Management's Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FOR FISCAL 1996, 1995, 1994
New orders received in 1996 were $20,856,000, a decrease of 21% from
1995, which increased 30% over 1994. In 1996, the decrease reflects large order
decreases in both the microwave signal generator (SG) and radio frequency signal
generator (RF) product line. In 1995, the increase in orders results from
additional orders in both the microwave signal generator and RF product line.
Overall, the approximate proportion of net sales coming from defense-related
customers was 31% in 1996 and less than 30% in 1995 and 1994. Continuing the
focus of a business better balanced between commercial and defense markets has
been and remains a major strategic priority. At year-end 1996, the Company's
backlog of unfilled orders was $6,112,000, compared to $10,154,000 at the end of
1995 and $5,800,000 at the end of 1994. The decrease in backlog from 1995 to
1996 resulted mostly from a decline in SG product line defense-related orders.
Net sales for 1996 were $24,898,000, a 13% increase from 1995, which
follows a 10% increase in 1995 from 1994. Somewhat greater sales for SG products
was the major factor. Gross profit as a percentage of sales increased to 37% in
1996, from 32% in 1995, due to better factory efficiencies. Gross profit as a
percentage of sales decreased from 40% to 32% from 1994 to 1995 due to factory
inefficiencies associated with the acquired RF signal generator product lines,
manufacturing scaleup of new microwave products, inventory reserve increases
related to the above product lines, and certain costs for upgrading the
Company's management information system. The Company continues to implement
programs to improve manufacturing efficiencies and reduce costs.
Operating expenses decreased 9% in 1996 over 1995. Costs were tightly
controlled in many areas despite higher sales. In 1995, operating expenses
increased 17% from 1994 due to personnel severance costs (including those
associated with the resignation of Mr. Donald F. Bogue as President and Chief
Executive Officer) and additional inventory reserves taken for customer
demonstration equipment utilized by sales and marketing.
Amortization expense, relating to the intellectual property and
non-compete convenants associated with two prior acquisitions, amounted to
$560,000, the same as 1995 and increasing from $410,000 in fiscal 1994. The
increase from 1994 to 1995 is due to 1995 being the first fiscal year with the
full 12 month effect of the two acquisitions (the RF product line in fiscal 1994
and the power measurement product line in fiscal 1993).
Interest income increased by 43% to $323,000 in 1996, following a
decrease of 28% from 1994 to 1995. The increase in 1996 interest income from
1995 was due primarily to an increase in cash, resulting from an earnings
increase and much lower inventory levels. The decrease in 1995 was due to the
earnings decline in 1995 and higher inventory balances in fiscal 1995 relative
to the inventory level in fiscal 1994. The Company continues to invest
principally in securities which are exempt from federal taxes.
The provision for income taxes in 1996 was $301,000. In 1995, income tax
expense was a benefit due to a pretax loss of approximately $2,220,000.
-18-
Management's Discussion and Analysis
The Company recorded net earnings of $901,000, or $0.34 per share, in
1996, an increase in earnings per share from a $0.61 loss in 1995, and $0.09
earnings per share in 1994. The improved results in 1996 were due to a sales
increase of 13%, an improved gross profit margin, a decrease in operating
expenses of 9%, and an increase in interest income. The loss in 1995 was largely
a result of delayed product shipments, depressed manufacturing margins in
certain microwave and RF signal generator product lines, related inventory
reserve increases, personnel severance costs, and certain costs for upgrading
the Company's management information systems.
Financial Condition and Liquidity
At year-end 1996, the Company had $10,785,000 in cash, cash equivalents
and investments, compared to $5,768,000 at the beginning of the year. Most of
the increase resulted from the higher earnings and lower inventories in 1996.
Cash provided from operations amounted to $5,191,000 in 1996, compared to cash
provided from operations of $127,000 in 1995, and cash used by operations of
$1,267,000 in 1994.
The Company continues to maintain a strong financial position, with
working capital at year-end of $15,830,000, compared to $13,242,000 and
$14,209,000 at the end of 1995 and 1994, respectively. The Company's current
ratio of 5.3 increased somewhat from the 1995 and 1994 figures.
Additions to property and equipment were $356,000 in 1996, compared to
$670,000 and $673,000 in 1995 and 1994, respectively. This spending reflects
continuing investments to support new product development, increase productivity
and improve product quality.
