UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
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.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0015491
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 WEST CALIFORNIA AVE., SUNNYVALE, CA 94086
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(Address of principal executive offices)
(408) 749-1888
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: Not
Applicable.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, without par value.
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 / /
Indicate by a check mark if disclosure by delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant:
Common Stock, without par value -- $144,069,063 as of January 5, 1998.
Number of shares of registrant's common stock outstanding:
Common Stock, without par value --8,525,341 shares as of January 5, 1998.
Rider 1.1
The registrant's Proxy Statement dated January 26, 1998 for the Annual Meeting
of Shareholders to be held on March 12, 1998 is incorporated herein by reference
in Part III to the extent stated herein.
This Annual Report on Form 10-K consists of 67 pages, including exhibits. the
exhibit index is on page 49.
<PAGE>
INDEX
APPLIED SIGNAL TECHNOLOGY, INC.
PART I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Executive Officers of Registrant
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
Signatures
<PAGE>
PART I
ITEM 1: BUSINESS
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. Stockholders are cautioned that all
forward-looking statements pertaining to the Company involve risks and
uncertainties, including, without limitation, those contained under
the caption, "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.
GENERAL
Applied Signal Technology, Inc. (Applied Signal Technology or the
Company) designs, develops, and manufactures signal processing
equipment to collect and process a wide range of telecommunication
signals. This equipment is used for reconnaissance of foreign
telecommunications predominantly by the United States Government and
allied foreign governments. 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 goes on to say 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 much more
marketing contact with customers and potential customers than is
customary among its competitors. In addition, the Company invests in
research and development (R&D) which it anticipates will enable it to
develop signal reconnaissance equipment that meets these needs. The
Company believes that it invests a greater percentage of its revenues
in R&D than is typical among its competitors. (See "Research and
Development.")
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.
DESCRIPTION OF THE BUSINESS
Applied Signal Technology designs, develops, and manufactures
equipment to collect and process telecommunication signals for signal
reconnaissance applications. The signal reconnaissance equipment is
purchased by both the military as well as the intelligence
organizations of the United States Government and is used for foreign
signal reconnaissance.
In recent years, accurate and comprehensive information regarding
foreign affairs and developments has become increasingly important to
the United States Government. The reduction in United States military
tactical forces overseas has heightened the United States Government's
need to quickly assess military risks, particularly in areas of
instability as they develop around the world. The breakup of the
Soviet Union and civil unrest in certain nations in Eastern Europe,
Africa, and South America indicate an increase in geographic areas
that might require monitoring. In addition, the United States
Government requires information regarding overseas activities to
conduct drug interdiction operations.
As part of its efforts to obtain information, the United States
Government gathers and analyzes telecommunication signals emanating
from foreign countries. In recent years, the use of established
telecommunication technologies has increased throughout the world and
new telecommunication technologies, supplementing rather than
replacing prior technologies, have been developed and commercialized.
These trends have led to a significant increase in the overall volume
of information communicated and an increase in the density of signals
transmitted throughout the radio frequency spectrum. This increase can
be seen in the proliferation of facsimile, cellular, and digital
signal telecommunications equipment and the global information network
(World Wide Web) in the last decade, resulting in a significant
increase in the amount of information being communicated. These trends
have required the development of signal reconnaissance equipment
capable of collecting and processing an increased volume of signals as
well as new types of signals.
Traditionally, organizations within the United States Government have
satisfied their signal reconnaissance needs by first identifying their
specific requirements and then contracting with government contractors
to provide equipment. Contractors typically designed and built custom
signal processing systems optimized to satisfy the particular needs of
various agencies. Development of custom systems usually required many
years of effort and involved great expense. The time required to
develop these systems often meant that when a system was delivered, it
did not address new telecommunications technologies that had evolved
during the development process. These factors, combined with growing
budgetary constraints, have caused many agencies to search for more
flexible and cost-effective signal reconnaissance solutions that can
be deployed promptly.
STRATEGY
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 States 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 granted 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 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 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 as well as at offices within its customer agencies
that have not contracted with the Company previously.
PRODUCTS
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 development contracts to
provide signal reconnaissance equipment to the United States
Government. This software and hardware enable 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.
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 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.
Prices may range from $100,000 to millions of dollars.
- 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.
CUSTOMERS, CONTRACTS, AND MARKETING
CUSTOMERS
To date, purchases by the United States Government have accounted for
almost all of the Company's revenues. Most of the Company's revenues
have come from contracts directly with the United States Government.
The Company also has subcontracts under which it supplies products or
services to prime contractors that have contracts with the United
States Government. Subcontract revenues accounted for approximately
29%, 27%, and 6% of the Company's total revenues for its fiscal years
1997, 1996, and 1995, respectively. In addition, the Company
occasionally sells small quantities of equipment to foreign
governments. Foreign revenues have accounted for approximately 2%, 2%,
and 5% of the Company's total revenues for fiscal years 1997, 1996,
and 1995, respectively.
The Company's United States Government customers consist of
approximately six military and intelligence agencies with signal
reconnaissance needs. Within these six major customers, the Company
has contracts with approximately 20 different offices, each with
separate budgets and contracting authority. Concentration of revenue
sources is significant for the United States Government. The largest
contract accounted for 22% of the Company's revenues in fiscal year
1997, 15% in fiscal year 1996, and 3% in fiscal year 1995.
Two intelligence agencies accounted for approximately 57% and 28%,
respectively, of revenues in fiscal year 1997; approximately 53% and
27%, respectively, of revenues in fiscal year 1996; and approximately
64% and 17%, respectively, of revenues in fiscal year 1995. The higher
concentration of revenues generated by a single contract experienced
in recent years is attributable to a significant ramp-up in the level
of effort applied to the Company's largest development contract.
Management does not anticipate a material impact in its future
operating results as the program moves into the ramp-down phase of its
program's life cycle.
In recent years, the United States defense budget has been reduced,
causing customers and potential customers of the Company's products to
reevaluate their needs. The Company believes that budget reductions
have caused agencies increasingly to favor standard products similar
to the Company's products rather than custom products that generally
are more expensive, take longer to deliver, and provide solutions to a
narrower range of signal reconnaissance problems. Future reductions in
United States Government spending on signal reconnaissance equipment
or future changes in the kinds of signal reconnaissance products or
services required by United States Government agencies, however, could
limit demand for the Company's products, which would have a material
adverse effect on the Company's operating results.
CONTRACTS
Government Contracts. Most of the Company's business is conducted
under contracts that include United States Government security
requirements. The Company's contracts with United States Government
agencies can be categorized in several ways.
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. Potential suppliers compete
informally for sole source contracts through R&D investment and
marketing efforts. This competition requires a contractor to identify
the United States Government's requirements early and invest in
developing potential solutions so that the contractor can demonstrate
a distinguishing expertise or technology promptly after the United
States Government has identified a signal reconnaissance requirement.
Competitive bid contracts are awarded after a formal bid and proposal
competition among suppliers, and sole source contracts are awarded
without a formal competition. During fiscal years 1997, 1996, and
1995, approximately 69%, 75%, and 95%, respectively, of the Company's
revenues were from sole source contracts, and approximately 31%, 25%,
and 5%, respectively, were from competitively bid contracts.
During fiscal years 1997 and 1996, the Company experienced an increase
in the percentage of contracts awarded on a competitive basis. This
increase is primarily due to an increase in the number of subcontracts
awarded to the Company; subcontracts are generally awarded on a
competitive basis. Management does not believe the shift in percentage
towards increasing subcontracts via competitive bidding will have a
material impact on the operating results of the Company.
As a Government contractor, the Company is subject to price
redetermination on certain fixed-price contracts if it is determined
that the Company did not price its products and services consistent
with the requirements of the Federal Acquisition Regulations. As of
October 31, 1997, the Company has not had a material claim sustained
against it for noncompliance.
Competitive bid contracts are awarded based on objective proposal
evaluation criteria established by the procuring agency. Interested
contractors prepare a bid and proposal that responds to the agency's
request for proposal. A bid and proposal is usually prepared in a
short period of time (for example, 45 days) in response to a deadline
and requires the extensive involvement of numerous technical and
administrative personnel.
Competitive bid or sole source contracts can be either fixed-price
contracts, pursuant to which the Company agrees to deliver equipment
for a fixed price and assumes the risk of cost overruns, or cost-plus
contracts, pursuant to which the Company is reimbursed for its direct
and indirect costs and paid a negotiated profit. During fiscal year
1997, approximately 50% of the Company's revenues were from fixed-
price contracts and 50% were from cost-plus contracts. During fiscal
year 1996, approximately 52% of the Company's revenues were from
fixed-price contracts and approximately 48% were from cost-plus
contracts. During fiscal year 1995, approximately 66% of the Company's
revenues were from fixed-price contracts and approximately 34% were
from cost-plus contracts.
Most of the Company's fixed-price contracts are for the manufacture of
multiple units of its products, rather than the development of new
products. The Company believes that the risk of cost overruns is much
less in the case of fixed-price manufacturing contracts, where the
product already has been developed and at least a prototype made, than
in the case of fixed-price development contracts.
Almost all of the Company's contracts contain termination clauses that
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 cancellations in
the past, there can be no assurance such cancellations will not occur
in the future.
MARKETING
The Company's primary marketing efforts consist of personal contact
between government technical representatives and technical personnel
of the Company. The Company involves all technically qualified staff
members in its marketing program. The Company believes it is extremely
important to have technically knowledgeable staff make marketing
contacts since an initial system concept is often developed during the
first such contact. The Company believes that it has much more
marketing contact with customers and potential customers than is
customary among its competitors generally, and that this contact
enables the Company to anticipate the United States Government's
signal reconnaissance needs, thereby giving the Company a potential
advantage over its competitors.
The Company's marketing occurs at three levels. The top level of
marketing involves contact between the Company's senior management and
officials of the United States Government responsible for signal
reconnaissance policy. The purpose of these contacts is to understand
national level requirements in future years (five to ten years out),
obtain guidance for direction of the Company's R&D, and keep the
United States Government community informed about the Company, its
technology, and its products.
The intermediate level of marketing is performed by the Company's
systems engineers contacting government officials responsible for
allocating budgets. These engineers seek to identify new requirements
that will result in projects within the next six to 18 months and work
with government technical representatives to develop system concepts.
The Company invests in R&D to address these requirements and to obtain
potential projects. To assist with this level of marketing, the
Company's technical staff often constructs a theoretical model of the
problem and tests processing solutions so that the Company and the
customer can determine whether a product can be developed or modified
to meet the customer's requirements. At this stage of marketing, the
customer often awards a sole source contract to the Company.
The final level of marketing involves establishing precise cost
estimates and detailed specifications. This level of marketing is
performed by development engineers who are involved in the actual
development or modification of the product.
