank, which
notice shall be received not later than 2:00 p.m. (California Time)
on the date specified for such Advance, which date shall be a
Business Day. Requests for Advances received after such time may,
at the Bank's option, be deemed to be a request for an Advance to be
made on the next succeeding Business Day.
G. Non-Usage Fee. The Borrower hereby promises and agrees to pay
the following fees in connection with this facility: The Borrower
shall be assessed and shall pay to the Bank each quarter in arrears,
a fee in an amount equal to 0.25% of the difference (if any) between
$3,000,000.00 and the average daily outstanding principal balance of
Advances under this Line of Credit Facility, and the total face
amount of all Letters of Credit outstanding under the Letter of
Credit Facility contained in section 2.03 of this Agreement during
the preceding quarter.
H. Expiration of the Line of Credit Facility. Unless earlier
terminated in accordance with the terms of this Agreement, the
Bank's commitment to make Advances to the Borrower hereunder shall
automatically expire on March 15, 1999 (the "Expiration Date"), and
the Bank shall be under no further obligation to advance any monies
thereafter.
I. Line Account. The Bank shall maintain on its books a record of
account in which the Bank shall make entries for each Advance and
such other debits and credits as shall be appropriate in connection
with the Line of Credit facility (the "Line Account"). The Bank
shall provide the Borrower with a monthly statement of the
Borrower's Line Account, which statement shall be considered to be
correct and conclusively binding on the Borrower unless the Bank is
notified by the Borrower to the contrary within thirty (30) days
after the Borrower's receipt of any such statement which is deemed
to be incorrect.
J. Amounts Payable on Demand. If the Borrower fails to pay on
demand any amount so payable under this Agreement, the Bank may, at
its option and without any obligation to do so and without waiving
any default occasioned by the Borrower's failure to pay such amount,
create an Advance in an amount equal to the amount so payable, which
Advance shall thereafter bear interest as provided under this Line
of Credit facility.
In addition, the Borrower hereby authorizes the Bank, if and to the
extent payment owed to the Bank under this Line of Credit facility
is not made when due, to charge, from time to time, against any or
all of the deposit accounts maintained by the Borrower with the Bank
any amount so due.
2.03. Letter of Credit Facility. The Bank agrees to issue standby
letters of credit (each a "Letter of Credit") on behalf of the Borrower;
provided however, that at no time shall the total face amount of all
Letters of Credit outstanding, including the aggregate outstanding
amount of those Letters of Credit issued under Section 2.02 of the Line
of Credit Agreement dated June 10, 1993 and under Section 2.03 of the
Line of Credit Agreement dated March 3, 1997, and any and all addenda
and riders thereto, (the Prior Agreements") less any partial draws paid
by the Bank, exceed the sum of $2,000,000.00; and provided further, that
this Letter of Credit facility is a sub-facility of the above
$3,000,000.00 Line of Credit facility and at no time shall the total
amount outstanding under such facility together with the total face
amount of all Letters of Credit outstanding, including those issued
under the Prior Agreements, less any partial draws paid by the Bank,
(plus any amounts outstanding under any other sub-facilities of the
above main facility) exceed the sum of $3,000,000.00.
A. Issuance Fees, Costs and Commissions. Upon the Bank's request,
the Borrower shall promptly pay to the Bank issuance fees and such
other fees, commissions, costs and any out-of-pocket expenses
charged or incurred by the Bank with respect to any Letter of
Credit.
B. Expiration of Facility. The commitment by the Bank to issue
Letters of Credit shall, unless earlier terminated in accordance
with the terms of this Agreement, automatically terminate on March
15, 1999 and no Letter of Credit shall expire on a date which is
more than 90 days after such date.
C. Limitations on Letters of Credit. Each Letter of Credit shall
be in form and substance and in favor of beneficiaries satisfactory
to the Bank, provided that the Bank may refuse to issue a Letter of
Credit due to the nature of the transaction or its terms or in
connection with any transaction where the Bank, due to the
beneficiary or the nationality or residence of the beneficiary,
would be prohibited by any applicable law, regulation or order from
issuing such Letter of Credit.