Management believes that the Company has adequate resources to meet its
operating and capital expenditure needs for the foreseeable future.
-19-
Balance Sheets
- ----------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 30, MARCH 25,
(IN THOUSANDS, EXCEPT SHARE DATA) 1996 1995
Assets
Current Assets
Cash and cash equivalents $ 5,772 $ 2,137
Investments 5,013 3,631
Trade accounts receivable, less allowance for doubtful
accounts of $222 and $32, respectively 2,715 3,524
Inventories 4,660 6,701
Prepaid expenses 188 588
Deferred income taxes 1,185 868
-------- ---------
Total current assets 19,533 17,449
Property and Equipment
Machinery and equipment 6,518 6,095
Office furniture and fixtures 322 411
Leasehold improvements 103 93
-------- ---------
6,943 6,599
Accumulated depreciation and amortization (5,185) (4,212)
--------- ----------
Net property and equipment 1,758 2,387
Patents and licenses 1,590 2,150
Other assets 146 239
-------- ---------
Total assets $ 23,027 $ 22,225
======== =========
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 1,540 $ 1,477
Accrued commissions 156 318
Accrued payroll and benefits 474 778
Accrued warranty 480 417
Accrued earnout payment 393 472
Accrued expenses 660 745
-------- ---------
Total current liabilities 3,703 4,207
Deferred income taxes 223 --
-------- ---------
Total liabilities 3,926 4,207
Shareholders' Equity
Convertible preferred stock of no par value;
1,000,000 shares authorized; no shares
outstanding in 1996 and 1995 -- --
Common stock of no par value;
40,000,000 shares authorized;
2,602,420 shares in 1996 and 2,569,920
shares in 1995 issued and outstanding 7,925 7,773
Unrealized loss on securities (47) (77)
Retained earnings 11,223 10,322
-------- ---------
Total shareholders' equity 19,101 18,018
-------- ---------
Total liabilities and shareholders' equity $ 23,027 $ 22,225
======== =========
<FN>
See accompanying notes to financial statements.
</FN>
-20-
Statements of Operations
- ----------------------------------------------------------------------------------------------------
53 WEEKS ENDED 52 WEEKS ENDED
-------------- ------------------------
MARCH 30, MARCH 25, MARCH 26,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994
Net sales $ 24,898 $ 21,937 $ 19,890
Cost of sales 15,616 15,019 11,947
--------- -------- ---------
Gross profit 9,282 6,918 7,943
--------- -------- ---------
Product development expense 2,512 2,700 2,569
Selling, general and administrative expenses 5,488 6,104 4,984
--------- -------- ---------
Operating expenses 8,000 8,804 7,553
--------- -------- ---------
Net operating income (loss) 1,282 (1,886) 390
Amortization of intangibles (560) (560) (410)
Interest income, net 323 226 313
Other income 157 -- --
--------- -------- ---------
Earnings (loss) before income taxes 1,202 (2,220) 293
Provision for income taxes (benefit) 301 (644) 62
--------- --------- ---------
Net earnings (loss) $ 901 $ (1,576) $ 231
========= ========= =========
Net earnings (loss) per share of common stock $ 0.34 $ (0.61) $ 0.09
========= ========= =========
Weighted average common shares outstanding 2,639 2,570 2,570
========= ======== =========
<FN>
See accompanying notes to financial statements.
</FN>
-21-
Statement of Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK UNREALIZED
(IN THOUSANDS, EXCEPT SHARE DATA) ----------------------- RETAINED LOSS ON
SHARES AMOUNT EARNINGS SECURITIES TOTAL
Balances as of March 27, 1993 2,569,920 $ 7,773 $ 11,667 $ -- $ 19,440
Net earnings -- -- 231 -- 231
--------- ---------- --------- ---------- -----------
Balances as of March 26, 1994 2,569,920 7,773 11,898 -- 19,671
Unrealized loss on securities net
of income tax credit of $41 -- -- -- (77) (77)
Net loss -- -- (1,576) -- (1,576)
--------- ---------- --------- ---------- -----------
Balances as of March 25, 1995 2,569,920 7,773 10,322 (77) 18,018
Repurchase of stock (12,500) (94) (94)
Exercise of stock options 45,000 246 -- -- 246
Unrealized gain on investments
net of income tax expense of $16 -- -- -- 30 30
Net earnings -- -- 901 -- 901
---------- ---------- --------- ---------- --------
Balances as of March 30, 1996 2,602,420 $ 7,925 $ 11,223 $ (47) $ 19,101
========== ========== ========= ========== ========
<FN>
See accompanying notes to financial statements.