In addition to its primary technical marketing, the Company also
conducts marketing activities designed to increase its visibility with
existing and potential customers. Each year the Company conducts two
equipment shows in the Washington, D.C. area demonstrating the
operation of many of its products. The Company uses direct mail and
magazine advertising from time to time to inform potential customers
of available products. The Company also produces a product summary
catalog that is updated every six months and a quarterly newsletter
for direct mailing. The Company's mailing list includes contacts at
private sector companies that may purchase the Company's products for
their own use or for inclusion in systems they are developing for
United States Government customers, as well as contacts at United
States Government agencies that buy products but do not contract for
development efforts.
BACKLOG
The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts, was $83.0 million, $82.9
million, and $29.6 million at October 31, 1997, 1996, and 1995,
respectively. Anticipated revenues included in backlog may be realized
over a multi-year period. The Company includes a contract in backlog
when the contract issigne by both the Company and the customer. The Company
believes that the backlog figures are firm, subject only to the cancellation
and modification provisions contained in its Government contracts.
RESEARCH AND DEVELOPMENT
Research and Development
The Company conducts R&D pursuant to United States Government R&D
contracts and as part of its own R&D program. United States Government
R&D contracts generated approximately $48.0 million of revenues in
fiscal year 1997, approximately $37.0 million in fiscal year 1996, and
approximately $23.0 million in fiscal year 1995. The Company's own R&D
program to date is funded both by the United States Government,
through reimbursement of certain of the Company's R&D expenditures,
and, at times, by the Company's own investment, which is not
reimbursed. The Company's R&D expenditures as a percentage of revenues
in fiscal years 1997, 1996, and 1995 were 10.7%, 12.1%, and 14.6%,
respectively. Research and development conducted by the Company and
sponsored by the United States Government (excluding United States
Government R&D contracts) was $8.1 million, $6.7 million, and $6.8
million in fiscal years 1997, 1996, and 1995, respectively, while
research and development conducted and sponsored by the Company was
$2.0 million, $2.7 million, and $3.1 million in those same periods,
respectively. The Company believes that its investment in R&D provides
it with a significant competitive advantage.
The Company seeks to develop technology capable of addressing new
signal reconnaissance requirements before its competitors. In
addition, the Company focuses its R&D on developing products that can
be used, with or without further modification, to satisfy various
needs of a variety of customers, thereby permitting the Company to
offer a solution promptly. The Company attempts to allocate its R&D
funds among projects intended to yield revenues within one to two
years, projects intended to yield revenues in two to five years, and
projects intended to yield revenues in more than five years. Most of
the Company's R&D expenditures are for projects intended to yield
revenues within one to two years.
An important aspect of the Company's R&D efforts is understanding
telecommunication trends to anticipate the future signal
reconnaissance needs of its customers. Not only does this allow the
Company to direct its R&D engineering efforts to produce solutions
promptly once a customer expresses a need, but it often allows the
Company to educate the customer about its potential needs and
simultaneously present a conceptual solution to those needs.
Another important aspect of the Company's R&D is the development of
components or products utilizing advanced technology. This enables the
Company to develop products superior to competing products in size,
power consumption, delivery time, and cost. The Company has developed
an in-house capability to design very large scale integration (VLSI)
circuits. Using its VLSI capabilities, the Company has designed
proprietary application specific integrated circuits that enhance the
processing power of many of its signal processing products.
Company Divisions
COMPANY DIVISIONS
The Company is organized into three technical divisions and a finance
division. Two of the three technical divisions-Communication Systems
and Strategic Systems-are engineering divisions which perform all of
the Company's development. The engineering divisions are primarily
responsible for conducting R&D and the initial development of
products, while the Operations Division is primarily responsible for
manufacturing multiple units of products. All divisions work together
to ensure that production-related issues, such as manufacturability,
reliability, and maintainability, are addressed from initial product
definition through final product shipment. The Company's technical
staff includes personnel with system development expertise, which the
Company applies not only to system development but also to its product
development in order to ensure the compatibility of its products with
a variety of system requirements. As of January 5, 1998, there were
299 employees in the engineering divisions and 177 employees in the
operations division. (See "Employees.")
Engineering. The engineering divisions are responsible for the
Company's R&D. The Company's R&D activities include both United States
Government R&D contracts and the Company's R&D projects. The
engineering division activities are directed toward developing
products that will ultimately be produced by the Operations Division.
The engineering divisions work in conjunction with the Operations
Division to assure that the development efforts will culminate in a
product able to be manufactured efficiently in quantity.
The Company has offices which also support the Company's marketing
activities in Herndon, Virginia and Annapolis Junction, Maryland. As
of January 5, 1998, there were 20 employees in the Virginia office and
15 employees in the Maryland office. Most of the personnel staffing
these offices are technical personnel and, in addition to marketing
activities, are involved in research and development and customer
support (for example, installation, training, and troubleshooting).
Operations. The Operations Division is responsible for completing
final product development and manufacturing multiple units of
products. By combining engineering and production expertise within the
Operations Division, the Company believes it is able to maximize
manufacturing efficiency and, therefore, reduce overall production
costs. Operations manufactures products using batch production
methods. The division achieves labor efficiency by extensive cross-
training of its personnel, which permits these personnel to
participate in the production of all of the Company's products. The
division is also responsible for managing the Company's purchases of
goods and services, including third party manufacturing and assembly
services. (See "Suppliers.")
SUPPLIERS
The Company uses suppliers in order to obtain quality goods and
services without incurring the costs of providing those goods and
services in-house. The Company purchases from suppliers nearly all
circuit boards, integrated circuits, and other components used in its
products. In addition, the Company contracts with suppliers to
assemble some of its products. The Company's reliance on suppliers
involves several risks, including the possibility of a shortage of
certain key components and assemblies and reduced control over
delivery schedules, manufacturing yields, quality, and costs. If the
Company experiences significant availability or quality control
problems in the future, its revenues and profitability could be
adversely affected.
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, Inc. and Force
Computers, Inc. and digital signal processing integrated circuits
available solely from Texas Instruments, Inc. While the Company
believes that substitute components or assemblies could be obtained,
use of substitutes would require development of new suppliers or would
require the Company to re-engineer its products, or both, which could
delay the Company's shipment of its products and could have a material
adverse effect on the Company's operating results.
COMPETITION
The signal reconnaissance 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. The Company's current competitors include Adams-
Russell, Inc. (a subsidiary of M/A-Com, Inc.); Boeing-North America;
E-Systems, Inc. (a subsidiary of Raytheon Corporation); GTE Government
Systems Corporation; Harris Corporation; Lockheed Martin Corporation;
Motorola Government Electronics Group (a subsidiary of Motorola,
Inc.); and TRW, Inc. Substantial competition could have a material
adverse effect on the Company's results of operations.
The competition for competitive bid contracts differs from the
competition for sole source contracts. Companies competing for
competitive bid contracts prepare bids and proposals in response to
government request for proposals. Potential suppliers compete
informally for sole source contracts through R&D investment and
marketing efforts. Companies competing for sole source contracts
attempt to identify the United States Government's requirements early
and invest in solutions so that they can demonstrate a distinguishing
expertise or technology promptly after the United States Government
has identified a signal reconnaissance requirement. The Company
competes primarily for sole source contracts and conducts its
operations accordingly. The principal factors of competition for sole
source contracts include investments in R&D; the ability to respond to
government needs promptly; product price relative to performance,
quality, and customer support. The Company believes that it competes
favorably on each of these factors.
PROPRIETARY RIGHTS
The United States Government has rights to most of the technology
developed by the Company under government contracts, including rights
to permit other companies, including the Company's competitors, to use
this technology to develop products for the United States Government.
The Company is not aware that the United States Government has
exercised these rights.
The Company has filed limited patent applications for its technology.
As of October 31, 1997, one patent has been granted to the Company for
"Efficient QAM Equalizer Demodulator with Non-Integer Sampling," and
one patent is pending for the "Non-invasive Digital Communication Test
System." The Company believes that given the rapidly changing nature
of signal collection and processing technology, its future success
will depend primarily upon the technical competence and creative
skills of its personnel. The Company attempts to protect its trade
secrets and other proprietary information through agreements with
customers, employees, and consultants and other security measures.
There can be no assurance that the measures adopted by the Company for
the protection of its intellectual property will be adequate.
Although the Company does not believe and has not received notice that
it is infringing upon the intellectual property rights of others,
there can be no assurance that such a claim will not be asserted
against the Company. In the event any third party made a valid claim
against the Company and a license was not made available to the
Company on commercially reasonable terms, this could have a material
adverse effect on the Company's results of operations.
GOVERNMENT REGULATIONS
Many of the Company's operations are subject to compliance with
regulatory requirements of federal, state and municipal authorities,
including regulations concerning employment obligations and
affirmative action, workplace safety and protection of the
environment. While compliance with applicable regulations has not
adversely affected the Company's operations in the past, there can be
no assurance that the Company will continue to be in compliance in the
future or that these regulations will not change.
In particular, the Company must comply with detailed government
procurement and contracting regulations and with United States
Government security regulations, certain of which carry substantial
penalty provisions for nonperformance or misrepresentation in the
course of negotiations. Failure of the Company to comply with its
government procurement or contracting obligations or security
obligations could result in penalties or suspension of the Company
from government contracting, which would have a material adverse
effect on the Company's results of operations. (See Item 1 - Business
- - "Customers, Contracts, and Marketing," and Item 3 -Legal
Proceedings.)
EMPLOYEES
As of January 5, 1998, the Company had approximately 592 full-time
employees, 144 of whom hold advanced technical degrees (master and/or
doctoral degrees), including 8 with doctoral degrees.
The Company's business requires that a large number of its technical
employees obtain security clearances from the United States
Government, which limits the available pool of eligible candidates for
such positions to those who can satisfy the prerequisites to obtaining
these clearances. In particular, the personnel involved in marketing
require the appropriate clearances to meet with government technical
representatives and discuss the government's signal reconnaissance
needs. The Company has a United States Government-sanctioned security
program that allows staff members to obtain appropriate clearances.
Approximately 58% of the Company's staff have security clearances. The
success of the Company is dependent on attracting, retaining, and
motivating qualified key management and technical personnel, the loss
of whom, could adversely affect the Company's business. Such personnel
are in great demand and limited supply.
The Company believes its employees are its most valuable resource and
that its workforce possesses a strong feeling of dedication to and
pride in the Company. This dedication is reinforced through incentive
compensation arrangements based on Company performance. The Company's
employees are not represented by any collective bargaining agreements,
and the Company has never experienced a work stoppage.
