1
EXHIBIT 13.0
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS FOR FISCAL 1997, 1996 AND 1995
The Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Annual Report to Stockholders
contain forward-looking statements that involve risks and uncertainties. The
actual results may differ significantly from the results discussed in the
forward looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed herein.
The merger of ASCOR, Inc. was completed in fiscal 1997 and was
accounted for by the pooling of interests method of accounting, accordingly
financial results for all periods reflect the consolidated Company. The merger
joined two companies with products and markets in the test and measurement
business.
New orders received in 1997 were $25,039,000, a decrease of 5% from
1996, which decreased 6% over 1995. In 1997, the decrease reflects order
reductions of approximately 40% in the signal generator (SG) line caused by the
maturing of the product line, delays in new product releases and continued
constraints on military budgets, offset by an increase of approximately 29% in
the power meter (PM) line. The increase in PM orders in 1997 is due to new
product releases and growth in the size of the commercial wireless
telecommunications market. In 1996, the decrease in orders reflects large
order declines in both the SG and radio frequency (RF) product lines.
At year-end 1997, the Company's backlog of unfilled orders was
$5,007,000, compared to $8,854,000 at the end of 1996 and $13,177,000 at the
end of 1995. The decrease in backlog from 1996 to 1997 resulted from a
continued decline in SG product line defense-related orders. The 1995 backlog
was unusually high due to large SG orders taken in the last quarter and reduced
levels of shipping during fiscal year 1995 caused by manufacturing constraints.
The decline in backlog from 1995 to 1996 was caused by the higher levels of
shipments in 1996 as production efficiencies improved along with a reduction in
new SG orders.
Net sales for 1997 were $28,886,000, a 6% decrease from 1996, which
follows a 19% increase in 1996 from 1995. Reduced sales volume for SG products
was the major factor for the
2
sales decline in 1997. The $3.0 million decline in SG sales was partially
offset by increased sales in the power meter and the switching modules product
lines. Average selling prices in the SG and RF lines were also lower in 1997
due to non-recurring discounts on certain large international orders. The
increase in sales in 1996 was a result of the high defense-related backlog at
the beginning of the year and the ability to ship more products as inventory
and production efficiencies improved with the implementation of the new
manufacturing information system. Overall, the approximate proportion of net
sales coming from defense-related customers was 37% in 1997, 42% in 1996, and
36% in 1995.
Gross profit as a percentage of sales increased to 38% in 1997 from
37% in 1996 as manufacturing efficiencies offset the lower sales prices and
lower sales volume. Gross profit as a percentage of sales increased to 37% in
1996 from 33% in 1995 due to improved manufacturing efficiencies in 1996 and
the effect in 1995 of additional required inventory reserves.
Operating expenses decreased 7% in 1997 over 1996. Costs were notably
lower in sales and marketing due to lower advertising and commission expenses.
Advertising expenses decreased due to an effort to reduce the advertising
frequency while increasing the focus by targeting specific publications.
Commission expenses declined as a result of reduced sales. In 1996, operating
expenses decreased 4% over 1995 as costs were tightly controlled in many areas
despite higher sales. Amortization expense, relating to the intellectual
property and non-compete covenants associated with two prior acquisitions,
amounted to $559,000 in 1997 and $560,000 in 1996 and 1995. As a result of a
commitment to increase research and development activity, the Company expects
operating expenses to increase in the near term.
Net interest income increased by 115% to $586,000 in 1997, following a
31% increase from 1995 to 1996. The increase in interest income from 1995 to
1997 was due primarily to an increase in available cash for investment,
resulting from lower inventory levels and positive earnings in 1996 and 1997.
The provision for income taxes in 1997 was $546,000, or 25% of pre-tax
income. The provision for income taxes in 1996 was $242,000, or 12% of pre-tax
income. The change in tax rate was due principally to the utilization of tax
loss carryovers in 1996 associated with the acquired subsidiary for which it
had previously not taken benefit.
17
3
The Company recorded net earnings of $1,644,000, or $0.48 per share,
in 1997, an 8% decrease in earnings per share from $0.52 in 1996. Earnings per
share in 1996 of $0.52 was a substantial increase over the $0.27 loss in
1995. The decline in 1997 net earnings was due to the sales decrease of 6%,
offset in part by 7% lower operating expenses and higher net interest income.