D. Issuance of Letters of Credit. Prior to the issuance of each
Letter of Credit but in no event later than 10:00 a.m. (California
time) on the day such Letter of Credit is to be issued (which shall
be a Business Day), the Borrower shall deliver to the International
Department of the Bank a duly executed form of the Bank's standard
form of application for issuance of a letter of credit with proper
insertions.
SECTION III
CONDITIONS PRECEDENT
3.01. Conditions Precedent to the Initial Extension of Credit and/or
First Advance. The obligation of the Bank to make the initial extension
of credit and/or the first Advance hereunder is subject to the
conditions precedent that the Bank shall have received before the date
of such extension of credit and/or the first Advance all of the
following, in form and substance satisfactory to the Bank:
A. Authority to Borrow. Evidence relating to the duly given
approval and authorization of the execution, delivery and
performance of this Agreement, all other documents, instruments and
agreements required under this Agreement and all other actions to be
taken by the Borrower hereunder or thereunder.
B. Loan Fees. Evidence that any required loan fees and expenses as
set forth above with respect to each credit facility have been paid
or provided for by the Borrower.
C. Audit. The opportunity to conduct an audit of the Borrower's
books, records and operations and the Bank shall be satisfied as to
the condition thereof.
D. Miscellaneous Documents. Such other documents, instruments,
agreements and opinions as are necessary, or as the Bank may
reasonably require, to consummate the transactions contemplated
under this Agreement, all fully executed.
3.02. Conditions Precedent to All Extensions of Credit and/or Advances.
The obligation of the Bank to make any extensions of credit and/or each
Advance to or on account of the Borrower (including the initial
extension of credit and/or the first Advance) shall be subject to the
further conditions precedent that, as of the date of each extension of
credit or Advance and after the making of such extension of credit or
Advance:
A. Representations and Warranties. The representations and
warranties set forth in the Section entitled "Representations and
Warranties" herein and in any other document, instrument, agreement
or certificate delivered to the Bank hereunder are true and correct.
B. Event of Default. No event has occurred and is continuing which
constitutes, or, with the lapse of time or giving of notice or both,
would constitute an Event of Default.
C. Subsequent Approvals, Etc. The Bank shall have received such
supplemental approvals, opinions or documents as the Bank may
reasonably request.
3.03. Reaffirmation of Statements. For the purposes hereof, the
Borrower's acceptance of the proceeds of any extension of credit and the
Borrower's execution of any document or instrument evidencing or
creating any Obligation hereunder shall each be deemed to constitute the
Borrower's representation and warranty that the statements set forth
above in this Section are true and correct.
SECTION IV
REPRESENTATIONS AND WARRANTIES
The Borrower hereby makes the following representations and warranties
to the Bank, which representations and warranties are continuing:
4.01. Status. The Borrower is a corporation duly organized and validly
existing under the laws of the State of California and is properly
licensed, qualified to do business and in good standing in, and, where
necessary to maintain the Borrower's rights and privileges, has complied
with the fictitious name statute of every jurisdiction in which the
Borrower is doing business.
4.02. Authority. The execution, delivery and performance by the
Borrower of this Agreement and any instrument, document or agreement
required hereunder have been duly authorized and do not and will not:
(i) violate any provision of any law, rule, regulation, writ, judgment
or injunction presently in effect affecting the Borrower; (ii) require
any consent or approval of the stockholders of the Borrower or violate
any provision of the articles of incorporation or by-laws of the
Borrower; or (iii) result in a breach of or constitute a default under
any material agreement to which the Borrower is a party or by which it
or its properties may be bound or affected.
4.03. Legal Effect. This Agreement constitutes, and any document,
instrument or agreement required hereunder when delivered will
constitute, legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their respective
terms.
4.04. Fictitious Trade Styles. The Borrower currently uses no
fictitious trade styles in connection with its business operations. The
Borrower shall notify the Bank within thirty (30) days of the use of any
fictitious trade style at any future date, indicating the trade style
and state(s) of its use.