</FN>
-22-
Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------
53 WEEKS ENDED 52 WEEKS ENDED
-------------- -------------------
(IN THOUSANDS) MARCH 30, MARCH 25, MARCH 26,
1996 1995 1994
Cash flows from operations:
Net earnings (loss) $ 901 $ (1,576) $ 231
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operations:
Depreciation and amortization 1,608 1,527 1,263
Deferred income taxes, net (94) (296) (119)
Changes in operating assets and liabilities
Trade accounts receivable 809 (126) 410
Inventories 2,041 625 (2,104)
Prepaid expenses 400 (434) 111
Patents and licenses, other assets 30 (31) (335)
Accounts payable 63 (68) (3)
Accrued commissions (162) (45) 97
Accrued payroll and benefits (304) 237 (181)
Accrued warranty 63 55 38
Accrued earnout and other expenses (164) 292 (506)
Income taxes payable -- (33) (169)
--------- --------- ----------
Net cash provided by (used in) operations 5,191 127 (1,267)
--------- -------- ----------
Cash flows from investing activities:
Purchases of investments (1,352) -- (3,749)
Acquisitions -- -- (1,123)
Additions to property and equipment (356) (670) (673)
---------- --------- ----------
Net cash used in investing activities (1,708) (670) (5,545)
---------- -------- ---------
Cash flows from financing activities:
Issuance of common stock 246 -- --
Repurchase of common stock (94) -- --
---------- -------- ---------
Net cash provided by financing activities 152 -- --
--------- -------- ---------
Increase (decrease) in cash and cash equivalents 3,635 (543) (6,812)
Beginning cash and cash equivalents 2,137 2,680 9,492
--------- -------- ---------
Ending cash and cash equivalents $ 5,772 $ 2,137 $ 2,680
========= ======== =========
Supplementary disclosure of cash flow information:
Cash paid for income taxes $ 340 $ 255 $ 22
========= ======== =========
<FN>
See accompanying notes to financial statements.
</FN>
-23-
Notes to Financial Statements
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations The Company designs, manufacturers and
markets microwave and radio frequency (RF) signal generation and power
measurement instruments. The market for the Company is the test and
measurement industry. These products are used primarily in the design,
production, repair and maintenance of wireless communications, radar
and electronic warfare systems.
Use of Estimates Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
Revenue Recognition Revenues are recognized when products are shipped.
Interest income is recognized when earned.
Cash Equivalents For purposes of the accompanying statements of cash
flows, the Company considers all highly liquid debt instruments with
maturity dates of 90 days or less from date of purchase to be cash
equivalents.
Inventories Inventories are stated at the lower of cost or market. Cost
is determined on a first-in, first-out basis.
Property and Equipment Property and equipment are stated at cost.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets, which range from 3 to
10 years. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful lives of the respective
improvements or the lease term.
Income Taxes The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 prescribes an
asset and liability approach that results in the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax
consequences, SFAS No. 109 generally considers all expected future
events other than enactment of changes in tax laws or rates.
Patents and Licenses Patents and licenses are being amortized using the
straight-line method over periods of five to seven years. As of March
30, 1996 and March 25, 1995, accumulated amortization on patents and
licenses was $1,741,000 and $1,180,000, respectively.
Earnings (Loss) Per Share Earnings (loss) per common and common
equivalent share is based on the weighted average number of shares of
common stock and dilutive common stock equivalent shares outstanding
during the year.
Investments During fiscal 1995, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." This statement addresses
the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. The Company's investments have been classified as
available-for-sale securities and are reported at fair value.
Unrealized gains and losses have been reported as a separate component
of shareholders' equity.
Concentration of Credit Risk and Financial Instruments Financial
instruments, which potentially subject the Company to credit risk,
consist principally of investments and trade accounts receivable. The
Company's investments consist principally of variable and fixed rate
bonds issued by state and local governmental agencies. The Company
individually evaluates the creditworthiness of its customers and
generally does not require collateral or other security. Historically,
the Company has not incurred any significant credit related losses.