SUMMARY OF BUSINESS CONSIDERATIONS AND CERTAIN FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS AND/OR STOCK PRICE
The Company's future earnings 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 22% of revenue for fiscal 1997. This compares to
15% attributable to the same contract in fiscal 1996. 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
experienced difficulty in attracting new talent 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. (See Item 1:
Business-Employees.) 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.
ITEM 2: PROPERTIES
The Company currently leases six buildings (51,851, 52,464, 34,862,
76,379, 58,000, and 58,000 square feet, respectively) in Sunnyvale,
California pursuant to a lease which expires in March 2012. These
buildings are used as the Company's headquarters and include
development, engineering, production, marketing, and administrative
offices. Under the terms of the lease, the Company has options to
construct three additional buildings over a five-year period
commencing February 1998.
The Company leases a 15,250 square foot building in Herndon, Virginia
pursuant to a lease which expires in February 1999. This building
houses a small development facility and marketing and administrative
offices.
The Company leases 20,520 square feet of a 90,000 square foot building
in Annapolis Junction, Maryland pursuant to a lease which expires in
April 2004. This building also houses a small development facility and
marketing and administrative offices. Commencing December 1998, the
Company is obligated to lease an additional 8,429 square feet in the
existing building.
In addition, the Company also leases two warehouses (19,835 and 5,900
square feet) in Sunnyvale, California for use as storage facilities.
Both leases, which the Company intends to renew, expire in 1998.
The Company's business requires that it maintain at each of its
offices a facility clearance sponsored and approved by the United
States Government. This approval could be suspended or revoked if the
Company is found not to have complied with security regulations
applicable to such facilities. Any revocation of such approval, and
any suspension of such approval that materially delayed the Company's
delivery of its products to customers would materially adversely
affect the Company's results of operations. Although the Company has
adopted policies directed at assuring its compliance with relevant
regulations, there can be no assurance that the approved status of the
Company's facilities will continue without interruption.
ITEM 3: 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 its 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 indicated 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 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 by $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.
While management believes the fiscal year 1995 third quarter charge is
adequate to cover all potential liabilities associated with this
investigation by the United States Government, 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: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to age and background
for each of the remaining officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- -------
<S> <C> <C>
Gary L. Yancey 52 President and Chairman of the Board
Brian M. Offi 44 Vice President-- Finance and Chief Financial Officer
Mary Rogge 51 Secretary
Bani M. Scribner, Jr. 53 Vice President-- Strategic Systems Division
Ken Snow 56 Vice President-- Operations Division
Kenway Wong 48 Vice President-- Communication System Division
</TABLE>
Gary L. Yancey, a co-founder of the Company, has served the Company as
President and Chairman of the Board since the Company's incorporation
in January 1984. Prior to co-founding the Company, he was employed for
10 years by ARGOSystems, a manufacturer of electronic reconnaissance
systems.
Brian M. Offi joined the Company in October 1990 as Chief Financial
Officer and was elected Vice President-Finance in May 1991. From May
1987 to October 1990, he served as Chief Financial Officer of S-Tron,
Inc., a manufacturer of life-support equipment worn by military
personnel.
Mary Rogge joined the Company in 1986 as an executive secretary
reporting to the President and was elected Secretary of the Company in
March 1988.
Bani M. Scribner, Jr. joined the Company in 1992 as senior staff
reporting to the President. In November 1996 he was elected Vice
President of the Strategic Systems Division.
Ken Snow joined the Company in January 1990 as a senior staff
engineer. He was promoted to the position of Deputy Director of
Engineering in 1991. In October of 1994 he became the Director of the
Operations Division and in March 1995 he was elected Vice President of
Operations.
Kenway Wong joined the Company in 1988 as a senior engineer. He was
promoted to Department Manager in 1989, and Engineering Director in
1994. In November 1997, he was elected Vice President of the
Communication Systems Division.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Selected Common Stock Data:
Applied Signal Technology, Inc. Common Stock was first offered to the public
on March 26, 1993. Since the initial public offering, the stock has been
traded on The Nasdaq National Market under the symbol "APSG". As of
January 5, 2998, the Company had approximately 460 shareholders of record.
The following table sets forth the range of high, low and closing sale
prices for the Company's Common Stock over the last eight (8) quarters
ending October 31, 1997. The "last" price per share in the table represents
the closing price on the last trading day of the quarter. The quotations
represent inter-dealer quotations, without retail markups, markdowns, or
commissions and may not necessarily represent actual transactions. The
Company's line of credit agreement prohibits the Company from making
dividend payments without the lender's approval.
<TABLE>
<CAPTION>
Share
Volume
High Low Last (in 000'S)
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Fiscal year ended October 31, 1996
First quarter $5.00 $3.50 $4.00 1,083.7
Second quarter $7.38 $4.00 $4.38 3,313.3
Third quarter $6.13 $3.75 $4.38 2,077.1
Fourth quarter $5.88 $4.38 $4.75 971.4
Fiscal year ended October 31, 1997
First quarter $5.63 $4.13 $4.38 1,431.0
Second quarter $5.13 $4.00 $4.38 833.9
Third quarter $10.13 $4.25 $8.00 8,682.0
Fourth quarter $13.88 $7.50 $12.07 9,853.4
</TABLE>
The Company has not paid any dividends on its stock since its inception
and anticipates that for the foreseeable future, it will retain its
earnings for use in operations.
Nasdaq Market Makers:
As of December 31, 1998, the following firms were registered market
makers of the Company's Common Stock on the Nasdaq National Market:
Cowen & Co., Fahnestock & Co., Inc., Mayer & Schweitzer Inc., Sherwood
Securities Corp., Troster Singer Corp., Tucker Anthony Incorporated, G.V.R.
Company, Herzog, Heine, Geduld, Inc., Barber & Bromin, Inc., Knight
Securities L.P.
Item 6. SELECTED FINANCIAL DATA
All data is in thousands except per common share data.
<TABLE>
<CAPTION>
Summary of Operations Fiscal Year Ended:
October 31,
1997 1996 1995 1994
<S> --------- --------- --------- ---------
Revenues from contracts <C> <C> <C> <C>
Operating expenses: $96,259 $77,410 $67,664 $64,341
Contract costs
Research and development 60,404 53,333 45,418 40,830
General and administrative 10,137 9,380 9,873 8,551
13,642 11,954 11,221 10,219
Total operating expenses --------- --------- --------- ---------
84,183 74,667 66,512 59,600
Operating income --------- --------- --------- ---------
Interest income 12,076 2,743 1,152 4,741
Interest expense 239 132 320 522
(49) (83) (133) (113)
Income before provision for income taxes --------- --------- --------- ---------
Provision for income taxes 12,266 2,792 1,339 5,150
4,600 977 435 2,010
Net income --------- --------- --------- ---------
$7,666 $1,815 $904 $3,140
Net income per common share ========= ========= ========= =========
Weighted average shares outstanding $0.91 $0.23 $0.12 $0.40
8,435 7,919 7,635 7,769
Financial Position at End of Fiscal Year:
1997 1996 1995 1994
--------- --------- --------- ---------
Working capital $34,936 $26,477 $24,269 $21,888
Total assets 64,161 52,103 49,030 47,316
Retained earnings 27,569 19,866 18,052 17,153
Shareholders' equity 49,766 39,965 36,947 35,809
Book value per common share $5.96 $5.08 $4.90 $4.84
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Applied Signal Technology designs, develops, manufactures, and markets
signal processing equipment to collect and process a wide range of
telecommunication signals. This equipment is used for reconnaissance
of telecommunication signals by the United States Government and
allied foreign governments. Signal reconnaissance systems are composed
of collection equipment and processing equipment. Collection equipment
consists of sophisticated receivers that scan the radio frequency
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
collected signals and selects signals that are likely to contain
relevant information.
The Company has focused its efforts, since inception, primarily on
processing equipment, but the Company also provides specialized
collection equipment, as well as complete signal reconnaissance
systems. The Company's business involves risks and uncertainties,
including, without litigation, those contained in this report in
"Business Considerations and Certain Factors That May Affect Future
Results of Operations and/or Stock Prices."
The Company's revenues are primarily generated from sales of its
products and services to two agencies of the United States Government.
The two agencies accounted for 57% and 28%, respectively, of revenues
for fiscal 1997. For fiscal 1996, the two agencies accounted for 53%
and 27%, respectively, of revenues and for fiscal 1995, the
percentages of revenues derived from these two agencies were 64% and
17%, respectively.
The Company's revenues are derived from either fixed price contracts,
which provide that the Company perform a contract for a fixed price
and assume the risk of any cost overruns or cost plus reimbursement
contracts, which provide that the Company receive the direct and
indirect costs of performance plus a negotiated profit. In fiscal
1997, approximately 50% of the Company's revenues were derived from
fixed price contracts, and approximately 50% of the Company's revenues
were derived from cost plus reimbursement contracts. In fiscal 1996,
approximately 52% of the Company's revenues were derived from fixed
price contracts, and approximately 48% of the Company's revenues were
derived from cost plus reimbursement contracts. In fiscal 1995,
approximately 66% of the Company's revenues were derived from fixed
price contracts, and approximately 34% of the Company's revenues were
derived from cost plus reimbursement 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 material costs,
inefficiencies or other factors, are borne by the Company, and could
have a material adverse effect on the Company's results of operations.
In accounting for cost plus reimbursement type contracts, all costs
are charged to operations as incurred (including allowable
administrative expenses), and revenues are recognized based on costs
incurred plus estimated fee rates at the date of evaluation. In
accounting for fixed price type contracts, revenue is recognized using
the percent completion method which is substantially the same as that
used for cost type contracts described above.
All costs are charged to operations (including allowable
administrative expenses) as incurred, and revenues are recognized
based on estimated costs and profits at completion on a contract by
contract basis. Losses on any individual contracts are provided for at
the time they become known. (See Note 1 to Financial Statements.)
Operating Results-Fiscal Years Comparison
The following table sets forth, for the periods indicated, statements of
operations data as a percentage of revenues from contracts and, at the
end of each period indicated, the Company's backlog:
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues from contracts 100.0% 100.0% 100.0%
Operating expenses:
Contract costs 62.8% 68.9% 67.1%
Research and development 10.5% 12.1% 14.6%
General and administrative 14.2% 15.5% 16.6%
------------ ------------ ------------
Total operating expenses 87.5% 96.5% 98.3%
------------ ------------ ------------
Operating income 12.5% 3.5% 1.7%
Interest income 0.2% 0.2% 0.5%
Interest expense 0.0% -0.1% -0.2%
------------ ------------ ------------
Income before provision for income taxes 12.7% 3.6% 2.0%
Provision for income taxes 4.7% 1.3% 0.5%
------------ ------------ ------------
Net income 8.0% 2.3% 1.4%
============ ============ ============
Backlog (thousands of dollars) $83,268 $82,886 $29,644
</TABLE>
Revenues
Revenues from contracts increased by 24% from $77.4 million in fiscal
1996 to $96.3 million in fiscal 1997. Revenues increased by 14% from
$67.7 million in fiscal 1995 to $77.4 million in fiscal 1996. Revenue
increases over these periods reflect the continued demand for the
Company's products and services, the introduction of new products and
services, as well as an increase in average fee recorded for
production contracts.