The improvement in results in 1996 over 1995 was due mostly to non-recurring
charges in 1995 of approximately $1.2 million related to the Company's San
Ramon facility. These charges included additions to the Company's inventory
reserves, new product start-up costs, severance costs, inventory write-offs,
and costs for upgrading the management information system.
FINANCIAL CONDITION AND LIQUIDITY
As of March 29, 1997, the Company had $13,806,000 in cash, cash
equivalents and investments, compared to $11,236,000 as of March 30, 1996 and
$7,033,000 as of March 25, 1995. Cash provided from operations amounted to
$3,480,000 in 1997, compared to cash provided from operations of $4,584,000 in
1996, and cash provided from operations of $524,000 in 1995. In 1997 and 1996,
cash provided from operations was principally due to earnings and significant
reductions in inventories. In 1995, cash provided was negligible due
principally to large operating losses.
The Company continues to maintain a strong financial position, with
working capital at year-end of $20,149,000 compared to $17,206,000 and
$13,940,000 at the end of 1996 and 1995, respectively. The Company's current
ratio of 6.1 increased from the 1996 and 1995 current ratio of 4.1 and 3.0,
respectively. The Company maintains a one million dollar line of credit
collateralized by the Company's cash equivalents and marketable securities.
This line of credit has never been utilized.
Additions to property and equipment were $636,000 in 1997, compared to
$633,000 and $745,000 in 1996 and 1995, respectively. This spending reflects
continuing investments to support new product development, increased
productivity and improved product quality. Other cash flows for 1997 included
$376,000 inflow from the issuance of common stock, $730,000 outflow for the
repayment of notes, and $1,639,000 outflow for the net purchase of short-term
investments. The common stock was issued in connection with the exercise of
stock options.
4
The notes payable were obligations of the Company's acquired subsidiary and
were subsequently paid off. The investments are principally marketable
securities, which are classified as available for sale. In 1996 and 1995,
respectively, net cash used in investing activities included $1.5 million and
$.2 million for purchases of short-term investments.
Management believes that the Company has adequate resources to meet
its operating and capital expenditure needs for the foreseeable future. The
Company intends to increase product development expenditures substantially in
the near term for the purpose of broadening its product base, especially in the
SG and RF lines where orders have been declining in recent years. It is the
Company's intention to broaden its product lines and expand its markets, both
by internal development of new products and through the acquisition of other
business entities. From time to time, the Company considers a variety of
acquisition opportunities. Such acquisition activity could increase the
Company's operating expenses and require additional capital resources.
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CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------
Years Ended March 29, 1997 March 30, 1996
(In thousands except share data)
Assets
Current Assets
Cash and cash equivalents $ 6,796 $ 5,923
Investments 7,010 5,313
Trade accounts receivable, less allowance for doubtful
accounts of $236 and $235, respectively 3,190 3,658
Inventories 5,219 6,293
Prepaid expenses 317 228
Deferred income taxes 1,562 1,305
-------- --------
Total current assets 24,094 22,720
-------- --------
Property and Equipment
Machinery and equipment 7,462 7,277
Office furniture and fixtures 543 518
Leasehold improvements 121 106
-------- --------
8,126 7,901
Accumulated depreciation and amortization (6,295) (5,779)
-------- --------
Net property and equipment 1,831 2,122
Patents and licenses 1,030 1,590
Other assets 66 152
-------- --------
Total assets $ 27,021 $ 26,584
======== ========
- --------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 1,688 $ 2,070
Accrued commissions 175 277
Accrued payroll and benefits 703 666
Accrued warranty 590 580
Accrued earnout payment -- 393
Accrued expenses 789 798
Notes payable -- 730
-------- --------
Total current liabilities 3,945 5,514
Deferred income taxes 161 223
Obligation under capital lease, long term 20 30
-------- --------
Total liabilities 4,126 5,767
-------- --------
Commitments -- --
Shareholders' Equity
Convertible preferred stock of no par value;
1,000,000 shares authorized; no shares
outstanding in 1996 and 1997 -- --
Common stock of no par value;
40,000,000 shares authorized;
3,379,199 shares in 1997 and 3,323,649
shares in 1996 issued and outstanding 10,919 10,543
Unrealized gain (loss) on securities 11 (47)
Retained earnings 11,965 10,321
-------- --------
Total shareholders' equity 22,895 20,817
-------- --------
Total liabilities and shareholders' equity $ 27,021 $ 26,584
======== ========
- --------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
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CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