4.05. Financial Statements. All financial statements, information and
other data which may have been and which may hereafter be submitted by
the Borrower to the Bank are true, accurate and correct and have been
and will be prepared in accordance with generally accepted accounting
principles consistently applied and accurately represent the Borrower's
financial condition and, as applicable, the other information disclosed
therein. Since the most recent submission of any such financial
statement, information or other data to the Bank, the Borrower
represents and warrants that no material adverse change in the
Borrower's financial condition or operations has occurred which has not
been fully disclosed to the Bank in writing.
4.06. Litigation. Except as have been disclosed to the Bank in
writing, there are no actions, suits or proceedings pending or, to the
knowledge of the Borrower, threatened against or affecting the Borrower
or the Borrower's properties before any court or administrative agency
which, if determined adversely to the Borrower, would have a material
adverse effect on the Borrower's financial condition or operations.
4.07. Title to Assets. The Borrower has good and marketable title to
all of its assets and the same are not subject to any security interest,
encumbrance, lien or claim of any third person except for Permitted
Liens.
4.08. ERISA. If the Borrower has a pension, profit sharing or
retirement plan subject to ERISA, such plan has been and will continue
to be funded in accordance with its terms and otherwise complies with
and continues to comply with the requirements of ERISA.
4.09. Taxes. The Borrower has filed all tax returns required to be
filed and paid all taxes shown thereon to be due, including interest and
penalties, other than taxes which are currently payable without penalty
or interest or those which are being duly contested in good faith.
4.10. Environmental Compliance. The operations of the Borrower comply,
and during the term of this Agreement will at all times comply, in all
respects with all Environmental Laws; the Borrower has obtained
licenses, permits, authorizations and registrations required under any
Environmental Law ("Environmental Permits") and necessary for its
ordinary operations, all such Environmental Permits are in good
standing, and the Borrower is in compliance with all material terms and
conditions of such Environmental Permits; neither the Borrower nor any
of its present properties or operations are subject to any outstanding
written order from or agreement with any governmental authority nor
subject to any judicial or docketed administrative proceeding,
respecting any Environmental Law, Environmental Claim or Hazardous
Material; there are no Hazardous Materials or other conditions or
circumstances existing, or arising from operations prior to the date of
this Agreement, with respect to any property of the Borrower that would
reasonably be expected to give rise to Environmental Claims; provided
however, that with respect to property leased from an unrelated third
party, the foregoing representation is made to the best knowledge of the
Borrower. In addition, (i) the Borrower does not have or maintain any
underground storage tanks which are not properly registered or permitted
under applicable Environmental Laws or which are leaking or disposing of
Hazardous Materials off-site, and (ii) the Borrower has notified all of
its employees of the existence, if any, of any health hazard arising
from the conditions of their employment and have met all notification
requirements under Title III of CERCLA and all other Environmental Laws.
SECTION V
COVENANTS
The Borrower covenants and agrees that, during the term of this
Agreement, and so long thereafter as the Borrower is indebted to the
Bank under this Agreement, the Borrower shall, unless the Bank otherwise
consents in writing:
5.01. Preservation of Existence; Compliance with Applicable Laws.
Maintain and preserve its existence and all rights and privileges now
enjoyed; not liquidate or dissolve, merge or consolidate with or into,
or acquire any other business organization; and conduct its business in
accordance with all applicable laws, rules and regulations.
5.02. Maintenance of Insurance. Maintain insurance in such amounts and
covering such risks as is usually carried by companies engaged in
similar businesses and owning similar properties in the same general
areas in which the Borrower operates and maintain such other insurance
and coverages as may be required by the Bank. All such insurance shall
be in form and amount and with companies satisfactory to the Bank. With
respect to insurance covering properties in which the Bank maintains a
security interest or lien, such insurance shall be in an amount not less
than the full replacement value thereof, at the Bank's request, shall
name the Bank as loss payee pursuant to a loss payable endorsement
satisfactory to the Bank and shall not be altered or canceled except
upon ten (10) days' prior written notice to the Bank. Upon the Bank's
request, the Borrower shall furnish the Bank with the original policy or
binder of all such insurance.
