1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 18, 1998
GIGA-TRONICS INCORPORATED
(Exact Name of Registrant as Specified in Charter)
California 0-12719 94-2656341
(State or Other Jurisdiction (Commission File (I.R.S. Employer
of Incorporation ) Number) Identification Number)
4650 Norris Canyon Road
San Ramon, California 94583
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (925) 328-4650
2
Item 2. Acquisition or Disposition of Assets
On May 18, 1998, Giga-tronics Incorporated, a California
corporation (the "Registrant"), acquired Microsource, Inc., a California
corporation("Microsource"), by merging Giga Micro Corp., a wholly-owned
subsidiary of the Registrant, with and into Microsource, with Microsource as the
surviving corporation. The purchase price (the "Purchase Price") consisted of
$1,500,000 plus contingent payments based upon future net income of Microsource
during the two fiscal years after the effective time of the merger. By virtue of
the merger, Microsource became a direct, wholly-owned subsidiary of the
Registrant, and all of Microsource's outstanding capital stock prior to the
merger was converted into rights to receive a pro rata portion of the Purchase
Price. Additionally, all outstanding options and warrants to purchase shares of
Microsource common stock which were not exercised prior to closing were
cancelled.
Prior to the merger, James Cole served as a member of the Board
of Directors of both the Registrant and Microsource. In addition, immediately
prior to the merger, the Registrant owned 3,985,069 shares, equaling
approximately 12%, of the outstanding Common Stock of Microsource and had a note
receivable from Microsource in the amount of $1,553,000.
The Registrant timely filed a Current Report of Form 8-K, dated May
18, 1998, on June 1, 1998, reporting in Item 2, the acquisition by Registrant
of Microsource, Inc., with the Securities and Exchange Commission.
The Registrant further reported in Item 7 of such Report, that it
would file financial statements of the acquired corporation within the time
period as specified by the rules relating to filing reports on a Current
Report on Form 8-K, by amendment.
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GIGA-TRONICS INCORPORATED
INDEX
PART I - FINANCIAL INFORMATION Page No.
ITEM 1 Not Applicable
ITEM 2 Acquisition or Disposition of Assets.....................................................2
ITEM 3
to
ITEM 6 Not applicable
ITEM 7 Financial Statements and Exhibits
A. Financial Statements
1. Microsource, Inc.
(a) Independent Auditors' Report...................................................5
(b) Consolidated Balance Sheet - December 31, 1997.................................6
(c) Consolidated Statement of Income -
For the Year Ended December 31, 1997.....................................7
(d) Consolidated Statement of Shareholders' Equity -
For the Year Ended December 31, 1997.....................................8
(e) Consolidated Statement of Cash Flows -
For the Year Ended December 31, 1997.....................................9
(f) Notes to Consolidated Financial Statements...............................10 - 22
2. Pro Forma Combined Financial Statements............................................23
(a) Unaudited Pro Forma Condensed Combined Balance Sheet -
March 28, 1998..........................................................24
(b) Unaudited Pro Forma Condensed Combined Statements of Operations -
For the Year Ended March 28, 1998.......................................25
(c) Notes to Unaudited Pro Forma Condensed Combined
Financial Statements....................................................26
3. Microsource, Inc.
(a) Unaudited Condensed Balance Sheet -
March 31, 1998...........................................................27
(b) Unaudited Condensed Statements of Operations -
For the Three Months Ended March 31, 1998 and 1997.....................28
(c) Unaudited Condensed Statements of Cash Flows -
For the Three months ended March 31, 1998 and 1997.....................29
(d) Notes to Unaudited Condensed Financial Statements.............................30
SIGNATURES ........................................................................31
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MICROSOURCE, INC.
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
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5
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Microsource, Inc.:
We have audited the accompanying balance sheets of Microsource, Inc. as of
December 31, 1997 and 1996, and the related statements of income, shareholders'
equity (deficit) and cash flows for the years then ended. 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 Microsource, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
As more fully described in Note 2, the 1996 financial statements, including
accumulated deficit at January 1, 1996 have been restated to reflect various
prior period adjustments.