Years Ended March 29, 1997 March 30, 1996 March 25, 1995
(In thousands except per share data)
Net sales $ 28,886 $ 30,811 $ 25,969
Cost of sales 18,023 19,425 17,396
-------- -------- --------
Gross profit 10,863 11,386 8,573
Product development expense 2,722 2,726 2,928
Selling, general and administrative expenses 5,971 6,590 6,768
-------- -------- --------
Operating expenses 8,693 9,316 9,696
-------- -------- --------
Net operating income (loss) 2,170 2,070 (1,123)
Amortization of intangibles (559) (560) (560)
Interest income, net 586 272 207
Other income (expense) (7) 200 17
-------- -------- --------
Earnings (loss) before income taxes 2,190 1,982 (1,459)
Provision for income taxes (benefit) 546 242 (592)
-------- -------- --------
Net earnings (loss) $ 1,644 $ 1,740 $ (867)
======== ======== ========
Net earnings (loss) per share of common $ 0.48 $ 0.52 $ (0.27)
stock
Weighted average common shares outstanding 3,411 3,360 3,259
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
(In thousands, except share data) Common Stock
--------------------------- Retained Unrealized Gain
Shares Amount Earnings (Loss) on Investments Total
Balances as of March 26, 1994 3,259,447 $ 10,379 $ 9,448 $ --- $ 19,827
Unrealized loss on investments,
net of income tax credit of $41 --- --- --- (77) (77)
Net loss --- --- (867) --- (867)
- -------------------------------------------------------------------------------------------------------------------
Balances as of March 25, 1995 3,259,447 10,379 8,581 (77) 18,883
Repurchase of stock (12,500) (94) --- --- (94)
Exercise of stock options 76,702 258 --- --- 258
Unrealized gain on investments,
net of income tax expense of $16 --- --- --- 30 30
Net earnings --- --- 1,740 --- 1,740
- -------------------------------------------------------------------------------------------------------------------
Balances as of March 30, 1996 3,323,649 10,543 10,321 (47) 20,817
Exercise of stock options 55,550 275 --- --- 275
Tax benefit associated with
exercise of stock options --- 101 --- --- 101
Unrealized gain on investments,
net of income tax expense of $31 --- --- --- 58 58
Net earnings --- --- 1,644 --- 1,644
- -------------------------------------------------------------------------------------------------------------------
Balances as of March 29, 1997 3,379,199 $ 10,919 $ 11,965 $ 11 $ 22,895
===================================================================================================================
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------
Years Ended March 29, 1997 March 30, 1996 March 25, 1995
(In thousands)
Cash flows from operations:
Net earnings (loss) $ 1,644 $ 1,740 $ (867)
Adjustments to reconcile net earnings (loss) to
net cash provided by operations:
Depreciation and amortization 1,486 1,659 1,525
Deferred income taxes, net (319) (214) (296)
Changes in operating assets and liabilities
Trade accounts receivable 468 266 (244)
Inventories 1,074 2,112 (327)
Prepaid expenses (89) 385 (414)
Accounts payable (382) 420 (50)
Accrued commissions (102) (41) (45)
Accrued payroll and benefits 37 (219) 252
Accrued warranty 10 113 57
Accrued earnout and other expenses (300) (211) 214
Customer advances -- (1,453) 732
Income taxes payable (47) 27 (13)
-------- -------- --------
Net cash provided by operations 3,480 4,584 524
-------- -------- --------
Cash flows from investing activities:
Patents and licenses, other assets 87 93 31
Purchases of investments (27,605) (7,315) (11,187)
Maturities of investments 25,966 5,863 10,987
Additions to property and equipment (636) (633) (745)
-------- -------- --------
Net cash used in investing activities (2,188) (1,992) (914)
-------- -------- --------
Cash flows from financing activities:
Proceeds (repayment) on line of credit (55) 55 --
Principal payment on notes payable (730) (81) --
Principal payment on obligation, capital lease (10) (9) (7)
Issuance of common stock 376 258 --
Repurchase of common stock -- (94) --
-------- -------- --------
Net cash provided by (used in) financing activities (419) 129 (7)
-------- -------- --------
Increase (decrease) in cash and cash equivalents 873 2,721 (397)
Beginning cash and cash equivalents 5,923 3,202 3,599
-------- -------- --------
Ending cash and cash equivalents $ 6,796 $ 5,923 $ 3,202
- ------------------------------------------------------------------------------------------------------------
Supplementary disclosure of cash
flow information:
Cash paid for income taxes $ 906 $ 376 $ 270
Cash paid for interest 45 50 51
Noncash transactions:
Purchase under capital lease obligation $ -- $ -- $ 55
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 BUSINESS COMBINATION
In July 1996, Giga-tronics Incorporated completed a merger with ASCOR,
Inc., hereafter collectively referred to as the Company, by issuing
approximately 721 thousand common shares in exchange for all of the
stock of ASCOR, Inc. The merger has been accounted for as a pooling
of interests, and accordingly, the consolidated financial statements
for periods prior to the combination have been restated to include the
results of operations, financial position and cash flows of ASCOR,
Inc.