5.03. Maintenance of Properties. The Borrower shall maintain and
preserve all its properties in good working order and condition in
accordance with the general practice of other businesses of similar
character and size, ordinary wear and tear excepted.
5.04. Payment of Obligations and Taxes. Make timely payment of all
assessments and taxes and all of its liabilities and obligations
including, but not limited to, trade payables, unless the same are being
contested in good faith by appropriate proceedings with the appropriate
court or regulatory agency. For purposes hereof, the Borrower's
issuance of a check, draft or similar instrument without delivery to the
intended payee shall not constitute payment.
5.05. Inspection Rights. At any reasonable time and from time to time
permit the Bank or any representative thereof to examine and make copies
of the records and visit the properties of the Borrower and to discuss
the business and operations of the Borrower with any employee or
representative thereof. If the Borrower now or at any time hereafter
maintains any records (including, but not limited to, computer generated
records and computer programs for the generation of such records) in the
possession of a third party, the Borrower hereby agrees to notify such
third party to permit the Bank free access to such records at all
reasonable times and to provide the Bank with copies of any records it
may request, all at the Borrower's expense, the amount of which shall be
payable immediately upon demand.
5.06. Reporting Requirements. Deliver or cause to be delivered to the
Bank in form and detail satisfactory to the Bank:
A. Annual Statements. Not later than 100 days after the end of
each of the Borrower's fiscal years, a copy of the annual financial
report of the Borrower for such year, which report shall be CPA
audited and certified by an officer of the corporation.
B. Annual 10K Reports. Not later than 10 days after filing with
the Securities Exchange Commission ("SEC"), a copy of the Borrower's
annual 10K report.
C. Interim Statements. Not later than 55 days after the end of
each first, second and third fiscal quarter, the Borrower's
financial statement as of the end of such quarter, certified by an
officer of the corporation.
D. Quarterly 10Q Reports. Not later than 10 days after filing with
the SEC, a copy of the Borrower's quarterly 10Q report.
E. Other Information. Promptly upon the Bank's request, such other
information pertaining to the Borrower or any Guarantor as the Bank
may reasonably request.
5.07. Payment of Dividends. The Borrower shall not declare or pay any
dividends on any class of its stock now or hereafter outstanding except
dividends payable solely in the corporation's capital stock.
5.08. Redemption or Repurchase of Stock. The Borrower shall not redeem
or repurchase any class of its corporate stock now or hereafter
outstanding in excess of $4,000,000.00 in any one fiscal year.
5.09. Liens and Encumbrances. Not create, assume or permit to exist
any security interest, encumbrance, mortgage, deed of trust or other
lien (including, but not limited to, a lien of attachment, judgment or
execution) affecting any of the Borrower's properties, or execute or
allow to be filed any financing statement or continuation thereof
affecting any such properties, except for Permitted Liens or as
otherwise provided in this Agreement.
5.10. Transfer Assets. Not sell, contract for sale, transfer, convey,
assign, lease or sublet any assets of the Borrower except in the
ordinary course of business as presently conducted by the Borrower, and
then, only for full, fair and reasonable consideration.
5.11. Change in the Nature of Business. Not make any material change
in the Borrower's financial structure or in the nature of the Borrower's
business as existing or conducted as of the date of this Agreement.
5.12. Financial Condition. Maintain at all times:
A. Net Worth. A minimum Effective Tangible Net Worth of not less
than $40,000,000.00.
B. Current Ratio. A ratio of current assets to current liabilities
of not less than 2.00 to 1.00.
C. Minimum Net Income. A minimum net profit after tax of $1.00 on
a quarterly basis.
5.13. Environmental Compliance. The Borrower shall:
A. Conduct the Borrower's operations and keep and maintain all of
its properties in compliance with all Environmental Laws.