/s/ PriceWaterhouseCoopers
- ---------------------------------------------
PriceWaterhouseCoopers
San Francisco, California
June 5, 1998
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MICROSOURCE, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
(Restated - Note 2)
------------ -------------------
Current assets:
Cash $ 156,617 $ 155,432
Accounts receivable, trade, net of allowance for bad debts
of $68,840 and $48,910
for 1997 and 1996, respectively 1,535,735 1,751,485
Revenue in excess of billings 5,289 --
Inventories 4,328,477 4,571,569
Prepaid expenses and other current assets 180,045 257,549
------------ ------------
Total current assets 6,206,163 6,736,035
Accounts receivable - related party -- 754,728
Property and equipment, net 2,003,531 2,197,018
Other assets 136,788 128,933
------------ ------------
$ 8,346,482 $ 9,816,714
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,253,683 $ 979,621
Accrued liabilities 683,482 491,846
Billings in excess of costs -- 220,427
Customer deposits 1,861,465 1,138,682
Bank line-of-credit 1,500,000 1,500,000
Notes payable to related parties 1,432,051 210,000
Current maturities of capital lease obligations 80,147 129,872
Current maturities of equipment loans 95,863 --
Current portion of long-term debt 1,021,871 499,443
------------ ------------
Total current liabilities 7,928,562 5,169,891
Capital lease obligations, less current maturities 56,864 142,796
Equipment loans, less current maturities 276,265 --
Long-term debt -- 686,038
Other liabilities 245,051 290,819
------------ ------------
Total liabilities 8,506,742 6,289,544
------------ ------------
Commitments (Note 6)
Shareholders' equity (deficit):
Preferred stock, no par value, aggregate liquidation
preference of $19,809,100 19,268,100 19,268,100
Common stock 237,470 387,403
Notes receivable from shareholders (47,548) (235,068)
Accumulated deficit (19,618,282) (15,893,265)
------------ ------------
Total shareholders' equity (deficit) (160,260) 3,527,170
------------ ------------
$ 8,346,482 $ 9,816,714
============ ============
The accompanying notes are an integral part of these statements.
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MICROSOURCE, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
(Restated - Note 2)
------------ -------------------
Revenues:
Net revenues $ 7,152,594 $ 8,248,188
------------ ------------
Operating costs and expenses:
Cost of revenues 7,686,828 5,552,566
Research and development 1,309,444 1,007,847
Marketing 603,321 709,203
General and administrative 1,314,385 929,537
------------ ------------
11,080,978 8,199,153
------------ ------------
Operating income (loss) (3,761,384) 49,035
Write-down of investment in VertiCom -- (983,475)
Interest expense, net (435,669) (228,216)
Gain on sale of investment in VertiCom 350,368 --
Other income 122,468 43,388
------------ ------------
Loss before provision for income taxes (3,724,217) (1,119,268)
Income tax expense 800 1,929
------------ ------------
Net loss $ (3,725,017) $ (1,121,197)
============ ============
The accompanying notes are an integral part of these statements.
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MICROSOURCE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
PREFERRED STOCK - NO PAR VALUE
-------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F
------------ ----------- ----------- ---------- ---------- -----------
Balance, January 1, 1996, as previously
Reported $738,700 $1,889,500 $1,466,700 $2,794,000 $7,315,800 $5,063,400
Prior period adjustment, net (Note 2)
Restated balance, January 1, 1996 738,700 1,889,500 1,466,700 2,794,000 7,315,800 5,063,400
Stock issued upon exercise of options
Stock returned upon cancellation of note receivable
from shareholder
Increase in notes receivable from shareholders
Net loss (restated - Note 2)
Balance, December 31, 1996 738,700 1,889,500 1,466,700 2,794,000 7,315,800 5,063,400
Stock issued upon exercise of options
Increase in notes receivable from shareholders
Reserve established for note in default
Net loss
Balance, December 31, 1997 $738,700 $1,889,500 $1,466,700 $2,794,000 $7,315,800 $5,063,400
========== =========== ============ =========== ========== ============
Shares of Preferred and Common Stock:
Shares authorized 790,000 633,333 461,535 666,667 4,788,544 12,000,000
========== =========== ============ =========== ========== ============
Shares issued and outstanding:
December 31, 1996 790,000 633,333 461,535 666,667 4,491,540 10,585,166