Prior to the merger, ASCOR's fiscal year ended on September 30. In
recording the business combination, ASCOR's prior period financial
statements have been restated to a year ended March, to conform with
Giga-tronics fiscal year end. There were no transactions between
Giga-tronics and ASCOR prior to the merger.
The results of operations for the separate companies and the combined
amounts presented in the consolidated financial statements follow.
(In thousands) Three Months Ended Year Ended Year Ended
June 29, 1996 March 30, 1996 March 25, 1995
Net Sales
Giga-tronics $ 5,855 $ 24,898 $ 21,937
ASCOR 1,938 5,913 4,032
-------- -------- --------
Combined 7,793 30,811 25,969
======== ======== ========
Net Earnings (loss)
Giga-tronics 285 901 (1,576)
ASCOR 220 839 709
-------- -------- --------
Combined $ 505 $ 1,740 $ (867)
======== ======== ========
Transaction costs related to the merger were approximately $180,000
and $125,000 in fiscal year 1997 and 1996 respectively. Transaction
costs consist principally of transaction fees for the investment
bankers, attorneys, accountants, financial printing and other related
charges and are included in general and administrative expenses in the
accompanying Consolidated Statement of Operations.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company The accompanying consolidated financial statements
include the accounts of Giga-tronics and ASCOR, its wholly owned
subsidiary. Giga-tronics designs, manufactures and markets microwave
and radio frequency (RF) signal generation and power measurement
instruments. These products are used primarily in the design,
production, repair and maintenance of wireless communications, radar
and electronic warfare systems. ASCOR designs and manufactures
modular, computer-based automatic test system equipment used for
testing computer assemblies. The Company's products are principally
sold to customers in the test and measurement industry. The Company
has no foreign operations, and all non-U.S. sales are made in U.S.
dollars, and, therefore, there is no currency risk on these
transactions.
Principles of Consolidation The consolidated financial statements
include the accounts of Giga-tronics and its wholly-owned subsidiary.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fiscal Year The Company's financial reporting year consists of
either a 52 week or 53 week period ending on the Saturday nearest to
the end of the month of March. Fiscal years 1997 and 1995 each
contained 52 weeks, and fiscal year 1996 contained 53 weeks.
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 remaining 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
three to ten years. Leasehold
23
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Patents and Licenses Patents and licenses are being amortized
using the straight-line method over periods of five to seven years.
As of March 29, 1997 and March 30, 1996, accumulated amortization on
patents and licenses was $2,300,000 and $1,741,000, respectively.
Earnings (Loss) Per Share Earnings (loss) per share is based on
the weighted average number of shares of common stock and dilutive
common stock equivalent shares outstanding during the year.
Investments The Company's investments in debt securities are
classified as available-for-sale securities and are reported at fair
value. The cost of securities sold is determined based on the
specific identification method. Unrealized gains and losses are
reported as a separate component of shareholders' equity.
Product Development Costs Product development costs are charged to
operations in the year incurred.