B. Give prompt written notice to the Bank, but in no event later
than 10 days after becoming aware, of the following: (i) any
enforcement, cleanup, removal or other governmental or regulatory
actions instituted, completed or threatened against the Borrower or
any of its affiliates or any of its respective properties pursuant
to any applicable Environmental Laws, (ii) all other Environmental
Claims, and (iii) any environmental or similar condition on any real
property adjoining or in the vicinity of the property of the
Borrower or its affiliates that could reasonably be anticipated to
cause such property or any part thereof to be subject to any
restrictions on the ownership, occupancy, transferability or use of
such property under any Environmental Laws.
C. Upon the written request of the Bank, the Borrower shall submit
to the Bank, at its sole cost and expense, at reasonable intervals,
a report providing an update of the status of any environmental,
health or safety compliance, hazard or liability issue identified in
any notice required pursuant to this Section.
D. At all times indemnify and hold harmless the Bank from and
against any and all liability arising out of any Environmental
Claims.
5.14. Notice. Give the Bank prompt written notice of any and all (i)
Events of Default; (ii) litigation, arbitration or administrative
proceedings to which the Borrower is a party and in which the claim or
liability exceeds $1,000,000.00; and (iii) other matters which have
resulted in, or might result in a material adverse change in the
financial condition or business operations of the Borrower.
SECTION VI
EVENTS OF DEFAULT
Any one or more of the following described events shall constitute an
event of default under this Agreement:
6.01. Non-Payment. The Borrower shall fail to pay any Obligations
within 10 days of when due.
6.02. Performance Under This and Other Agreements. The Borrower shall
fail in any material respect to perform or observe any term, covenant or
agreement contained in this Agreement or in any document, instrument or
agreement evidencing or relating to any indebtedness of the Borrower
(whether owed to the Bank or third persons), and any such failure
(exclusive of the payment of money to the Bank under this Agreement or
under any other document, instrument or agreement, which failure shall
constitute and be an immediate Event of Default if not paid when due or
when demanded to be due) shall continue for more than 30 days after
written notice from the Bank to the Borrower of the existence and
character of such Event of Default.
6.03. Representations and Warranties; Financial Statements. Any
representation or warranty made by the Borrower under or in connection
with this Agreement or any financial statement given by the Borrower or
any Guarantor shall prove to have been incorrect in any material respect
when made or given or when deemed to have been made or given.
6.04. Insolvency. The Borrower or any Guarantor shall: (i) become
insolvent or be unable to pay its debts as they mature; (ii) make an
assignment for the benefit of creditors or to an agent authorized to
liquidate any substantial amount of its properties or assets; (iii)
file a voluntary petition in bankruptcy or seeking reorganization or to
effect a plan or other arrangement with creditors; (iv) file an answer
admitting the material allegations of an involuntary petition relating
to bankruptcy or reorganization or join in any such petition; (v) become
or be adjudicated a bankrupt; (vi) apply for or consent to the
appointment of, or consent that an order be made, appointing any
receiver, custodian or trustee for itself or any of its properties,
assets or businesses; or (vii) any receiver, custodian or trustee shall
have been appointed for all or a substantial part of its properties,
assets or businesses and shall not be discharged within 30 days after
the date of such appointment.
6.05. Execution. Any writ of execution or attachment or any judgment
lien shall be issued against any property of the Borrower and shall not
be discharged or bonded against or released within 30 days after the
issuance or attachment of such writ or lien.
6.06. Revocation or Limitation of Guaranty. Any Guaranty shall be
revoked or limited or its enforceability or validity shall be contested
by any Guarantor, by operation of law, legal proceeding or otherwise or
any Guarantor who is a natural person shall die.
6.07. Suspension. The Borrower shall voluntarily suspend the
transaction of business or allow to be suspended, terminated, revoked or
expired any permit, license or approval of any governmental body
necessary to conduct the Borrower's business as now conducted.
6.08. Change in Ownership. There shall occur a sale, transfer,
disposition or encumbrance (whether voluntary or involuntary), or an
agreement shall be entered into to do so, with respect to more than 10%
of the issued and outstanding capital stock of the Borrower.