The following table identifies the source of the Company's revenues for
fiscal years 1995, 1996 and 1997 by major market.
<TABLE>
<CAPTION>
FY97 FY96 FY95
----- ----- -----
<S> <C> <C> <C>
Intelligence Agencies 92% 89% 88%
Military 6% 6% 4%
Foreign 2% 2% 5%
Commercial -- 3% 3%
</TABLE>
Backlog
The Company's backlog, which consists of anticipated revenues from the
uncompleted portions of existing contracts (excluding unexercised
options), was $83,268,000 at the end of fiscal 1997. This represents a
nominal increase over the prior year's ending backlog of $82,886,000.
Fiscal 1996 backlog increased 179.6% from $29,644,000 to $82,886,000.
Management believes this increase in backlog was attributable to the
Company's continued emphasis on marketing and research and development
activities and the use of inventory to generate off-the-shelf sales.
Contract Costs
Contract costs consist of direct costs on contracts, including labor,
materials, and manufacturing overhead costs. Contract costs as a
percentage of revenues decreased to 62.8% in fiscal 1997 from 68.9% in
fiscal 1996. As a percentage of revenues, contract costs for fiscal
1996 were higher than contract costs of 67.1% of revenues for fiscal
1995. The decrease in contract costs as a percentage of revenue for
fiscal 1997 compared to fiscal 1996 is due, in part, to lower material
acquisition costs and, in part, to economies achieved in the
manufacturing division from higher production quantities. The increase
in contract costs as a percentage of revenues in fiscal 1996 as
compared to fiscal 1995 is attributable, in part, to an increase in
the percent of development jobs (which typically require more labor-
per-revenue dollar) versus production jobs and, in part, due to an
increase in manufacturing overhead costs. The manufacturing overhead
increase is attributable to increased facilities costs resulting from
the addition of a newly constructed 30,000 square foot building
completed during fiscal 1996, an increase in fringe benefit costs
specifically related to health insurance, and an increase in
recruiting costs.
Research and Development
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. Research
and development expenses as a percentage of revenues were 10.5%,
12.1%, and 14.6% for fiscal years 1997, 1996, and 1995, respectively.
Although R&D spending grew by $10.1 million in fiscal 1997 from $9.4
million in 1996, the decrease in research and development expenses as
a percentage of revenues in fiscal 1997 when compared to fiscal 1996
is, in part, attributable to actions taken by management to divert
personnel from R&D to other activities since the Company was
experiencing some constraint on labor resources during the fiscal
year. The decrease in research and development spending in fiscal 1996
as compared to fiscal 1995 is attributable to management's actions to
curb R&D spending since the Company was experiencing some constraint
on earnings during fiscal 1996. The Company-funded investment in R&D
for fiscal 1997 was 2.1% of revenues versus 3.5% during fiscal 1996
and 4.5% during fiscal 1995. The Company intends to continue to make
substantial investments in research and development in an effort to
meet the needs of customers before its competitors.
General and Administrative Expenses
General and administrative expenses include administrative salaries,
costs related to the Company's marketing and proposal activities, and
other administrative costs. General and administrative expenses were
$13.6 million or 14.2% of revenues in fiscal 1997 compared to $12.0
million or 15.4% of revenues in fiscal 1996 and $11.2 million or 16.6%
of revenues in fiscal 1995. The successive decreases in general and
administrative expenses as a percentage of revenues in fiscal years
1997 and 1996 are primarily attributable to the Company's higher
revenues during each of the fiscal years following fiscal 1995.
Interest Income/Expense (Net)
Net interest income/expense for fiscal 1997 increased $141,000 from
$49,000 net interest income in fiscal 1996 to $190,000 in fiscal 1997.
Net interest income in fiscal 1996 decreased $139,000 to $49,000 from
$188,000 net interest income in fiscal 1995. The increase in interest
income during fiscal 1997 is primarily the result of higher invested
cash balances generated from higher profit margins. The decrease in
interest income during fiscal 1996 was primarily the result of a
smaller Company portfolio of government treasuries offset by interest
expense on the Company's higher average outstanding line of credit
balance during fiscal 1996. For fiscal 1995, a portion of working
capital was derived from the partial sale of the Company's portfolio
of U.S. Government treasuries and an increase in the average bank line
of credit outstanding; as a result, interest income decreased and
interest expense increased.
Provision for Income Taxes
Income taxes as a percentage of income before provision for income
taxes have been provided for at a combined federal and state income
tax rate of 37.5% for fiscal 1997 versus 35% for fiscal 1996 and 32.5%
for fiscal 1995. The 1997 effective tax rate is lower than the
combined federal and state statutory income tax rates primarily due to
the benefit derived from state income tax credits. The increases in
the effective tax rate from fiscal 1996 to fiscal 1997 and from fiscal
1995 to fiscal 1996 are primarily a result of the increases in state
tax liabilities as a result of the lower impact of state tax credits
on increased profitability.
Quarterly Results
The following table sets forth certain unaudited quarterly financial data for
the eight quarters ending October 31, 1997. In the opinion of the Company's
management, the unaudited information set forth below has been prepared on
the same basis as the audited information and includes all adjustments
necessary to present fairly the information set forth herein. The operating
results for any quarter are not indicative of results for any future period.
All data is in thousands except per common share data.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 FISCAL YEAR 1996
---------------------------------------------- ------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
---------- ---------- ---------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues from contracts $20,084 $23,987 $22,600 $29,588 $15,798 $16,970 $19,504 $25,138
Operating expenses
Contract costs 13,136 15,742 13,793 17,733 10,815 12,180 12,624 17,714
Research and development 2,470 2,394 2,269 3,004 1,912 2,155 2,281 3,032
General and administrative 3,182 3,171 3,062 4,227 2,840 2,528 2,877 3,709
---------- ---------- ---------- ---------- --------- --------- --------- ---------
Total operating expenses 18,788 21,307 19,124 24,964 15,567 16,863 17,782 24,455
---------- ---------- ---------- ---------- --------- --------- --------- ---------
Operating income 1,296 2,680 3,476 4,624 231 107 1,722 683
Interest income/(expense) net 60 37 18 75 19 (4) 23 11
---------- ---------- ---------- ---------- --------- --------- --------- ---------
Income before provision for
income taxes 1,356 2,717 3,494 4,699 250 103 1,745 694
Provision for income taxes 495 992 1,351 1,762 100 24 610 243
---------- ---------- ---------- ---------- --------- --------- --------- ---------
Net income $861 $1,725 $2,143 $2,937 $150 $79 $1,135 $451
========== ========== ========== ========== ========= ========= ========= =========
Net income per common share $0.11 $0.21 $0.25 $0.34 $0.02 $0.01 $0.14 $0.06
Weighted average shares outstan 8,114 8,156 8,517 8,749 7,782 7,905 8,062 8,035
Net income per common
share for the year $0.91 $0.23
</TABLE>
The Company has at times experienced fluctuations in its quarterly results
due to both seasonal and nonseasonal factors inherent in its business. These
have included costs associated with uneven flows of incoming material, the
level of research and development spending during any given quarter, fee
recognition on development contracts in the early phases of contract
performance where the financial risk is not entirely known until the contract
is further along in the development cycle, the United States Government
and the timing of contract awards. Management expects these fluctuations
to continue into the future.
Analysis of Liquidity and Capital Resources:
The Company's primary source of liquidity has been the cash flow
generated from operations, as well as the issuance of common stock
through its employee stock plans.
The Company has a bank credit agreement to augment cash flow needs and
to provide term financing for capital investments. The Company
maintains a $6,000,000 unsecured, revolving line of credit for short-
term cash requirements and a $1,000,000 line of credit for use in
purchasing capital investments. The unsecured, revolving line of
credit bears interest at the bank's reference rate (8.5% as of October
31, 1997). The line of credit for use in purchasing capital
investments bears interest at the bank's reference rate plus one-half
percent (9.0% as of October 31, 1997). Outstanding amounts on the
unsecured, revolving line of credit were zero at October 31, 1997 and
1996. Outstanding amounts on the line of credit for use in purchasing
capital investments were zero at October 31, 1997 and 1996. Both lines
expire March 1, 1998; the Company intends to renew both lines in March
1998.
Net cash provided by/(used in) operating activities: Net cash provided
by operating activities has varied significantly from year to year. In
fiscal 1997, $9.6 million was provided by operating activities. In
fiscal 1996, $5.4 million was provided by operating activities and in
fiscal 1995, $1.5 million was used in operating activities. These
year-to-year variances are primarily the result of changes in net
income, changes in accounts receivable, changes in the level of
accrued liabilities and the change in inventories held by the Company.
During fiscal 1997, net income increased to $7.7 million. During
fiscal 1996, net income increased to $1.8 million from $0.9 million in
fiscal 1995. The improvement in the year-to-year change in cash
provided by operating activities for fiscal 1997 is primarily due to
higher contract fees and improved margins realized because of lower
material acquisition costs, and economies derived from manufacturing
in larger production quantities than in the prior fiscal year. The
increased level of accounts receivable during fiscal 1997 is primarily
due to greater contract activity, and in part to certain limitations
and terms stipulated in certain engineering and production contracts.
The increased level of inventories, prepaid expenses and other current
assets in fiscal 1997 is primarily due to the purchase of parts
required for future production, purchases for anticipated future
contract awards, as well as due to the timing of rent payments at the
end of the year and for increased tax payments due to higher profits.
Cash provided by increases in accrued liabilities in fiscal 1997 is
primarily due to the year-end timing of the issuance of payroll checks
and accrued employee benefits. The reduction in the increase in
accounts receivable for fiscal 1996 is primarily attributable to a
higher percentage of the Company's billings occurring under cost-type
contracts which generally provide for invoicing twice monthly. The
reduction in the increase in inventory is due to a management
initiative to more aggressively manage the Company's inventory
balances. The cash used in operating activities during fiscal 1995 was
due to a reduction in net income and to an increase in accounts
receivable and inventory. The growth in accounts receivable for fiscal
1995 was primarily due to the growth of the Company's business and the
timing of eligible billings to be submitted to customers. The increase
in inventory in fiscal 1995 is the result of management's anticipation
of future contract awards expected during the following years for the
Company's products and services.