========== =========== ============ =========== ========== ============
December 31, 1997 790,000 633,333 461,535 666,667 4,491,540 10,585,166
========== =========== ============ =========== ========== ============
Liquidation preference $750,500 $1,900,000 $1,500,000 $3,000,000 $7,366,100 $5,292,500
========== =========== ============ =========== ========== ============
NOTES
RECEIVABLE
COMMON FROM
STOCK SHARE- ACCUMULATED
NO PAR VALUE HOLDERS DEFICIT TOTAL
------------- ------------- ------------- ------------
Balance, January 1, 1996, as previously
Reported $403,866 $(247,357) $(8,732,632) $10,691,977
Prior period adjustment, net (Note 2) (6,039,436) (6,039,436)
Restated balance, January 1, 1996 403,866 (247,357) (14,772,068) 4,652,541
Stock issued upon exercise of options 200 200
Stock returned upon cancellation of note receivable
from shareholder (16,663) 16,663 -
Increase in notes receivable from shareholders (4,374) (4,374)
Net loss (restated - Note 2) (1,121,197) (1,121,197)
Balance, December 31, 1996 387,403 (235,068) (15,893,265) 3,527,170
Stock issued upon exercise of options 67 67
Increase in notes receivable from shareholders (9,223) (9,223)
Reserve established for note in default (150,000) 196,743 46,743
Net loss (3,725,017) (3,725,017)
Balance, December 31, 1997 $237,470 $(47,548) $(19,618,282) $ (160,260)
=========== =========== ============== ===========
Shares of Preferred and Common Stock:
Shares authorized 40,000,000 59,340,079
=========== ===========
Shares issued and outstanding:
December 31, 1996 3,512,227 21,140,468
=========== ===========
December 31, 1997 3,512,892 21,141,133
=========== ===========
Liquidation preference $19,809,100
===========
The accompanying notes are an integral part of these statements.
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MICROSOURCE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
(Restated - Note 2)
----------- -------------------
Cash flows from operating activities:
Net loss $(3,725,017) $(1,121,197)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 667,814 665,520
Write-down of investment in VertiCom -- 983,475
Gain on sale of investment in VertiCom (350,368) --
Loss on cancellation of note receivable from shareholder 46,743 --
Decrease (increase) in accounts receivable, trade, net 215,750 (86,488)
Increase in revenue in excess of billings (5,289) --
Decrease (increase) in accounts receivable, related party 24,459 (459,718)
Decrease (increase) in inventories 243,092 (939,264)
Decrease (increase) in prepaid expenses and other current assets 77,504 (59,007)
Increase in notes receivable from shareholders (9,223) (4,374)
Increase in accounts payable and other accrued liabilities 465,698 149,916
Decrease in accounts payable - related party -- (60,725)
Increase in customer deposits 722,783 460,719
(Decrease) increase in billings in excess of costs (220,427) 220,427
Increase in other assets and liabilities (53,623) (63,605)
----------- -----------
Net cash used in operating activities (1,900,104) (314,321)
Cash flows from investing activities:
Purchase of property and equipment (122,279) (532,994)
Proceeds from sale of VertiCom investment 1,080,637 --
----------- -----------
Net cash provided by (used in) investing activities 958,358 (532,994)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable to related parties 1,432,051 320,000
Repayments on notes payable to related parties (210,000) (110,000)
Borrowings under line of credit -- 500,000
Payments under capital lease obligations and equipment loans (115,577) (217,558)
Proceeds from issuance of long-term debt 400,000 1,500,000
Repayments on long-term debt (563,610) (1,052,704)
Proceeds from issuance of common stock 67 200
----------- -----------
Net cash provided by financing activities 942,931 939,938
Net increase in cash 1,185 92,623
Cash, beginning of year 155,432 62,809
----------- -----------
Cash, end of year $ 156,617 $ 155,432
=========== ===========
Supplemental disclosure of noncash financing activities:
Equipment acquired through equipment loans and capital lease obligations $ 352,048 $ 101,716
=========== ===========
Stock returned upon cancellation of note receivable from shareholder $ 150,000 $ 16,663
=========== ===========
Accounts receivable - related party converted to investment in VertiCom $ 730,269 $ --
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 324,882 $ 239,213
=========== ===========
Income taxes paid $ 800 $ 13,195
=========== ===========
The accompanying notes are an integral part of these statements.