SECTION VII
REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default, the Bank may, at its sole
election, without demand and upon only such notice as may be required by
law:
7.01. Acceleration. Declare any or all of the Borrower's indebtedness
owing to the Bank, whether under this Agreement or under any other
document, instrument or agreement, immediately due and payable, whether
or not otherwise due and payable.
7.02. Cease Extending Credit. Cease making Advances or otherwise
extending credit to or for the account of the Borrower under this
Agreement or under any other agreement now existing or hereafter entered
into between the Borrower and the Bank.
7.03. Termination. Terminate this Agreement as to any future
obligation of the Bank without affecting the Borrower's obligations to
the Bank or the Bank's rights and remedies under this Agreement or under
any other document, instrument or agreement.
7.04. Letters of Credit. In addition to any other remedies available
to the Bank under this Agreement or otherwise, the Bank may require the
Borrower to pay immediately to the Bank, for application against any
drawings under any outstanding Letters of Credit, the outstanding
principal amount of any such Letters of Credit which have not expired.
Any portion of the amount so paid to the Bank which is not applied to
satisfy draws under any such Letters of Credit or any other obligations
of the Borrower to the Bank shall be repaid to the Borrower without
interest.
7.05. Non-Exclusivity of Remedies. Exercise one or more of the Bank's
rights set forth herein or seek such other rights or pursue such other
remedies as may be provided by law, in equity or in any other agreement
now existing or hereafter entered into between the Borrower and the
Bank, or otherwise.
SECTION VIII
MISCELLANEOUS PROVISIONS
8.01. Default Interest Rate. If an Event of Default has occurred and
is continuing, the Bank, at its option, may require the Borrower to pay
to the Bank interest on any Indebtedness or amount payable under this
Agreement at a rate which is 3% in excess of the rate or rates otherwise
then in effect under this Agreement.
8.02. Reimbursement of Certain Costs in Connection With Letters of
Credit. The Borrower shall, upon the Bank's request, promptly pay to
and reimburse the Bank for all costs incurred and payments made by the
Bank by reason of any future assessment, reserve, deposit or similar
requirement or any surcharge, tax or fee imposed upon the Bank or as a
result of the Bank's compliance with any directive or requirement of any
regulatory authority pertaining or relating to any Letters of Credit.
8.03. Reliance. Each warranty, representation, covenant and agreement
contained in this Agreement shall be conclusively presumed to have been
relied upon by the Bank regardless of any investigation made or
information possessed by the Bank and shall be cumulative and in
addition to any other warranties, representations, covenants or
agreements which the Borrower shall now or hereafter give, or cause to
be given, to the Bank.
8.04. Dispute Resolution.
A. Disputes. It is understood and agreed that, upon the request of
any party to this Agreement, any dispute, claim or controversy of
any kind, whether in contract or in tort, statutory or common law,
legal or equitable, now existing or hereinafter arising between the
parties in any way arising out of, pertaining to or in connection
with: (i) this Agreement, or any related agreements, documents or
instruments, (ii) all past and present loans, credits, accounts,
deposit accounts (whether demand deposits or time deposits), safe
deposit boxes, safekeeping agreements, guarantees, letters of
credit, goods or services, or other transactions, contracts or
agreements of any kind, (iii) any incidents, omissions, acts,
practices, or occurrences causing injury to any party whereby
another party or its agents, employees or representatives may be
liable, in whole or in part, or (iv) any aspect of the past or
present relationships of the parties, shall be resolved through a
two-step dispute resolution process administered by the Judicial
Arbitration & Mediation Services, Inc. ("JAMS") as follows:
B. Step I - Mediation. At the request of any party to the dispute,
claim or controversy, the matter shall be referred to the nearest
office of JAMS for mediation, which is an informal, non-binding
conference or conferences between the parties in which a retired
judge or justice from the JAMS panel will seek to guide the parties
to a resolution of the case.