Fair Market Value of Financial Instruments The carrying amount for the
Company's trade accounts receivable, accounts payable and other accrued
expenses approximates fair market value because of the short maturity
of these financial instruments.
Recent Accounting Pronouncements In October, 1995 the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 will be effective for fiscal
years beginning after December 15, 1995, and will require that the
Company either recognize in its financial statements costs related to
its employee stock-based compensation plans, such as stock option
-24-
Notes to Financial Statements
and stock purchase plans, or make pro forma disclosures of such costs
in a footnote to the financial statements.
The Company expects to continue to use the intrinsic value-based method
of Accounting Principles Board Opinion No. 25, as allowed under SFAS
No. 123, to account for all of its employee stock-based compensation
plans. Therefore, in its financial statements for fiscal 1997, the
Company will make the required pro forma disclosures in a footnote to
the financial statements. SFAS No. 123 is not expected to have a
material effect on the Company's results of operations or financial
position.
2 CASH, CASH EQUIVALENTS AND INVESTMENTS
Cash and cash equivalents consist of bank and money market accounts,
variable and fixed rate bonds, and fixed rate municipal notes which are
stated at cost. Investments consist of municipal notes and bonds and
U.S. Treasury Bills of varying maturities. The cash equivalents and
investments mature or are marketable within 30 days, thus being
available for current operating cash needs. As of March 30, 1996, the
interest rates on cash, cash equivalents and investments ranged from
3.5% to 6.6%.
As of March 30, 1996 and March 25, 1995, the Company had $3,822,000 and
$4,249,000, respectively, invested in variable and fixed rate bonds and
fixed rate notes issued by governmental agencies. The portfolio is
diversified, consisting of five and six different governmental agencies
located in various geographic regions of the United States as of March
30, 1996 and March 25, 1995, respectively.
3 ESTIMATED VALUE OF INVESTMENTS
Certain cash equivalents and all investments have been classified as
available-for-sale securities, and as of March 30, 1996 consisted of
the following.
- ------------------------------------------------------------------------------------------------------------------
MARCH 30, 1996
(IN THOUSANDS) AVAILABLE-FOR-SALE SECURITIES
----------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------
U.S. Treasury Bills $ 429 $ 1 $ -- $ 430
U.S. Treasury Notes 498 -- 1 497
Municipal securities 4,158 -- 72 4,086
--------- -------- -------- ---------
Total debt securities $ 5,085 $ 1 $ 73 $ 5,013
========= ======== ======== =========
There were no realized gains (losses) on sales of available-for-sale
securities in fiscal 1996. Unrealized losses on available-for-sale
securities are included as a separate component of shareholders' equity
net of a tax benefit of $25,000.
The Company's investments are classified as follows:
- ------------------------------------------------------------------------------------------------------------------
MARCH 30,
1996
Short-term investments $ 5,013
=========
The amortized cost and estimated fair value of debt securities as of
March 30, 1996 are shown below, by contractual maturity.
- ------------------------------------------------------------------------------------------------------------------
MARCH 30, 1996
(IN THOUSANDS) AVAILABLE-FOR-SALE
---------------------------
ESTIMATED
FAIR
COST VALUE
---------------------------
Due in 90 days or less $ 2,689 $ 2,693
Due after 90 days through one year 2,396 2,320
-------- ---------
$ 5,085 $ 5,013
======== =========
-25-
Notes to Financial Statements
4 SALES TO SIGNIFICANT CUSTOMERS AND EXPORT SALES
Sales on contracts with offices and agencies of the U.S. government
accounted for 31%, 26%, and 27% of the Company's sales in fiscal 1996,
1995 and 1994, respectively. Export sales accounted for 27%, 20%, and
23% of the Company's sales in fiscal 1996, 1995 and 1994, respectively.