Net cash provided by / (used in) investing activities: Net cash used
in investing activities was $5.8 million for fiscal 1997 compared to
$5.3 million during fiscal 1996, and $0.5 million provided by
investing activities during fiscal 1995. Use of cash for investing
activities was for additions to property and equipment. The continued
heavy investment in capital equipment is driven by the Company's
increased volume of development contracts, the increased number of new
staff hired by the Company, and the continued investment in R&D, which
all have a tendency to create demand for test and computer equipment.
Other cash provided by investing activities during fiscal 1997
included the maturity of $0.8 million of the Company's short-term
investments in U.S. Government treasuries. Other cash provided by
investing activities during fiscal 1995 included the sale of $3.4
million of U.S. Government treasuries and the maturity of $2.5 million
of the Company's short-term investments in U.S. Government treasuries.
Both of the amounts were used as working capital to finance the
increases in inventory, accounts receivable, and investment in fixed
assets.
Net cash provided by/(used in) financing activities: Net cash provided
by financing activities was $1.9 million during fiscal 1997 compared
to $1.1 million during fiscal 1996, and $0.2 million during fiscal
1995. The $1.9 million and the $1.1 million provided by financing
activities during fiscal 1997 and fiscal 1996, respectively, were
predominately due to the issuance of common stock under the Company's
employee stock purchase plan and stock option plans. During fiscal
1995, the $0.2 million provided by financing activities is
attributable to the issuance of $1.2 million of common stock under the
employee stock purchase plan, offset by $1.0 million of common stock
repurchases authorized under the Company's buyback program.
In November 1997, the Board of Directors authorized a share repurchase
program which the Company intends to use to offset the dilutive effect
of future issuances under the Company's employee benefit plans.
The Company believes that the funds generated from operations,
existing working capital, and amounts available under existing lines
of credit will be sufficient to meet its cash needs for at least the
next 12 months.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Applied Signal Technology, Inc.
We have audited the accompanying balance sheets of Applied Signal Technology,
Inc. as of October 31, 1997 and 1996, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Applied Signal Technology, Inc.
at October 31, 1997 and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1997 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
December 12, 1997
<PAGE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues from contracts $96,258,831 $77,410,481 $67,664,260
Operating expenses:
Contract costs 60,403,961 53,333,328 45,417,725
Research and development 10,137,304 9,380,007 9,873,295
General and administrative 13,641,613 11,953,861 11,221,096
------------ ------------ ------------
Total operating expenses 84,182,878 74,667,196 66,512,116
------------ ------------ ------------
Operating income 12,075,953 2,743,285 1,152,144
Interest income 239,042 131,825 320,182
Interest expense (49,089) (82,982) (132,441)
------------ ------------ ------------
Income before provision for income taxes 12,265,906 2,792,128 1,339,885
Provision for income taxes 4,599,715 977,245 435,463
------------ ------------ ------------
Net income $7,666,191 $1,814,883 $904,422
============ ============ ============
Net income per common share $0.91 $0.23 $0.12
Number of shares used in calculating
net income per common share 8,435,191 7,918,603 7,634,858
</TABLE>
See accompanying notes.
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31,
-------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $7,403,128 $1,559,212
Short term investments 1,330,656 767,355
Accounts receivable:
Billed 20,495,931 14,491,255
Unbilled 12,152,475 15,527,053
------------ ------------
Total accounts receivable 32,648,406 30,018,308
Inventory 4,821,541 3,207,648
Prepaid and other current assets 2,175,087 2,235,362
------------ ------------
Total current assets 48,378,818 37,787,885
Property and equipment, at cost:
Machinery and equipment 27,311,561 23,220,856
Furniture and fixtures 3,650,412 3,300,754
Leasehold improvements 5,310,361 3,356,327
Construction in process 418,689 191,551
------------ ------------
36,691,023 30,069,488
Accumulated depreciation and amortization (20,979,847) (17,198,416)
------------ ------------
Net property and equipment 15,711,176 12,871,072
Long-term investments 0 1,326,124
Other assets 70,573 118,133
------------ ------------
Total Assets $64,160,567 $52,103,214
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $3,704,581 $3,044,801
Accrued payroll and related benefits 6,294,724 4,336,930
Other accrued liabilities 1,877,054 1,900,501
Income taxes payable 1,566,676 2,028,802
------------ ------------
Total current liabilities 13,443,035 11,311,034
Deferred income taxes 951,372 827,428
Commitments
Shareholders' equity:
Preferred stock, no par value: 2,000,000 shares
authorized; none issued and outstanding -- --
Common stock, no par value: 20,000,000 shares
authorized; issued and outstanding
shares - 8,351,629 at October 31, 1997
and 7,873,347 at October 31, 1996 22,197,167 20,099,127
Retained earnings 27,568,993 19,865,625
------------ ------------
Total shareholders' equity 49,766,160 39,964,752
------------ ------------
Total liabilities and shareholders' equity $64,160,567 $52,103,214
============ ============
</TABLE>
See accompanying notes.
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended October 31,
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $7,666,191 $1,814,883 $904,422
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,781,431 3,706,093 3,137,566
Tax benefit related to stock plans 238,114 69,448 25,713
Changes in:
Accounts receivable (2,630,098) (453,670) (4,600,988)
Inventory, prepaid expenses and other current assets (1,553,618) 127,382 (1,546,378)
Other assets 47,560 58,143 (13,776)
Accounts payable, taxes payable and accrued expenses 2,132,001 75,718 443,488
Deferred income taxes 123,944 (19,914) 132,342
----------- ----------- -----------
Net cash provided by (used in) operating activities 9,805,525 5,378,083 (1,517,611)
Investing activities:
Sale of available-for-sale securities -- -- 3,400,000
Maturity of available-for-sale securities 800,000 -- 2,500,000
Additions to property and equipment (6,621,535) (5,322,077) (5,419,022)
----------- ----------- -----------
Net cash provided by (used in) investing activities (5,821,535) (5,322,077) 480,978
Financing activities:
Issuance of common stock 1,866,925 1,135,129 1,200,271
Repurchase of common stock (6,999) (760) (986,920)
----------- ----------- -----------
Net cash provided by financing activities 1,859,926 1,134,369 213,351
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 5,843,916 1,190,375 (823,282)
Cash and cash equivalents at beginning of year 1,559,212 368,837 1,192,119
----------- ----------- -----------
Cash and cash equivalents at end of year $7,403,128 $1,559,212 $368,837
=========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid $49,089 $82,983 $118,866
=========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Retained Shareholders'
Stock Earnings Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balance at October 31, 1994 $18,656,246 $17,152,841 $35,809,087
Issuance of 363,178 common shares to
employees under stock purchase
agreements and stock option plan 1,200,271 -- 1,200,271
Repurchase of 229,538 common shares (986,920) -- (986,920)
Tax benefit related to stock plans 25,713 -- 25,713
Net unrealized loss on securities
available for sale -- (5,405) (5,405)
Net income -- 904,422 904,422
------------ ------------ ------------
Balance at October 31, 1995 18,895,310 18,051,858 36,947,168
Issuance of 340,949 common shares to
employees under stock purchase
agreements and stock option plan 1,135,129 -- 1,135,129
Repurchase of 245 common shares (760) -- (760)
Tax benefit related to stock plans 69,448 -- 69,448
Net unrealized loss on securities
available for sale -- (1,116) (1,116)
Net income -- 1,814,883 1,814,883
------------ ------------ ------------
Balance at October 31, 1996 20,099,127 19,865,625 39,964,752
Issuance of 483,259 common shares to
employees under stock purchase
agreements and stock option plan 1,866,925 -- 1,866,925
Repurchase of 4,977 common shares (6,999) -- (6,999)
Tax benefit related to stock plans 238,114 -- 238,114
Net unrealized loss on securities
available for sale -- 37,177 37,177
Net income -- 7,666,191 7,666,191
------------ ------------ ------------
Balance at October 31, 1997 $22,197,167 $27,568,993 $49,766,160
============ ============ ============
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Applied Signal Technology, Inc. (the Company) was incorporated in
California on January 12, 1984. The Company designs, develops,
manufactures, and markets signal processing equipment to collect and
process a wide range of telecommunications signals. At October 31,
1997 and 1996, 97% of the accounts receivable and substantially all of
the revenues were from contracts with the U.S. Government, its
agencies, or prime contractors for the U.S. Government.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Contracts and Contract Accounting
Approximately 50% of contract revenues in fiscal 1997 (48% in fiscal
1996 and 34% in fiscal 1995) is represented by cost reimbursement type
contracts. In accounting for these contracts, all costs are charged to
operations as incurred (including allowable administrative expenses)
and revenues are recognized based on costs incurred plus estimated
effective fee rates. Estimated fee rates are determined on a contract-
by-contract basis according to the type of fee (e.g., fixed,
incentive, or award) and the most recent estimated cost of completion
of the individual contract.
Approximately 50% of contract revenues in fiscal 1997 (52% in fiscal
1996 and 66% in fiscal 1995) is represented by fixed price type
contracts. In accounting for these contracts, the Company uses the
percentage-of-completion method which is substantially the same method
as that used for cost reimbursement type contracts as described above.
All contract costs (including administrative expenses) are charged to
operations as incurred and revenues are recognized based on estimates
of costs and profits at completion on a contract-by-contract basis.
Losses on any individual contract are provided for at the time they
become known.
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 material costs, inefficiencies or other factors, are borne by the
Company, and could have a material adverse effect on the Company's
results of operations.
completion costs will be revised in the near-term. Such revisions could result
Accounts receivable are segregated between billed and unbilled
accounts. The Company bills incurred costs and ratable portions of
fees regularly under its cost reimbursement type contracts. Under
fixed price contracts, the Company either regularly progress bills 90%
of incurred costs or bills contract costs on a milestone or unit of
delivery basis. Unbilled amounts result from recognition of contract
revenue in advance of contractual billing or progress billing terms.
The Company regards the credit risk of its business to be minimal.
Price Redetermination
As a government contractor, the Company is subject to price
redetermination on certain fixed price contracts if it is determined
that the Company did not price its products and services consistent
with the requirements of the Federal Acquisition Regulations.
Cash Equivalents, Short and Long Term Investments
The Company considers all highly liquid debt investments purchased
with a maturity of three months or less to be cash equivalents. Short-
and long-term investments are comprised of U.S. Government treasury
bills and notes, with contract maturities staggered through June 30,
1998.
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as
of each balance sheet date. The Company's debt securities, which
consist of U.S. Treasury securities, are classified as available-for-
sale and are carried at fair market value in short-term investments
and long-term investments. Unrealized gains and losses, net of tax,
are reported in shareholders equity as part of retained earnings and
were immaterial as of October 31, 1997. Realized gains and losses on
available-for-sale securities have not been material. The cost of
securities sold is based on the specific identification method.
Property and Equipment
Machinery and equipment as well as furniture and fixtures are
depreciated using the straight-line method over the estimated useful
lives of the assets, ranging from three to five years. Leasehold
improvements are amortized using the straight-line method over the
lesser of the useful life of the assets or the lease term.