C. Step II - Arbitration (Contracts Not Secured By Real Property).
Should any dispute, claim or controversy remain unresolved at the
conclusion of the Step I Mediation Phase, then (subject to the
restriction at the end of this subparagraph) all such remaining
matters shall be resolved by final and binding arbitration before a
different judicial panelist, unless the parties shall agree to have
the mediator panelist act as arbitrator. The hearing shall be
conducted at a location determined by the arbitrator in Los Angeles,
California (or such other city as may be agreed upon by the parties)
and shall be administered by and in accordance with the then
existing Rules of Practice and Procedure of JAMS and judgement upon
any award rendered by the arbitrator may be entered by any State or
Federal Court having jurisdiction thereof. The arbitrator shall
determine which is the prevailing party and shall include in the
award that party's reasonable attorneys' fees and costs. This
subparagraph shall apply only if, at the time of the submission of
the matter to JAMS, the dispute or issues involved do not arise out
of any transaction which is secured by real property collateral or,
if so secured, all parties consent to such submission.
As soon as practicable after selection of the arbitrator, the
arbitrator, or the arbitrator's designated representative, shall
determine a reasonable estimate of anticipated fees and costs of the
arbitrator, and render a statement to each party setting forth that
party's pro-rata share of said fees and costs. Thereafter, each
party shall, within 10 days of receipt of said statement, deposit
said sum with the arbitrator. Failure of any party to make such a
deposit shall result in a forfeiture by the non-depositing party of
the right to prosecute or defend the claim which is the subject of
the arbitration, but shall not otherwise serve to abate, stay or
suspend the arbitration proceedings.
D. Step II - Trial By Court Reference (Contracts Secured By Real
Property). If the dispute, claim or controversy is not one required
or agreed to be submitted to arbitration, as provided in the above
subparagraph, and has not been resolved by Step I mediation, then
any remaining dispute, claim or controversy shall be submitted for
determination by a trial on Order of Reference conducted by a
retired judge or justice from the panel of JAMS appointed pursuant
to the provisions of Section 638(1) of the California Code of Civil
Procedure, or any amendment, addition or successor section thereto,
to hear the case and report a statement of decision thereon. The
parties intend this general reference agreement to be specifically
enforceable in accordance with said section. If the parties are
unable to agree upon a member of the JAMS panel to act as referee,
then one shall be appointed by the Presiding Judge of the county
wherein the hearing is to be held. The parties shall pay in
advance, to the referee, the estimated reasonable fees and costs of
the reference, as may be specified in advance by the referee. The
parties shall initially share equally, by paying their proportionate
amount of the estimated fees and costs of the reference. Failure of
any party to make such a fee deposit shall result in a forfeiture by
the non-depositing party of the right to prosecute or defend any
cause of action which is the subject of the reference, but shall not
otherwise serve to abate, stay or suspend the reference proceeding.
E. Provisional Remedies, Self Help and Foreclosure. No provision
of, or the exercise of any rights under any portion of this Dispute
Resolution provision, shall limit the right of any party to exercise
self help remedies such as set off, foreclosure against any real or
personal property collateral, or the obtaining of provisional or
ancillary remedies, such as injunctive relief or the appointment of
a receiver, from any court having jurisdiction before, during or
after the pendency of any arbitration. At the Bank's option,
foreclosure under a deed of trust or mortgage may be accomplished
either by exercise of power of sale under the deed of trust or
mortgage, or by judicial foreclosure. The institution and
maintenance of an action for provisional remedies, pursuit of
provisional or ancillary remedies or exercise of self help remedies
shall not constitute a waiver of the right of any party to submit
the controversy or claim to arbitration.
8.05. Waiver of Jury. The Borrower and the Bank hereby expressly and
voluntarily waive any and all rights, whether arising under the
California constitution, any rules of the California Code of Civil
Procedure, common law or otherwise, to demand a trial by jury in any
action, matter, claim or cause of action whatsoever arising out of or in
any way related to this Agreement or any other agreement, document or
transaction contemplated hereby.
8.06. Restructuring Expenses. In the event the Bank and the Borrower
negotiate for, or enter into, any restructuring, modification or
refinancing of the Indebtedness under this Agreement for the purposes of
remedying an Event of Default, The Bank, may require the Borrower to
reimburse all of the Bank's costs and expenses incurred in connection
therewith, including, but not limited to reasonable attorneys' fees and
the costs of any audit or appraisals required by the Bank to be
performed in connection with such restructuring, modification or
refinancing.