5 INVENTORIES
- ------------------------------------------------------------------------------------------------------------------
MARCH 30, MARCH 25,
(IN THOUSANDS) 1996 1995
Raw materials $ 1,705 $ 2,489
Work-in-progress 2,022 3,347
Finished goods 933 865
-------- ---------
$ 4,660 $ 6,701
======== =========
6 SELLING EXPENSES
Selling expenses consist primarily of commissions paid to various
marketing agencies. Commission expense totaled $1,598,000, $1,564,000,
and $1,420,000 in fiscal 1996, 1995 and 1994, respectively. Advertising
costs totaled $583,000, $663,000, and $520,000 for fiscal 1996, 1995
and 1994, respectively.
7 INCOME TAXES
Following are the components of the provision for income taxes:
- ------------------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 30, MARCH 25, MARCH 26,
(IN THOUSANDS) 1996 1995 1994
Current:
Federal $ 319 $ (307) $ 114
State 91 -- 67
--------- --------- --------
410 (307) 181
Deferred:
Federal (104) (337) (154)
State (5) -- 35
---------- --------- --------
(109) (337) (119)
---------- --------- --------
Provision for income taxes (benefit) $ 301 $ (644) $ 62
========= ========== ========
-26-
Notes to Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
- -------------------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 30, MARCH 25,
(IN THOUSANDS) 1996 1995
Current tax assets, net $ 1,185 $ 868
Noncurrent tax liabilities, net (223) --
-------- -------
Net deferred taxes $ 962 $ 868
======= =======
Future state tax effect $ 29 $ (133)
Allowance for doubtful accounts 96 14
Fixed asset depreciation (223) (91)
Inventory reserves and additional costs capitalized 1,059 936
Inventory purchase accounting difference -- (11)
Deferred revenue 71 58
Alternative minimum federal tax credit carryforward 16 47
Accrued vacation 92 118
Accrued warranty 170 152
Other accrued liabilities 59 130
General business credit carryforward 115 184
State net operating loss carryforward -- 37
Unrealized loss on equity securities 25 --
Valuation allowances (547) (573)
-------- --------
$ 962 $ 868
======= =======
-27-
Notes to Financial Statements
Income tax expense differs from the amounts computed by applying the
U.S. federal income tax rate to pretax income as a result of the following:
- -----------------------------------------------------------------------------------------------------------
YEARS ENDED MARCH 30, MARCH 25, MARCH 26,
(IN THOUSANDS, EXCEPT PERCENTAGES) 1996 1995 1994
Statutory federal income tax $ 409 34% $ (755) (34.0)% $ 99 34.0%
Beginning of year change in deferred
tax asset valuation allowance (26) (2.2) 236 10.6 -- --
State income tax, net of
federal benefit 56 4.7 -- -- 68 23.1
Nontax deductible expenses 20 1.6 34 1.5 -- --
Interest income exempt
from federal tax (52) (4.3) (66) (3.0) (92) (31.4)
Tax credits (106) (8.8) (122) (5.5) (27) (9.3)
Other -- -- 29 1.3 14 6.2
------ -------- ------ --------- ------ -------
Effective income tax $ 301 25% $ (644) (29.1)% $ 62 22.6%
====== ====== ======= ========== ====== =======
8 STOCK OPTION AND EMPLOYEE BENEFIT PLANS
Stock Option Plans In March 1990, the Company established a stock
option plan which provided for the granting of up to 300,000 shares of
common stock at 100% of fair market value at the date of grant, with
each grant needing approval by the Board of Directors of the Company.
Options granted vest in one or more installments as set forth in the
option agreement and must be exercised while the grantee is employed by
the Company or within a certain period after termination of employment.
Options granted to employees shall not have terms in excess of 10 years
from the grant date. In May 1994, the Company amended the 1990 Stock
Option Plan to allow the total number of shares of common stock
available for issuance to be increased by 100,000 shares to 400,000
shares. During fiscal 1995, the Company offered option holders the
opportunity to have outstanding options repriced to current fair value,
with the related vesting period starting over. The Company cancelled
and reissued (repriced) 77,900 options pursuant to the repricing.
Options granted vest in annual installments and must be exercised while
the grantee is employed by the Company, or within a certain period
after termination of employment. During fiscal 1996, 45,000 options
were exercised. As of March 30, 1996, the total number of shares of
common stock available for issuance is 355,000. As of March 30, 1996,
157,900 options for shares have been granted, all of which have a term
of 5 years.
Holders of options may be granted stock appreciation rights
which entitle them to surrender outstanding options for a cash
distribution under certain changes in ownership of the Company, as
defined in the stock option plan.