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MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
Microsource, Inc. (the Company) manufactures microwave components and
subsystems including YIG oscillators, filters and multipliers for
worldwide commercial and governmental use. The Company is also engaged in
research and development of new and experimental technology in the
microwave component field. The Company sells primarily to defense
contractors under U.S. government contracts. See Note 16 for a discussion
of the sale of the Company to Giga-tronics, Inc. (Giga-tronics) in May
1998.
2. PRIOR PERIOD ADJUSTMENTS:
During 1997, it was determined that the Company had used inappropriate
accounting for certain long-term contracts in prior periods. Adjustments
have been made to conform with generally accepted accounting principles,
as more fully described under revenue recognition in Note 3. The
Company's management has determined that certain of these adjustments
properly related to amounts reported in periods prior to January 1, 1996.
Accordingly, the beginning balance of accumulated deficit at January 1,
1996, as previously reported has been restated to reflect the
overstatement of income related to contracts in prior years. These
adjustments aggregated $298,184 on a pretax basis and have been presented
on an after-tax basis of $6,039,436. The tax effect of such adjustments
of $5,741,252 is comprised of a deferred tax benefit of $115,303 and
deferred tax expense of $5,856,555, which expense relates to the
establishment of a full valuation allowance on the net deferred tax asset
previously not reserved for at December 31, 1995. The 1996 financial
statements as previously reported have also been restated for these
adjustments. The impact on the 1996 statement of income was to increase
loss before provision for income taxes by $936,709, decrease tax expense
by $317,151, and increase net loss by $619,658. The impact on the 1996
balance sheet primarily related to an increase in customer deposits of
$951,994 and a decrease in deferred taxes of $5,424,101, related to
providing a full valuation allowance.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and 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.
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MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments with
original maturities of three months or less to be cash equivalents.
There were no cash equivalents outstanding at December 31, 1997 and
1996.
INVESTMENT:
At December 31, 1996, the Company owned 17% of VertiCom, Inc.
(VertiCom), a related company through its investment in shares of
common stock, as converted (see Note 15). The Company accounts for
its investment using the cost method. Recoverability of the carrying
amount of the investment is reviewed periodically by management and
reserves are established as required. At December 31, 1996, the
Company determined the investment in VertiCom's common stock to be
permanently impaired and reduced the carrying value to zero. This
investment was sold in 1997.
ACCOUNTS RECEIVABLE:
Accounts receivable are principally from large defense contractors
under U.S. government contracts. At December 31, 1997, four
contractors represented 56% of accounts receivable trade. At December
31, 1996, three contractors represented approximately 62% of accounts
receivable, trade. Two customers represented approximately 29% of net
revenues for the year ended December 31, 1997. One customer
represented approximately 17%, of net revenue for the year ended
December 31, 1996. The Company generally requires no collateral from
its customers. The Company performs ongoing evaluations of its
customers and maintains reserves for potential credit losses. Such
losses have been within management's expectations.
INVENTORIES:
Inventories are recorded at the lower of cost or market. Cost is
determined using the average cost method.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is recorded
using the straight-line method over estimated useful lives of three
to seven years. Leasehold improvements are amortized over the lives
of the respective leases.
Expenditures for repairs and maintenance are charged to expense
incurred. Upon disposition, the cost and related accumulated
depreciation are removed from the accounts and the resulting gain or
loss is reflected in the statement of income.
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MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
DEFERRED RENT:
Rent expense is recognized in an amount equal to the minimum
guaranteed base rent plus future rental increases amortized on the
straight-line basis over the terms of the lease, including free rent
periods. Included in other long-term liabilities is the excess of
rent expense over required rental payments. The deferred rent balance
at December 31, 1997 and 1996 was $236,131 and $281,898,
respectively.
REVENUE RECOGNITION:
Revenue from the pre-production portion of long-term contracts is
recognized under the percentage of completion method computed at the
percentage of estimated total revenues that incurred costs to date
bears to total estimated costs. Revisions in cost and revenue
estimates are reflected in the period in which the facts become
known. When revised cost estimates indicate a loss on an individual
contract, the total estimated loss is provided for currently.
Revenue earned on contracts in progress in excess of billings is
classified as a current asset. Billings in excess of costs represent
amounts billed in excess of revenue earned.
Revenues from production contracts and other product sales are
recognized upon shipment to the customer.
Customer deposits represent customer prepayments for product sales.
INCOME TAXES:
In accordance with Statement of Financial Accounting Standards No.