8.07. Attorneys' Fees. In the event of any suit, mediation,
arbitration or other action in relation to this Agreement or any
document, instrument or agreement executed with respect to, evidencing
or securing the indebtedness hereunder, the prevailing party, in
addition to all other sums to which it may be entitled, shall be
entitled to reasonable attorneys' fees.
8.08. Notices. All notices, payments, requests, information and
demands which either party hereto may desire, or may be required to give
or make to the other party shall be given or made to such party by hand
delivery or through deposit in the United States mail, postage prepaid,
or by Western Union telegram, addressed to the address set forth below
such party's signature to this Agreement or to such other address as may
be specified from time to time in writing by either party to the other.
8.09. Waiver. Neither the failure nor delay by the Bank in exercising
any right hereunder or under any document, instrument or agreement
mentioned herein shall operate as a waiver thereof, nor shall any single
or partial exercise of any right hereunder or under any document,
instrument or agreement mentioned herein preclude other or further
exercise thereof or the exercise of any other right; nor shall any
waiver of any right or default hereunder or under any other document,
instrument or agreement mentioned herein constitute a waiver of any
other right or default or constitute a waiver of any other default of
the same or any other term or provision.
8.10. Conflicting Provisions. To the extent that any of the terms or
provisions contained in this Agreement are inconsistent with those
contained in any other document, instrument or agreement executed
pursuant hereto, the terms and provisions contained herein shall
control. Otherwise, such provisions shall be considered cumulative.
8.11. Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the Borrower and the Bank and their
respective successors and assigns, except that the Borrower shall not
have the right to assign its rights hereunder or any interest herein
without the Bank's prior written consent. The Bank may sell, assign or
grant participations in all or any portion of its rights and benefits
hereunder. The Borrower agrees that, in connection with any such sale,
grant or assignment, the Bank may deliver to the prospective buyer,
participant or assignee financial statements and other relevant
information relating to the Borrower and any guarantor.
8.12. Jurisdiction. This Agreement, any notes issued hereunder, and
any documents, instruments or agreements mentioned or referred to herein
shall be governed by and construed according to the laws of the State of
California, to the jurisdiction of whose courts the parties hereby
submit.
8.13. Headings. The headings set forth herein are solely for the
purpose of identification and have no legal significance.
8.14. Entire Agreement. This Agreement and all documents, instruments
and agreements mentioned herein constitute the entire and complete
understanding of the parties with respect to the transactions
contemplated hereunder. All previous conversations, memoranda and
writings between the parties or pertaining to the transactions
contemplated hereunder that are not incorporated or referenced in this
Agreement or in such documents, instruments and agreements are
superseded hereby.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto as of the date first hereinabove written.
BANK:
SANWA BANK CALIFORNIA
By:
_______________________
__________
Jillian Mathur,
Authorized Officer
Address:
San Jose Commercial
Banking Center
220 Almaden Blvd.
San Jose, CA 95113
BORROWER:
APPLIED SIGNAL
TECHNOLOGY, INC.
By:
_______________________
__________
Gary L. Yancey,
Chief Executive Officer
and President
By:
_______________________
__________
Brian Offi, Chief
Financial Officer
Address:
400 W. California
Avenue
Sunnyvale, CA 94086
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<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF OPERATIONS INCLUDED IN THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED JANUARY 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-30-1998
<CASH> 6,706
<SECURITIES> 5,969
<RECEIVABLES> 28,568
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<INVENTORY> 7,531
<CURRENT-ASSETS> 51,198
<PP&E> 38,095
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<CURRENT-LIABILITIES> 13,097
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0
0
<COMMON> 23,527
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<SALES> 24,361
<TOTAL-REVENUES> 24,361
<CGS> 15,095
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<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 147
<INCOME-PRETAX> 3,615
<INCOME-TAX> 1,410
<INCOME-CONTINUING> 2,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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