-28-
Notes to Financial Statements
Following is a summary of stock option activity:
- ----------------------------------------------------------------------------------------------------------
SHARES OPTION PRICE
Outstanding as of March 27, 1993 361,000 5.50-8.50
Cancelled (41,750) 5.88-8.50
Granted 30,000 6.25
--------------
Outstanding as of March 26, 1994 349,250 5.50-8.50
Cancelled (260,900) 5.50-8.50
Granted 124,800 4.00-5.50
--------------
Outstanding as of March 25, 1995 213,150 4.00-7.25
Exercised (45,000) 4.00-5.87
Cancelled (37,250) 4.00-7.25
Granted 27,000 7.75
--------------
Outstanding as of March 30, 1996 157,900 4.00-7.75
==============
As of March 30, 1996, options to purchase 48,350 shares were
exercisable at prices ranging from $4.00 to $7.00 per share.
401(k) Plan The Company has adopted a 401(k) plan which covers substantially all
employees. Participants may make voluntary contributions to the plan up to 15%
of their defined compensation. The Company is required to match 50% of the first
5% contributed by plan participants. The Company added a discretionary match of
20% of the first 5% contributed by plan participants for calendar 1995.
Participants vest ratably in the Company contribution over a four-year period.
Company contributions to the plan for fiscal 1996 and 1995 were approximately
$127,000 and $101,100, respectively.
-29-
Notes to Financial Statements
9 COMMITMENTS AND CONTINGENCIES
On December 6, 1993, the Company entered into an agreement to lease a
47,300 square foot facility located in San Ramon, California, for a
period of 10 years commencing April 15, 1994, and ending April 14,
2004. On June 22, 1995, the Company renegotiated the lease. The revised
expiration date is December 31, 2006. The facility accommodates all of
the Company's present operations. The future minimum lease payments are
shown below:
- ---------------------------------------------------------------------------------------------------------------------------
FISCAL YEARS
1997 $ 561,737
1998 568,368
1999 568,368
2000 625,678
2001 630,888
Remaining six years 3,858,742
--------------
$ 6,813,781
=============
The aggregate rental expense was $637,000, $568,000 and $595,000 in
fiscal 1996, 1995 and 1994, respectively.
The Company maintains a $2,000,000 line of credit collateralized by all
of the Company's assets. This line of credit bears interest at prime
plus 2.25% and expires on July 31, 1996. As of March 30, 1996, none of
this line has been utilized.
10 SUBSEQUENT EVENT
On May 2, 1996 the Company entered into an agreement to merge with
ASCOR, Inc., a private company that designs, manufactures and markets a
line of switching and connecting devices. The merger will be accounted
for as a pooling-of-interests. Accordingly the historical accounts of
ASCOR will be combined with those of the Company as if they had always
been merged. The merger is expected to be effective in June 1996. The
merger is subject to final approval of the transaction by Giga-tronics
and ASCOR shareholders.