Per Share Data
Net income per share is computed using the weighted average number of
shares of Common Stock outstanding and common equivalent shares from
stock options (using the treasury stock method). Common equivalent
shares from the assumed exercise of warrants are excluded from the
computation as their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be
adopted for the quarter ended January 30, 1998. At that time, the
Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the
new requirements for calculating earnings per share, the diluted
effect of stock options will be excluded. The impact to the results
would have only affected the fiscal year ended October 31, 1997; the
impact would have been an increase of $0.05 per share. Fiscal years
ended October 31, 1996 and 1995 would have remained as originally
reported.
Impact of Recently Issued Accounting Standards
In 1997, the Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income," was issued and is
effective for fiscal years commencing after December 15, 1997.
In 1997, the Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosure About Segments of an Enterprise and Related
Information," was issued and is effective for fiscal years commencing
after December 15, 1997.
The Company is required to adopt the provisions of SFAS' 130 and 131
in fiscal year 1999 and expects the adoption will not impact results
of operations or financial position, but will require additional
disclosure.
NOTE 2: INVENTORY
The Company manufactures product subassemblies in inventory to be able
to quickly meet the requirements of future contracts. Inventories are
stated at the lower of average cost or market and consisted of the following:
<TABLE>
<CAPTION>
October 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 1,121,625 $ 590,396
Work-in-process 3,130,648 2,195,125
Finished goods 278,832 322,089
----------- -----------
4,531,105 3,107,610
Precontract costs 290,436 100,038
----------- -----------
$ 4,821,541 $ 3,207,648
=========== ===========
</TABLE>
Precontract costs represent costs incurred in connection with ongoing
level-of-effort type contracts for which contract modifications have not been
definitized ($216,726 at October 31, 1997 and $78,405 at October 31, 1996) and
production costs incurred in anticipation of specific expected future contract
awards. The production items in the latter group generally would be usable if
the expected contract awards did not occur. Allocable administrative expenses
included in precontract costs have not been material.
NOTE 3: LINES OF CREDIT
As of October 31, 1997, the Company has a $6,000,000 revolving line of
credit available with a bank. The line of credit bears interest at the
bank's reference rate (8.5% at October 31, 1997), payable monthly, and
expires on March 1, 1998; the Company intends to renew this line of
credit. There were no borrowings outstanding at October 31, 1997 and
1996.
The line of credit agreement requires compliance with certain
financial covenants and restricts dividend payments and any loans or
advances made to any third parties without the prior written consent
of the lender. The Company was in compliance with these covenants as
of October 31, 1997. The Company has a $1,000,000 line of credit for
use in purchasing capital equipment. Amounts outstanding under the
line of credit bear interest at the bank's reference rate plus 0.5%
(9.0% at October 31, 1997) and is payable monthly. There were no
amounts outstanding as of October 31, 1997 and 1996.
NOTE 4: COMMITMENTS
Facility Commitment
The Company leases its facilities under noncancelable lease agreements
which expire at various dates between fiscal years 1998 and 2011.
Certain of the leases contain escalation clauses and requirements for
the payment of property taxes, insurance and maintenance expenses. The
aggregate minimum annual lease commitments at October 31, 1997 under
long-term operating leases are as follows:
<TABLE>
<S> <C>
1998 $ 3,599,987
1999 3,740,412
2000 3,774,801
2001 3,887,083
2002 3,925,864
Thereafter 33,903,967
-----------
$52,832.114
===========
</TABLE>
Rent expense under operating leases was approximately $3,296,185 in 1997
($3,078,843 in 1996; $2,479,581 in 1995).
The Company has outstanding letters of credit at October 31, 1997 of $1,000,000
of which $218,250 and $11,755 are used as security deposits for its leased
operating facilities.
The Company has no noncancelable purchase commitments for materials as of
October 31, 1997 and as of October 31, 1996.
NOTE 5: SHAREHOLDERS' EQUITY
Employee Stock Purchase Plan
Under the Company's 1993 Employee Stock Purchase Plan (1993 Plan), a total of
1,600,000 shares of common stock have been reserved for issuance. The 1993 Plan
permits eligible employees to purchase common stock through payroll deductions
(which cannot exceed 10% of any employee's compensation) at 85% of the lower of
its fair market value at the beginning or end of the purchase period. As of
October 31, 1997, 566,118 shares remain eligible for purchase under the
1993 Plan.
Stock Option Plan
The Company's 1991 Stock Option Plan (the 1991 Plan) provides for the granting
of incentive stock options and non-qualified stock options to employees,
directors, and consultants of the Company at prices ranging from 85% to 110%
(depending on the type of grant) of the fair market value of the common stock on
the date of grant. Company stock options are generally exercisable over a
four year period at the rate of one-fourth one year after the date of grant
and 1/48 per month for each month thereafter provided the optionee continues
to be employed by the Company. Some options are only exercisable at the end
of a two-year vesting period. The vesting and exercise provisions of the option
grants are determined by the Board of Directors.
A summary of the option activity under the 1991 Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------------------------
Options Weighted
Available Average
for Number of Aggregate Exercise
Grant Shares Price Share Price
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at October 31, 1994 557,246 897,960 $3,706,602 $4.13
Granted (250,000) 250,000 1,157,500 $4.63
Exercised -- (88,650) (230,773) $2.60
Canceled 69,897 (69,896) (377,144) $5.40
------------- ----------- -----------
Balance at October 31, 1995 377,143 989,414 4,256,185 $4.30
Granted (263,080) 263,080 1,203,860 $4.58
Exercised -- (82,321) (220,420) $2.68
Canceled 83,434 (83,434) (436,568) $5.23
------------- ----------- -----------
Balance at October 31, 1996 197,497 1,086,739 4,803,057 $4.42
Authorized (Note 1) 500,000
Granted (20,000) 20,000 90,000 $4.50
Exercised -- (179,173) (800,821) $4.47
Canceled 203,183 (203,183) (997,799) $4.91
------------- ----------- -----------
Balance at October 31, 1997 880,680 724,383 3,094,437 $4.27
</TABLE>
Note 1: Additional shares approved by shareholders on March 6, 1997.
As of October 31, 1997, there were 724,383 options outstanding for which
471,323 options are exercisable to purchase common shares.
Accounting for Stock-Based Compensation
The following table summarizes information about options outstanding at
October 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
Weighted
Average Weighted
Number Remaining Average Number Weighted
Range of Outstanding Contractual Exercise Exercisable Average
Exercise Prices of 10/31/97 Life (years) Price As of 10/31/97 Exercise Price
- --------------- ------------ ---------- ----------- ----------- ------------
$2.50 - $4.50 435,293 3.53 3.57 202,233 $2.50
$4.63 - $6.75 283,310 2.22 5.29 263,310 $5.27
$7.00 - $7.25 5,780 0.58 7.23 5,780 $7.23
-------- --------
$2.50 - $7.25 724,383 2.99 4.27 471,323 $4.11
======== ========
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
and related interpretations in accounting for its stock option plans
The Company has opted under Statement of Financial Accounting Standards No.
123, "Accounting for StockBased Compensation" (SFAS 123") to disclose
its stock-based compensation with no financial effect. The pro forma
effects of applying SFAS 123 in this initial phase-in period are not
necessarily representative of the effects on reported net income or loss
for future years. Had compensation expense for the Company's stock
options plans been determined based upon the fair value at the grant date
for awards under these plans consistent with the methodology prescribed
under SFAS 123, the Company's pro forma net income and net income per
share would have been as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net income
As reported $7,666,191 $1,814,883
Pro forma 5,984,637 396,689
Net income per share
As reported $0.91 $0.23
Pro forma $0.71 $0.05
</TABLE>
The weighted average fair value of the options granted during fiscal
years 1996 and 1997 is estimated on the date of grant using the
Black-Scholes option pricing model. The weighted average fair values
and weighted average assumptions used in calculating the fair values
were as follows:
<TABLE>
<CAPTION>
Employee Employee Stock
Option Plans Purchase Plan
--------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Expected lives (in years) 2.5 2.5 .5 .5
Risk-free interest rate 6.0% 5.9% 6.0% 6.0%
Expected volatility 84% 84% 84% 84%
Dividend yeild 0% 0% 0% 0%
</TABLE>
NOTE 6: INCOME TAXES
The provision for income taxes for the years ended October 31, 1997, 1996 and
1995 consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current $3,921,838 $1,164,539 $785,846
Deferred (prepaid) 44,731 348,533 (292,087)
------------- ----------- -----------
3,966,569 1,513,072 493,759
State:
Current 218,788 136,388 212,687
Deferred (prepaid) 414,358 (672,215) (270,983)
------------- ----------- -----------
633,146 (535,827) (58,296)
------------- ----------- -----------
$4,599,715 $977,245 $435,463
============= =========== ===========
</TABLE>
The tax benefits associated with disqualifying dispositions of stock options or
employee stock purchase plan shares reduce taxes currently payable as shown by
$238,114, $69,448, and $25,713 for fiscal 1997, 1996, and 1995, respectively.
Such benefits are credited to additional paid-in-capital when realized.
The provision for income taxes differs from the amount computed by applying the
federal income tax rate of 34% to income before provision for income taxes as
follows:
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Computed expected tax provision $4,293,067 $949,324 $455,561
State income tax,
net of federal benefit 411,545 (17,817) (74,688)
Other individually immaterial
items (104,897) 45,738 54,590
------------- ----------- -----------
$4,599,715 $977,245 $435,463
------------- ----------- -----------
Effective Tax Rate 3750.0% 35.0% 32.5%
============= =========== ===========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
October 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued expenses and reserves $1,377,004 $1,225,231
Deferred revenue (64,998) 16,850
State taxes and other 81,030 486,100
----------- -----------
$1,393,036 $1,728,181
=========== ===========
Deferred tax liabilities:
Tax over book depreciation (951,372) (827,429)
----------- -----------
$441,664 $900,752
=========== ===========
</TABLE>
During fiscal 1997, the Company made total cash payments, net of refunds, of
approximately $4,347,000, ($1,279,000 during fiscal 1996: $528,000 during
fiscal 1995) for income tax purposes.
NOTE 7: RETIREMENT PLAN
All employees who perform at least 1,000 hours of service per year are
covered under the Company's retirement plan (the Retirement Plan).
Contributions to the Retirement Plan by the Company are discretionary
and currently are at the rate of 4% of qualified compensation up to
$150,000. The Company accrues for the accumulated contributions which
are payable bi-weekly to the Retirement Plan's administrator. The
Company has expensed approximately $1,524,000 in fiscal 1997
($1,275,000 in fiscal 1996; $1,206,000 in fiscal 1995), which is
included in general and administrative expenses.