Financial Instruments and Concentration of Credit Risk 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
portfolio is diversified, consisting of nine and five different
governmental agencies located in various geographic regions of the
United States as of March 29, 1997 and March 30, 1996, respectively.
Concentration of credit risk in trade accounts receivable results
primarily from sales to major customers. 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, notes
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 is effective for fiscal years
beginning after December 15, 1995, and requires that the Company
either recognize in its financial statements costs related to its
employee stock-based compensation plans, such as stock option and
stock purchase plans, or make pro forma disclosures of such costs in a
footnote to the financial statements. The Company has elected 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
has made the required pro forma disclosures in a footnote to the
financial statements. SFAS No. 123 did not have a material effect on
the Company's results of operations or financial position.
The Financial Accounting Standards Board recently issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires the presentation of basic
earnings per share ("EPS") and, for companies with complex capital
structures, diluted EPS. SFAS No. 128 is effective for annual and
interim periods ending after December 31, 1997. The Company expects
that basic EPS will be higher than primary earnings per share and that
diluted EPS will not differ materially from fully diluted earnings per
share as presented in the accompanying consolidated financial
statements.
In March 1995, the FASB issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of. The new standard requires long-lived assets to be
evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
The Company adopted SFAS No. 121 in fiscal 1996, which did not have a
material impact on the Company's consolidated results of operations or
financial position.
24
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3 CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
Cash, cash equivalents, and short-term investments consisted of the
following at March 29, 1997 and March 30, 1996:
- ------------------------------------------------------------------------------------------------------------------------
March 29, 1997
(In thousands)
Cash and Cash Equivalents Short-term Investments
------------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Cash $4,049 $4,049 $ --- $ ---
Money Market Funds 647 647 104 104
U.S. Government Securities -- -- 3,004 2,996
Municipal Obligations 2,100 2,100 2,026 2,020
Other Marketable Securities -- -- 1,859 1,890
------ ------ ------ ------
Total debt securities $6,796 $6,796 $6,993 $7,010
====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------
March 30, 1996
(In thousands)
Cash and Cash Equivalents Short-term Investments
--------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Cash $5,923 $5,923 $ -- $ --
Money Market Funds -- -- 343 343
U.S. Government Securities -- -- 927 927
Municipal Obligations -- -- 2,895 2,823
Other Marketable Securities -- -- 1,220 1,220
------ ------ ------ ------
Total debt securities $5,923 $5,923 $5,385 $5,313
====== ====== ====== ======
There were no realized gains (losses) on sales of available-for-sale
securities in fiscal 1997 and fiscal 1996. Unrealized gains (losses)
on available-for-sale securities were $17,000 and ($72,000) in fiscal
year 1997 and 1996, respectively, and are included net of a tax
benefit as a separate component of shareholders' equity.
As of March 29, 1997, all of the Company's short term investments
mature within one year, except for approximately $1,020,000 of
Municipal securities which have maturities of between one and two
years. These securities have interest rates that ranged from 3.4% to
6.5%. As of March 30, 1996, all of the Company's short-term
investments matured within one year.
4 SALES TO SIGNIFICANT CUSTOMERS AND EXPORT SALES
Sales to agencies of the U.S. government and defense-related customers
accounted for 37%, 42%, and 36% of the Company's sales in fiscal 1997,
1996 and 1995, respectively. Export sales accounted for 29%, 22%, and
17% of the Company's sales in fiscal 1997, 1996 and 1995,
respectively. Export sales by geographical area are shown below.
Years ended March 29, 1997 March 30 , 1996 March 25, 1995
(In thousands)
Americas $ 286 $ 935 $ 337
Europe 2,380 2,354 1,441
Asia 5,111 2,833 2,357
Rest of World 460 669 323
------ ------ ------
$8,237 $6,791 $4,458
====== ====== ======
5 INVENTORIES
- ------------------------------------------------------------------------------------
Years ended March 29, 1997 March 30, 1996
(In thousands)
Raw materials $1,966 $2,388
Work in-progress 2,293 2,972
Finished goods 960 933
------ ------
$5,219 $6,293
====== ======
25
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6 SELLING EXPENSES
Selling expenses consist primarily of commissions paid to various
marketing agencies. Commission expense totaled $1,721,000, $1,835,000
and $1,643,000 in fiscal 1997, 1996 and 1995, respectively.