If the merger had been effective as of March 30, 1996 revenues, net
earnings (loss) and earnings (loss) per share would have been as
follows:
1996 1995 1994
---- ---- ----
Revenues (000's) $ 30,811 $ 25,969 $ 23,467
Net earnings (loss) (000's) 1,865 (867) 1,305
Earnings (loss) per share $ 0.55 $ (0.26) $ 0.40
-30-
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Giga-tronics Incorporated:
We have audited the accompanying balance sheets of Giga-tronics
Incorporated as of March 30, 1996, and March 25, 1995, and the related
statements of operations, shareholders' equity and cash flows for the
fifty-three week period ended March 30, 1996, and for each of the fifty-two week
periods in the two-year period ended March 25, 1995. 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 Giga-tronics
Incorporated as of March 30, 1996, and March 25, 1995, and the results of its
operations and its cash flows for the fifty-three week period ended March 30,
1996, and for each of the fifty-two week periods in the two-year period ended
March 25, 1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
San Jose, California
April 18, 1996
except as to note 10, which is as of May 2, 1996
-31-
Information for Shareholders
Summary of Operations:
- ------------------------------------------------------------------------------------------------------
53 WEEKS ENDED 52 WEEKS ENDED
----------------- ---------------------------------------------------
MARCH 30, MARCH 25, MARCH 26, MARCH 27, MARCH 28,
(IN THOUSANDS) 1996 1995 1994 1993 1992
Net sales $ 24,898 $ 21,937 $ 19,890 $ 23,085 $ 16,181
Gross profit 9,282 6,918 7,943 9,287 5,503
Operating expenses 8,000 8,804 7,553 7,367 4,847
Interest income, net 323 226 313 244 414
Earnings (loss) before income taxes 1,202 (2,220) 293 1,954 1,070
Net earnings (loss) 901 (1,576) 231 1,327 878
Net earnings (loss) per share $ 0.34 $ (0.61) $ 0.09 $ 0.52 $ 0.34
Financial Position:
- ------------------------------------------------------------------------------------------------------
53 WEEKS ENDED 52 WEEKS ENDED
----------------- ---------------------------------------------------
MARCH 30, MARCH 25, MARCH 26, MARCH 27, MARCH 28,
(IN THOUSANDS, EXCEPT RATIO) 1996 1995 1994 1993 1992
Current ratio 5.3 4.1 4.8 4.9 11.7
Working capital $ 15,830 $ 13,242 $ 14,209 $ 15,370 $ 16,588
Total assets 23,027 22,225 23,580 23,597 19,817
Shareholders' equity 19,101 18,018 19,671 19,440 18,113
Shares of common stock 2,602 2,570 2,570 2,570 2,570
Percentage Data:
- ------------------------------------------------------------------------------------------------------
53 WEEKS ENDED 52 WEEKS ENDED
----------------- ---------------------------------------------------
MARCH 30, MARCH 25, MARCH 26, MARCH 27, MARCH 28,
1996 1995 1994 1993 1992
Percent of net sales:
Gross profit 37.3% 31.5% 39.9% 40.2% 34.0%
Operating expenses 32.1 40.1 38.0 31.9 30.0
Interest income, net 1.3 1.0 1.6 1.1 2.6
Earnings (loss) before income taxes 4.8 (10.1) 1.5 8.5 6.6
Net earnings (loss) 3.6 (7.2) 1.2 5.7 5.4
-32-
Information for Shareholders
Quarterly Financial Information (Unaudited)
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1996
-------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
Net sales $ 6,261 $ 6,212 $ 6,171 $ 6,254 $ 24,898
Gross profit 2,285 2,314 2,264 2,419 9,282
Operating expenses 2,112 2,036 1,862 1,990 8,000
Interest income, net 52 76 91 104 323
Earnings before income taxes 157 287 360 398 1,202
Net earnings 118 215 270 298 901
Net earnings per share $ 0.05 $ 0.08 $ 0.10 $ 0.11 $ 0.34
Shares of common stock 2,570 2,570 2,570 2,602 2,602
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA) 1995
-------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
Net sales $ 5,547 $ 5,606 $ 5,853 $ 4,931 $ 21,937
Gross profit 2,205 2,103 2,298 312 6,918
Operating expenses 1,954 1,858 2,033 2,959 8,804
Interest income, net 35 52 48 91 226
Earnings (loss) before income taxes 147 157 173 (2,697) (2,220)
Net earnings (loss) 93 102 129 (1,900) (1,576)
Net earnings (loss) per share $ 0.04 $ 0.04 $ 0.05 $ (0.74) $ (0.61)
Shares of common stock 2,570 2,570 2,570 2,570 2,570
Common Stock Market Prices
The Company's common stock is traded over the counter on NASDAQ/NMS National
Market System using the symbol "GIGA." The number of record holders of the
Company's common stock as of March 30, 1996 exceeded 300. The table below shows
the high and low closing bid quotations for the common stock during the
indicated fiscal periods.
1996 HIGH LOW 1995 HIGH LOW
--------------------------- -----------------------------
First Quarter (3/26-6/24) 7-7/8 6 (3/27-6/25) 7-1/4 5-7/8
Second Quarter (6/25-9/30) 10-1/2 6-3/4 (6/26-9/24) 6 4-3/4
Third Quarter (10/1-12/30) 9 6-7/8 (9/25-12/24) 6-3/8 5
Fourth Quarter (12/31-3/30) 8 6-5/8 (12/25-3/25) 6-3/16 4
-33-