NOTE 8: CONTINGENCY
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 its 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 third quarter operating results in anticipation of a
settlement with the government on the subject contracts. The charge
resulted in a reduction of $1.2 million of the fiscal 1995 third
quarter's operating income.
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.
While management believes the fiscal 1995 third quarter charge is
adequate to cover all potential liabilities associated with this
investigated by the United States Government, 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 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained on pages 6 and 7 of Applied Signal Technology,
Inc.'s Proxy Statement dated February 2, 1998, with respect to directors of the
Company, is incorporated herein by reference. Information with respect to
executive officers of the Company is contained in Part I of this report.
ITEM 11: EXECUTIVE COMPENSATION
The information contained on pages 9 through 10 of Applied Signal
Technology, Inc.'s Proxy Statement dated February 2, 1998, with respect to
executive compensation and other matters, is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained on pages 4 and 5 of Applied Signal Technology,
Inc.'s Proxy Statement dated February 2, 1998, with respect to security
ownership of certain beneficial owners and management, is incorporated herein by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2) -- The following financial statements of Applied Signal
Technology, Inc., included in this Reporting.
Balance Sheets -- October 31, 1997 and 1996
Statements of Income -- Years ended October 31, 1997, 1996, and 1995
Statements of Shareholders' Equity -- Years ended October 31, 1997,
1996, and 1995
Statements of Cash Flows -- Years ended October 31, 1997, 1996, and
1995
Notes to Financial Statements -- October 31, 1997
Report of Ernst & Young LLP, Independent Auditors.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(3) -- Listing of Exhibits -- See Exhibit Index on page 49 of this Report
on Form 10-K.
(b) Reports on Form 8-K filed in the Company's fiscal year ended October 31,
1997:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
Dated January 26, 1998 /s/ Gary L. Yancey
------------------------------
Gary L. Yancey, President and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE TITLE
--------- ---- -----
<S> <C> <C>
/s/ Gary L. Yancey ____________ President and Chairman of the Board
- ----------------------------- (Principal Executive Officer)
/s/ Brian M. Offi ____________ Vice President of Finance and Chief
- ----------------------------- Financial Officer (Principal Financial and
Accounting Officer)
/s/ James F. Collins ____________ Director
- ----------------------------
/s/ John P. Devine ____________ Director
- ----------------------------
/s/ David D. Elliman ____________ Director
- ----------------------------
/s/ John R. Treichler ____________ Director
- ----------------------------
/s/ Stuart G. Whittelsey, Jr. ____________ Director
- ----------------------------
</TABLE>
<PAGE>
APPLIED SIGNAL TECHNOLOGY
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT
NUMBER ----------------------
- - ------
<S> <C>
3.1(1) Second Amended and Restated Articles of Incorporation
3.2(1) Amended and Restated Bylaws
4.1(1) Specimen Common Stock Certificate
4.2(1) Rights Agreement dated January 25, 1991
10.1(1) Form of Indemnification Agreement for directors and officers
10.2(1) 1984 Stock Purchase Plan and form of agreement thereunder
10.3(1) 1991 Stock Option Plan and forms of agreements thereunder
10.4(1) 1993 Employee Stock Purchase Plan
10.5(1) Profit Sharing Policy
10.6(1) Summary Plan Description of 401(k) Retirement Plan
10.7(1) Warrant to Purchase Common Stock dated June 27, 1990 issued to
Owenoake Partners, L.P. ("Owenoake"), Letter Agreement with
Owenoake dated September 20, 1990, and Amendment Number One to
Warrants to Purchase Common Stock with Owenoake and certain
warrant holders dated February 8, 1993
10.8(1) Warrants to Purchase Common Stock dated September 25, 1990 issued
to certain warrant holders
10.9(2) Line of Credit Agreement dated June 10, 1993 with Sanwa Bank
California and related Equipment Purchase Line of Credit
Agreement dated June 10, 1993
10.10(1) Lease Agreement dated August 21, 1985 with Lincoln Mathilda
Associates, Ltd. and Patrician Associates, Inc., and amendments
thereto
10.11(3) Lease agreements dated November 23, 1994 with Lincoln Property
Company Management Services, Inc. for Buildings H and I
10.12(4) Amendment to Commercial Credit Agreement dated March 7, 1995 with
Sanwa Bank California and related Equipment Purchase Line
Agreement dated March 10, 1995
10.13(5) Amendments to Commercial Credit Agreements dated March 1, 1996
with Sanwa Bank California
10.14(6) Lease agreement dated May 31, 1996 with Constellation Real
Estate, Inc., for 135 National Business Parkway
10.15(6) Amendments to lease agreements dated November 23, 1994 with
Lincoln Property Company Management Services, Inc.
10.16 Commercial Credit Agreement dated March 3, 1997 with Sanwa Bank
California
10.17 Lease agreement dated May 29, 1996 with Constellation Real
Estate, Inc.
11.1 Statement regarding computation of net income per share
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
</TABLE>
(1) Incorporated by reference to corresponding Exhibit filed as an Exhibit to
Registrant's Registration Statement on Form S-1 filed January 29, 1993
(File No. 33-58168).
(2) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-K for fiscal year 1993 dated January 22, 1994.
(3) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-K for fiscal year 1994 dated January 27, 1995.
(4) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-K for fiscal year 1995 dated January 26, 1996.
(5) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-Q for fiscal year 1996 dated August 2, 1996.
(6) Incorporated by reference to corresponding Exhibit filed with the
Registrant's Form 10-K for fiscal year 1996 dated January 26, 1997.
COMMERCIAL CREDIT AGREEMENT
This Commercial Credit Agreement ("Agreement") is made and entered
into this 3 day of March 1997 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. "Equipment" shall mean, in connection with the Equipment
Purchase Facility contained in Section II of this Agreement,
equipment as defined in the California Uniform Commercial Code.
I. "Equipment Value" shall mean, in connection with the
Equipment Purchase Facility contained in Section II of this
Agreement, the lesser of: (i) the invoice cost of the Equipment
(excluding taxes, license fees, transportation costs, insurance
premiums and installation and connection expenses, fees and costs);
(ii) the book value of the Equipment; or (iii) the liquidation value
of the Equipment as determined by the Bank.
J. "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.
K. "Event of Default" shall have the meaning set forth in the
section herein entitled "Events of Default".
L. "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.
M. "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.
N. "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.
O. "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.
P. "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.
Q. "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 $6,000,000.00. 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, 1997.
D. Repayment of Principal. Unless sooner due in accordance
with the terms of this Agreement, on March 1, 1998 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 $6,000,000.00 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 1, 1998 (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 any and
all addenda and riders thereto, (the "Prior Agreement") less any
partial draws paid by the Bank, exceed the sum of $3,000,000.00; and
provided further, that this Letter of Credit facility is a sub-
facility of the above $6,000,000.00 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 Agreement, 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
$6,000,000.00.
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 1, 1998 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.
2.04. Equipment Purchase Facility. The Bank agrees to make loans
and Advances to the Borrower, upon the Borrower's written request
therefor made prior to the Expiration Date (as defined below in this
Section 2.04), to assist the Borrower in purchasing items of
Equipment. Each Advance made hereunder shall be in an amount not to
exceed 100% of the Value of the items of Equipment being purchased;
provided however, that at no time shall the total aggregate
outstanding principal amount of Advances made under this Equipment
Purchase Facility exceed the sum of $1,000,000.00. This Equipment
Purchase Facility is on a non-revolving basis and any amounts repaid
under the Equipment Purchase Facility may not be reborrowed.
A. Purpose. Advances made under this Equipment Purchase
Facility shall be used for the purchase of equipment by the Borrower
for use in the Borrower's business.
B. Interest Rate. Interest shall accrue on the outstanding
principal balance of Advances under this Equipment Purchase Facility
at a variable rate equal to the Bank's Reference Rate, as it may
change from time to time, plus 0.500% per annum. (Such rate is
referred to in this Section 2.04 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, 1997.
D. Repayment of Principal. Unless sooner due in accordance
with the terms of this Agreement, on March 1, 1998 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. Fixed Rate Alternative Pricing. In addition to Advances
based upon the Variable Rate ("Variable Rate Advances"), at the
Borrower's election, the Bank hereby agrees to make Advances to the
Borrower under this Equipment Purchase facility at a fixed rate
("Fixed Rate") to be quoted and offered by the Bank from time to time
upon the request of the Borrower. The Bank shall only quote and
offer such Fixed Rate for Advances in the minimum amount of
$100,000.00 and in $100,000.00 increments thereafter and for such
period of time (each an "Interest Period") as the Bank may quote and
offer, provided that the Interest Period shall be for a minimum of at
least 30 days and provided further that any Interest Period shall not
extend beyond the Expiration Date (as defined below) of this
facility. Advances based upon the Fixed Rate are hereinafter
referred to as "Fixed Rate Advances".
Interest on any Fixed Rate Advance shall be computed on the
basis of 360 days per year but charged on the actual number of days
elapsed.
The Borrower hereby promises and agrees to pay the Bank
interest on any Fixed Rate Advance on the basis described above with
respect to the Variable Rate. If interest is not paid as and when it
is due, the amount of such unpaid interest shall bear interest, until
paid in full, at a rate of interest equal to the Variable Rate.
(i) Repayment of Fixed Rate Advances. Unless sooner due
in accordance with other terms of this Agreement, or unless adjusted
at the end of the relevant Interest Period as described below, the
Borrower hereby promises and agrees to pay the Bank the principal
amount of each Fixed Rate Advance, together with accrued and unpaid
interest thereon, on the last day of the Interest Period pertaining
to such Fixed Rate Advance.
(ii) Notice of Election to Adjust Interest Rate. Upon
telephonic notice which shall be received by the Bank at or before
11:00 am (California time) on a Business Day, the Borrower may elect:
(a) That interest on a Variable Rate Advance shall be
adjusted to accrue at a quoted and offered Fixed Rate; provided,
however, that such notice shall be received by the Bank no later than
two business days prior to the day (which shall be a business day) on
which the Borrower requests that interest be adjusted to accrue at
the Fixed Rate.
(b) That interest on a Fixed Rate Advance shall continue
to accrue at a newly quoted Fixed Rate or shall be adjusted to
commence to accrue at the Variable Rate; provided however, that such
notice shall be received by the Bank no later than two business days
prior to the last day of the Interest Period pertaining to such Fixed
Rate Advance. If the Bank shall not have received notice as
prescribed herein of the Borrower's election that interest on any
Fixed Rate Advance shall continue to accrue at the Fixed Rate, the
Borrower shall be deemed to have elected that interest thereon shall
be adjusted to accrue at the Variable Rate upon the expiration of the
Interest Period pertaining to such Advance.