Advertising costs totaled $405,000, $625,000 and $691,000 for fiscal
1997, 1996 and 1995, respectively.
7 INCOME TAXES
Following are the components of the provision for income taxes:
---------------------------------------------------------------
Years ended March 29, 1997 March 30, 1996 March 25, 1995
(In thousands)
Current:
Federal $ 676 $ 322 $(298)
State 221 149 43
----- ----- -----
897 471 (255)
Deferred:
Federal (215) (211) (337)
State (136) (18) --
----- ----- -----
(351) (229) (337)
Provision for income taxes (benefit) $ 546 $ 242 $(592)
===== ===== =====
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 29, 1997 March 30, 1996
(In thousands)
Current tax assets, net $ 1,562 $ 1,305
Noncurrent tax liabilities, net (161) (223)
------- -------
Net deferred taxes $ 1,401 $ 1,082
======= =======
Future state tax effect $ 23 $ 44
Allowance for doubtful accounts 101 102
Fixed asset depreciation (161) (282)
Inventory reserves and additional costs capitalized 1,234 1,102
Deferred revenue 77 71
Alternative minimum federal tax credit carryforward -- 45
Accrued vacation 128 118
Accrued warranty 210 213
Other accrued liabilities 146 59
General business credit carryforward -- 149
Federal net operating loss carryforward -- 239
Unrealized loss (gain) on equity securities (7) 25
Valuation allowances (350) (803)
------- -------
$ 1,401 $ 1,082
======= =======
26
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate to pre-tax income as a result of the following:
Years ended March 29, 1997 March 30, 1996 March 25, 1995
(In thousands except percentages)
Statutory federal income tax $ 745 34.0% $ 674 34.0% $(496) (34.0)%
Beginning of year change in deferred (272) (12.4) (381) (19.2) -- --
tax asset valuation allowance
State income tax, net of federal benefit 55 2.5 86 4.3 28 1.9
Nontax deductible expenses 40 1.8 21 1.0 35 2.4
Interest income exempt from federal tax (20) (.9) (52) (2.6) (66) (4.5)
Tax credits (67) (3.1) (106) (5.3) (122) (8.4)
Other 65 3.0 -- -- 29 2.0
----- ---- ----- ---- ----- ----
Effective income tax $ 546 24.9% $ 242 12.2% $(592) (40.6)%
===== ==== ===== ==== ===== =====
8 STOCK OPTION AND EMPLOYEE BENEFIT PLANS
Stock Option Plan The Company has established a stock option plan
which provides for the granting of up to 400,000 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. 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. 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 canceled and
reissued (repriced) 77,900 options pursuant to the repricing. As of
March 29, 1997, the total number of shares of common stock available
for issuance is 324,450. All outstanding options have a term of five
years, except for 75,000 options (which have a term of 2-1/2 years).
Following is a summary of stock option activity:
Per Share
Weighted
Average Weighted
Fair Value Average
of Options Options Exercise
Granted Exercisable Shares Price
--------------------------------------------------------------------------------------------------
Outstanding as of March 26, 1994 --- --- 359,028 $6.312
--------------------------------------------------------------------------------------------------
Forfeited (260,900) 7.154
Granted 124,800 5.000
--------------------------------------------------------------------------------------------------
Outstanding as of March 25, 1995 N/A 68,500 222,928 4.591
--------------------------------------------------------------------------------------------------
Exercised (76,702) 3.364
Forfeited (37,250) 4.784
Granted 48,924 4.447
--------------------------------------------------------------------------------------------------
Outstanding as of March 30, 1996 $ 3.510 48,350 157,900 5.104
--------------------------------------------------------------------------------------------------
Exercised (55,550) 4.945
Forfeited (51,750) 4.874
Granted 211,900 8.574
--------------------------------------------------------------------------------------------------
Outstanding as of March 29, 1997 $ 4.008 12,150 262,500 $ 7.984
--------------------------------------------------------------------------------------------------
27
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized for its stock options in its results of operations. Had
the Company recorded a charge for the fair value of options granted
consistent with FASB Statement 123, net earnings and net earnings per
share would have been reduced to the pro forma amounts shown below.