109, deferred income taxes are provided for differences between the
financial and tax basis of an asset or liability that will result in
taxable or deductible amounts in future years when the asset or
liability is recovered or settled, respectively. A valuation
allowance is recognized for deferred tax assets when it is more
likely than not that some portion or all of the deferred tax asset
will not be realized. The net income tax expense or benefit is the
tax payable or refundable, respectively, for the period plus or minus
the change during the period in deferred tax assets and liabilities.
ADVERTISING:
The Company expenses advertising costs as they are incurred.
Advertising expense for the years ended December 31, 1997 and 1996
was $16,390 and $54,917, respectively.
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MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
4. INVENTORIES:
Inventories are summarized as follows:
1997 1996
(Restated - Note 2)
----------- -------------------
Raw materials and components $ 5,235,424 $ 3,976,329
Work in process 864,496 1,561,113
----------- -----------
6,099,920 5,537,442
Reserve for obsolete and slow moving inventory (1,771,443) (965,873)
----------- -----------
$ 4,328,477 $ 4,571,569
=========== ===========
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
1997 1996
(Restated - Note 2)
------------ -------------------
Equipment $ 8,645,961 $ 8,860,329
Equipment under capital leases 775,177 1,193,479
Leasehold improvements 205,812 201,866
------------ ------------
9,657,403 10,286,127
Less accumulated depreciation and amortization (7,653,872) (8,089,109)
------------ ------------
Property and equipment, net $ 2,003,531 $ 2,197,018
============ ============
Accumulated amortization on equipment under capital leases was $182,348
and $536,303 at December 31, 1997 and 1996, respectively.
6. LINE-OF-CREDIT:
The Company has a bank line-of-credit with an outstanding balance of
$1,500,000 at December 31, 1997 and 1996. Under the terms of the
agreement, the Company may borrow the lesser of $1,500,000 or 80% of its
qualified accounts receivable. The amounts outstanding under the line
bear interest at the bank's prime rate (8.5% at December 31, 1997) plus
2.00%. This line was repaid as part of the Company's acquisition in May
1998 (see Note 16).
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MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
7. LONG-TERM DEBT:
In 1996, the Company entered into a bank note payable of $1,000,000 with
36 monthly principal installments of $27,778 beginning July 5, 1996. The
note bears interest at the bank's prime rate (8.5% at December 31, 1997)
plus 2% and is due on June 4, 1999. The balance outstanding at December
31, 1997 and 1996 was $500,000 and $833,333, respectively.
In 1996, the Company entered into a bank note payable of $415,274. The
note bears interest at the bank's prime rate (8.5% at December 31, 1997)
plus 2.5%. The note is payable in monthly principal installments of
$12,553 and is due on April 5, 1999. The balance outstanding at December
31, 1997 and 1996 was $201,871 and $352,508, respectively.
The Company had a bank note payable due in monthly installments of
$30,303. The entire principal and related interest were repaid during
1996.
In 1997, the Company entered into a bank note payable of $400,000. The
note bears interest at the bank's prime rate (8.5% at December 31, 1997)
plus 1.5%. The note is payable in monthly principal installments of
$11,429 and is due on April 5, 2000.
The balance outstanding at December 31, 1997 was $320,000.
The annual principal maturities of long-term debt are as follows:
1998 $ 617,304
1999 350,873
2000 53,694
----------------
$ 1,021,871
================
The bank line-of-credit (see Note 6) and bank notes payable are
collateralized by accounts receivable, inventories, and certain equipment
of the Company. The credit agreements require the Company to maintain
profitable operations, minimum levels of net worth and working capital
and specified ratios of current assets to current liabilities and of debt
to net worth. At December 31, 1997, the Company was in violation of
certain covenants and, accordingly, has classified this as a current
liability.
All bank debt was repaid as part of the Company's acquisition in May 1998
(see Note 16).
8. NOTES PAYABLE TO RELATED PARTIES:
In 1996, the Company entered into promissory notes payable of $320,000
with certain shareholders of the Company. A $110,000 note was repaid
during 1996. The notes bear interest at 10% and were repaid in January
1997.
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MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
8. NOTES PAYABLE TO RELATED PARTIES, continued:
In October 1997, the Company entered into a promissory note payable to
Giga-tronics for $750,000. The note bears interest at 10% per annum.