(iii) PROHIBITION AGAINST PREPAYMENT OF FIXED RATE
ADVANCES. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE AGREEMENT,
NO PREPAYMENT SHALL BE MADE ON ANY FIXED RATE ADVANCE EXCEPT ON A DAY
WHICH IS THE LAST DAY OF THE INTEREST PERIOD PERTAINING THERETO. IF
THE WHOLE OR ANY PART OF ANY FIXED RATE ADVANCE IS PREPAID BY REASON
OF ACCELERATION OR OTHERWISE, THE BORROWER SHALL, UPON THE BANK'S
REQUEST, PROMPTLY PAY TO AND INDEMNIFY THE BANK FOR ALL COSTS AND ANY
LOSS (INCLUDING INTEREST) ACTUALLY INCURRED BY THE BANK AND ANY LOSS
(INCLUDING LOSS OF PROFIT RESULTING FROM THE RE-EMPLOYMENT OF FUNDS)
SUSTAINED BY THE BANK AS A CONSEQUENCE OF SUCH PREPAYMENT.
(iv) Indemnification for Fixed Rate Costs. During any
period of time in which interest on any Advance is accruing on the
basis of a Fixed Rate, 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 requirements 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 funds used by the Bank in quoting and determining the
Fixed Rate.
(v) Involuntary Conversion from Fixed Rate to Variable
Rate. In the event that the Bank shall at any time determine that
the accrual of interest on the basis of the Fixed Rate (a) is
infeasible because the Bank is unable to determine the Fixed Rate due
to the unavailability of U.S. dollar deposits, contracts or
certificates of deposit in an amount approximately equal to the
amount of the relevant Advance and for a period of time approximately
equal to the relevant Interest Period; or (b) is or has become
unlawful or infeasible by reason of the Bank's compliance with any
new law, rule, regulation, guideline or order, or any new
interpretation of any present law, rule, regulation, guideline or
order, then the Bank shall give telephonic notice thereof (confirmed
in writing) to the Borrower, in which event any Fixed Rate Advance
shall be deemed to be a Variable Rate Advance and interest shall
thereupon immediately accrue at the Variable Rate.
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 written notice received from
the Borrower in form acceptable to the Bank, which notice shall be
received by the Bank at or before 11:00 am (California time) on a
Business Day. The Borrower may borrow under this Equipment Purchase
Facility by requesting either:
(i) A Variable Rate Advance. A Variable Rate Advance
may be made on the day notice is received by the Bank; provided
however, that if the Bank shall not have received notice at or before
11:00 am (California time) on the day such Advance is requested to be
made, such Variable Rate Advance may be made, at the Bank's option,
on the next Business Day.
(ii) A Fixed Rate Advance. The Borrower may elect that
an Advance be made as a Fixed Rate Advance by requesting the Bank to
provide a quote as to the rate which would apply for a designated
Interest Period and concurrently with receiving such quote, giving
the Bank irrevocable notice of the Borrower's acceptance of the rate
quoted, provided such notice shall be given to the Bank not later
than 10:00 a.m. (California time) on a date (which shall be a
Business Day) at least two days prior to the first day of the
requested Interest Period. Any telephonic or oral quote or offer by
the Bank of a Fixed Rate for a given Interest Period may be confirmed
in writing by the Bank upon the election (as provided herein) of the
Borrower to accept such terms and such confirmation shall be deemed
conclusive as to the terms quoted and offered.
G. Security Interest in Equipment. Upon the Bank's request,
the Borrower shall execute and deliver to the Bank, prior to the
making of any Advance under this Equipment Purchase Facility, such
documents and instruments (in form and substance satisfactory to the
Bank) which the Bank may require with respect to such Advance and the
perfection of the Bank's security interest in the Equipment
pertaining to such Advance.
H. 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 Equipment Purchase Facility 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.
I. Conversion to Term Loan. It is hereby agreed that the
Borrower may, by giving written notice to the Bank at least one (1)
day prior to March 1, 1998, convert the principal balance outstanding
under the Equipment Purchase facility as of March 1, 1998 to be
payable on a term loan basis. The term loan (the "Converted Term
Loan") shall be in the amount of such outstanding principal balance
and shall be evidenced by a promissory note or credit agreement (the
"Term Agreement") containing the following payment terms: Interest
shall be paid concurrently with principal. Principal shall be paid
in equal monthly installments based upon a maximum of 60 equally
amortized payments of the principal amount outstanding at the time of
conversion. Accrued and unpaid interest under the Equipment Purchase
facility shall be paid to the Bank concurrently with the Borrower's
execution of the Term Agreement. Interest shall accrue and principal
and interest shall be paid in accordance with the terms and
provisions of the Term Agreement.
J. Non-Usage Fee. The Borrower shall be assessed and shall
pay to the Bank each quarter, a fee in an amount equal to 0.250% of
the difference (if any) between $1,000,000.00 and the average daily
outstanding principal balance of Advances under this Equipment
Purchase facility during the preceding quarter.
K. Expiration of the Equipment Purchase 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 1, 1998 (the "Expiration Date").
L. 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 this Equipment Purchase 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.
M. 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
Equipment Purchase Facility.
In addition, the Borrower hereby authorizes the Bank, if and to
the extent payment owed to the Bank under this Equipment Purchase
Facility is not made when due, to charge, from time to time, against
any or all deposit accounts maintained with the Bank by the Borrower
any amount so due.
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. Location and Maintenance of Equipment.
A. Location. The Equipment shall at all times be in the
Borrower's physical possession, shall not be held for sale or lease
and shall be kept only at the following location(s): 160 Sobrante
Way, Sunnyvale, CA 94086.
The Borrower shall not secrete, abandon or remove, or permit
the removal of, the Equipment, or any part thereof, from the
location(s) shown above or remove or permit to be removed any
accessories now or hereafter placed upon the Equipment.
B. Equipment Schedules. Upon the Bank's demand, the Borrower
shall immediately provide the Bank with a complete and accurate
description of the Equipment including, as applicable, the make,
model, identification number and serial number of each item of
Equipment. In addition, the Borrower shall immediately notify the
Bank of the acquisition of any new or additional Equipment or the
replacement of any existing Equipment and shall supply the Bank with
a complete description of any such additional or replacement
Equipment.
C. Maintenance of Equipment. The Borrower shall, at the
Borrower's sole cost and expense, keep and maintain the Equipment in
a good state of repair and shall not destroy, misuse, abuse,
illegally use or be negligent in the care of the Equipment or any
part thereof. The Borrower shall not remove, destroy, obliterate,
change, cover, paint, deface or alter the name plates, serial
numbers, labels or other distinguishing numbers or identification
marks placed upon the Equipment or any part thereof by or on behalf
of the manufacturer, any dealer or rebuilder thereof, or the Bank.
The Borrower shall not be released from any liability to the Bank
hereunder because of any injury to or loss or destruction of the
Equipment. The Borrower shall allow the Bank and its representatives
free access to and the right to inspect the Equipment at all times
and shall comply with the terms and conditions of any leases covering
the real property on which the Equipment is located and any orders,
ordinances, laws, regulations or rules of any federal, state or
municipal agency or authority having jurisdiction of such real
property or the conduct of business of the persons having control or
possession of the Equipment.
D. Fixtures. The Equipment is not now and shall not at any
time hereafter be so affixed to the real property on which it is
located as to become a fixture or a part thereof. The Equipment is
now and shall at all times hereafter be and remain personal property
of the Borrower.
5.05. 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.
5.06. 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.
5.07. 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 90 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 45 days after the end
of each 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.
5.08. 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.
5.09. 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 $2,000,000.00 in any one fiscal
year.
5.10. 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.
5.11. 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.
5.12. 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.
5.13. Financial Condition. Maintain at all times:
A. Net Worth. A minimum Effective Tangible Net Worth of not
less than $33,000,000.00.
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.
D. Debt Service Coverage Ratio. A Debt Service Coverage ratio
(which is defined herein as the sum of net profit plus depreciation
divided by the current portion of long term debt) of not less than
2.00 to 1.00.
5.14. 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.
5.15. 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: /s/ Jillian Mathur
Jillian Mathur, Authorized Officer
Address:
San Jose Commercial Banking Center
220 Almaden Blvd.
San Jose, CA 95113
BORROWER:
APPLIED SIGNAL TECHNOLOGY, INC.
By: /s/ Gary L. Yancey
Gary L. Yancey, Chief Executive Officer and President
By: /s/ Brian Offi
Brian Offi, Chief Financial Officer
Address:
160 Sobrante Way
Sunnyvale, CA 94086
[ARTICLE] 5
[MULTIPLIER] 1,000
APPLIED SIGNAL TECHNOLOGY, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
(in thousands except per share)
<TABLE>
<CAPTION>
Year Ended October 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Number of shares outstanding 7,970 7,754 7,455
Net effect of dilutive stock options,
based on the treasury stock method
using the year-end market price, if
higher than average market price 465 165 180
------------ ------------ ------------
Total 8,435 7,919 7,635
============ ============ ============
Net income $7,666 $1,815 $904
============ ============ ============
Net income per share $0.91 $0.23 $0.12
============ ============ ============
</TABLE>
APPLIED SIGNAL TECHNOLOGY, INC.
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-21236) pertaining to the Applied Signal Technology, Inc.
Non-Incentive Stock Option Plan of our report dated December 12, 1997, with
respect to the financial statements of Applied Signal Technology, Inc.
included in this Annual Report (Form 10-K) for the year ended
October 31, 1997.
/s/ Ernst & Young LLP
Palo Alto, California
January 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Consolidated Balance Sheet and Consolidated Statement of
Income included in the Company's Form 10-K for the period ended
October 31, 1997 and is qualified in its entirety by reference to
such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Oct-31-1997
<PERIOD-START> Nov-01-1996
<PERIOD-END> Oct-31-1997
<PERIOD-TYPE> 12-MOS
<CASH> 7,403
<SECURITIES> 1,331
<RECEIVABLES> 32,648
<ALLOWANCES> 0
<INVENTORY> 4,822
<CURRENT-ASSETS> 48,379
<PP&E> 36,691
<DEPRECIATION> 20,980
<TOTAL-ASSETS> 64,161
<CURRENT-LIABILITIES> 13,443
<BONDS> 0
0
0
<COMMON> 22,197
<OTHER-SE> 27,569
<TOTAL-LIABILITY-AND-EQUITY> 64,161
<SALES> 96,259
<TOTAL-REVENUES> 96,259
<CGS> 60,404
<TOTAL-COSTS> 84,183
<OTHER-EXPENSES> 23,779
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49
<INCOME-PRETAX> 12,266
<INCOME-TAX> 4,600
<INCOME-CONTINUING> 7,666
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,666
<EPS-PRIMARY> $0.91
<EPS-DILUTED> $0.91
</TABLE>