Years Ended March 29, 1997 March 30, 1996
-----------------------------------------------------------------------
(In thousands except per share
data)
Net earnings
As reported $ 1,644 $ 1,740
Pro forma 1,640 1,602
Net earnings per share
As reported 0.48 0.52
Pro forma $ 0.48 $ 0.48
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options' vesting period of five years, and compensation cost
for options granted prior to January 1, 1995 is not considered.
The per share weighted average fair value of each stock option granted
during 1997 and 1996 is estimated on the date of the grant using the
Black Scholes option pricing model, with the following weighted
average assumptions: dividend yield of zero percent for both years,
expected volatility of 56% for both years; risk-free interest rates of
6.51% and 5.11% respectively; and expected lives of 3.5 years for both
years.
OPTIONS OUTSTANDING AND EXERCISABLE AS OF MARCH 29, 1997, BY PRICE RANGE
------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of of Options Contractual Exercise of Options Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------------------------
$4.00 29,600 2.95 $ 4.000 5,400 $ 4.000
From $7.25 to $9.35 232,900 3.61 8.490 6,750 7.750
------- ---- ------- ------ -------
From $4.00 to $9.35 262,500 3.53 $ 7.984 12,150 $ 6.083
------- ---- ------- ------ -------
401(k) Plan The Company has established a 401(k) plan which covers
substantially all employees. Participants may make voluntary
contributions to the plan up to 20% of their defined compensation.
The Company is required to match a percentage of the participants'
contributions in accordance with the plan. The Company added a
discretionary match of 20% of the first 5% contributed by plan
participants for calendar 1996. Participants vest ratably in Company
contributions over a four-year period. Company contributions to the
plan for fiscal 1997, 1996, and 1995 were approximately $111,000,
$136,000, and $107,000 respectively.
28
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9 COMMITMENTS
The Company leases a 47,300 square foot facility located in San Ramon,
California, under a 12 year lease (as amended) that commenced in April
1994. The Company leases a facility located in Fremont under an
operating lease agreement which expires in January 1998 with a
one-year renewal option. These facilities accommodate all of the
Company's present operations. The future minimum lease payments are
shown below:
--------------------------------------------------------------------
Fiscal Years
(in thousands)
1998 $ 635
1999 568
2000 626
2001 631
2002 631
Remaining five years 3,228
------
$6,319
======
The aggregate rental expense was $752,000, $735,000, and $662,000 in
fiscal 1997, 1996 and 1995, respectively.
10 NOTES PAYABLE
The Company's wholly owned subsidiary entered into three bridge
financing agreements during the period of April 1991 through December
1991. All of the notes were due on demand, provided for interest at
6% per annum and were secured by the assets of the Company. Unpaid
interest on the notes payable was approximately $46,645 at March 30,
1996. The notes and interest were repaid in 1997.
The Company maintains a $1,000,000 line of credit collaterized by the
Company's cash equivalents and marketable securities. As of March 29,
1997, none of this line has been utilized.
11 SUBSEQUENT EVENTS
On June 6, the Company entered into an agreement to acquire Viking
Semiconductor Equipment, Inc., a private company that designs,
manufactures and markets a line of optical inspection equipment used
to manufacture and test semiconductor devices. Products include die
attachments, automatic die sorters, tape and reel and wafer inspection
equipment.
The merger will be accounted for as a pooling-of-interests.
Accordingly, the historical accounts of Viking Semiconductor
Equipment, Inc. will be combined with those of the Company as if they
had always been merged. Each share of Viking Common Stock will be
converted to a pro-rata portion of an aggregate of 420,000 shares of
Giga-tronics Common Stock. The merger is expected to be effective in
June 1997. The merger is subject to final approval of the transaction
by Viking Semiconductor Equipment shareholders.
If the merger had been effective as of March 29, 1997 revenues, net
earnings (loss) and earnings (loss) per share would have been as
follows:
Years Ended March 29, 1997 March 30, 1996 March 25, 1995
(In thousands except per share data)
Revenues $ 32,428 $ 35,305 $ 29,824
Net earnings (loss) 1,122 1,748 (778)
Net earnings (loss) per share $ 0.29 $ 0.46 $ (0.21)
29
16
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Giga-tronics Incorporated:
We have audited the accompanying balance sheets of Giga-tronics
Incorporated and subsidiary as of March 29, 1997, and March 30, 1996, and the
related statements of operations, shareholders' equity and cash flows for years
ended March 29, 1997, March 30, 1996, and 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 and subsidiary as of March 29, 1997, and March 30, 1996, and the
results of their operations and their cash flows for the years ended March 29,
1997, March 30, 1996 and March 25, 1995, in conformity with generally accepted
accounting principles.
/s/
KPMG Peat Marwick LLP
San Jose, California
April 18, 1997
except as to note 11, which is as of June 6, 1997
30
17
SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS:
(In thousands except per share data) March 29, March 30, March 25, March 26, March 27,
1997 1996 1995 1994 1993
Net sales $ 28,886 $ 30,811 $ 25,969 $ 23,467 $ 24,888
Gross profit 10,863 11,386 8,573 9,546 9,258
Operating expenses 8,693 9,316 9,696 8,145 7,964
Interest income, net 586 272 207 249 220
Earnings (loss) before
income taxes 2,190 1,982 (1,459) 1,392 1,354
Net earnings (loss) 1,644 1,740 (867) 1,305 727
Net earnings (loss) per share $ 0.48 $ 0.52 $ (0.27) $ 0.40 $ 0.22
FINANCIAL POSITION:
(In thousands except ratio) March 29, March 30, March 25, March 26, March 27,
1997 1996 1995 1994 1993
Current ratio 6.1 4.1 3.0 4.0 3.2
Working capital $20,149 $17,206 $13,940 $15,040 $15,121
Total assets 27,021 26,584 25,826 25,690 25,176
Shareholders' equity 22,895 20,817 18,883 19,827 18,522
Shares of common stock 3,379 3,324 3,259 3,259 3,259
PERCENTAGE DATA:
March 29, March 30, March 25, March 26, March 27,
1997 1996 1995 1994 1993
Percent of net sales:
Gross profit 37.6% 37.0% 33.0% 40.7% 37.2%
Operating expenses 30.1 30.2 37.3 34.7 32.0
Interest income, net 2.0 .9 .8 1.7 0.9
Earnings (loss) before
income taxes 7.6 6.4 (5.6) 5.9 5.4
Net earnings (loss) 5.7 5.6 (3.3) 5.6 2.9
31
18
SELECTED FINANCIAL DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 1997
-------------------------------------------------------------------
First Second Third Fourth Year
Net sales $ 7,793 $ 7,138 $ 7,697 $ 6,258 $28,886
Gross profit 3,065 2,665 2,741 2,392 10,863
Operating expenses 2,385 2,052 2,106 2,150 8,693
Interest income, net 111 159 161 155 586
Earnings before income taxes 672 630 623 265 2,190
Net earnings 505 472 469 198 1,644
Net earnings per share 0.15 0.14 0.14 0.06 0.48
Equivalent shares of common stock 3,408 3,420 3,411 3,401 3,411
- -------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 1996
-------------------------------------------------------------------
First Second Third Fourth Year
Net sales $ 7,649 $ 7,692 $ 7,718 $ 7,752 $30,811
Gross profit 2,847 2,916 2,888 2,735 11,386
Operating expenses 2,355 2,413 2,219 2,329 9,316
Interest income, net 40 66 67 99 272
Earnings before income taxes 476 515 614 377 1,982
Net earnings 453 453 532 302 1,740
Net earnings per share 0.14 0.13 0.16 0.09 0.52
Equivalent shares of common stock 3,341 3,369 3,369 3,360 3,360
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 29, 1997 exceeded 1,000. The table below
shows the high and low closing bid quotations for the common stock during the
indicated fiscal periods.
1997 HIGH LOW 1996 HIGH LOW
---------------------------------------------------------------------------------------
First Quarter (3/31 - 6/29) 14-1/4 7 (3/26 - 6/24) 7-7/8 6
Second Quarter (6/30 -9/28) 11-5/8 7-7/8 (6/25 -9/30) 10-1/2 6-3/4
Third Quarter (9/29 - 12/28) 9 7-5/8 (10/1 - 12/30) 9 6-7/8
Fourth Quarter (12/29 - 3/29) 9-1/8 7-1/4 (12/31 - 3/30) 8 6-5/8
32