Principal ($750,000 at December 31, 1997) and accrued interest are due in
May 1998. The note is collateralized by certain equipment owned by the
Company. In May 1998, Giga-tronics purchased the Company (see Note 16).
In 1997, the Company entered into promissory notes payable aggregating
$682,051 to various investors at an interest rate of 10%. Principal
payments of $303,526 and $378,525 along with accrued interest were
payable on September 30, 1997 and December 31, 1997, respectively. At
December 31, 1997, the Company was in default on such payments. These
notes were repaid as part of the Company's acquisition in May 1998 (see
Note 16).
In connection with the issuance of the Giga-tronics and other investor
promissory notes, the Company agreed to issue warrants to purchase shares
of the Company's common stock, equal to 10% of the face value of the
outstanding notes payable balance per month, at an exercise price of
$0.10 per share. 7,357,885 warrants relating to this debt were
outstanding and exercisable at December 31, 1997.
Interest expense on notes payable to related parties was $35,656 and
$8,500 for the years ended December 31, 1997 and 1996, respectively.
9. LEASE OBLIGATIONS:
The Company leases office, research and manufacturing facilities and
certain equipment under long-term operating leases and also leases
production, research and development and office equipment under capital
leases. Certain operating leases include provisions for increases in the
minimum rent.
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MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
9. LEASE OBLIGATIONS, continued:
The following is a schedule of future minimum lease payments under
capital and operating leases, together with the present value of the net
minimum lease payments, at December 31, 1997:
CAPITAL OPERATING
LEASES LEASES
---------- -----------
1998 $ 95,635 $ 468,387
1999 27,682 468,387
2000 19,642 480,707
2001 18,761 534,526
2002 - 534,526
Thereafter - 178,178
-------- ===========
Total minimum lease payments 161,720 $ 2,664,711
===========
Less amount representing interest (24,709)
--------
Present value of net minimum lease payments 137,011
Less amount due within one year 80,147
--------
$ 56,864
========
Total minimum rental commitments under noncancelable operating leases
exclude minimum sublease rentals of $349,239. Total sublease income,
included in other income, for the years ended December 31, 1997 and 1996
was $126,996 for both years. Total rent expense was $512,430 and $436,983
in 1997 and 1996, respectively.
Obligations under certain capital leases are collateralized by
interest-bearing deposits held by lessors in amounts equal to
approximately 5 percent of the leased equipment's value at the inception
of the lease. The related deposits held by lessors amounted to $20,210
and $51,093 at December 31, 1997 and 1996, respectively.
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MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
10. EQUIPMENT LOANS:
In 1997, the Company entered into several equipment loans with a leasing
company. The notes bear interest of 11% and are collateralized by the
related equipment.
The following is a schedule of future minimum payments for equipment
loans, at December 31, 1997:
1998 $ 132,652
1999 112,252
2000 91,852
2001 91,852
2002 32,446
----------------
Total minimum payments 461,054
Less amount representing interest (88,926)
----------------
Present value of net minimum payments 372,128
Less amount due within one year 95,863
----------------
$ 276,265
================
11. INCOME TAXES:
The provision for income taxes is composed of the following:
1997 1996
(Restated - Note 2)
-------------- --------------------------
Current:
Federal - $ 1,129
State $ 800 800
--------------- ---------------------------
$ 800 $ 1,929
=============== ===========================
17
18
MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
11. INCOME TAXES, continued:
The Company's net deferred tax asset is summarized as follows:
1997 1996
-------------------------------------- -----------------------------------------------
FEDERAL STATE TOTAL FEDERAL STATE TOTAL
----------- ----------- ----------- ----------- ----------- -----------
Tax effect of net operating loss
Carryforwards $ 5,795,711 $ 269,856 $ 6,065,567 $ 4,655,441 $ 227,133 $ 4,882,574
Research and experimental credit
Carryforwards 338,703 71,585 410,288 338,703 71,585 410,288
Nondeductible inventory reserves 416,560 71,482 488,042 265,665 47,960 313,625
Other differences between financial
reporting and tax bases of
assets and liabilities 179,488 30,753 210,241 227,906 41,095 269,001
Alternative minimum tax credit
Carryforwards 15,682 1,602 17,284 15,682 1,602 17,284
----------- ----------- ----------- ----------- ----------- -----------
Net deferred tax asset 6,746,144 445,278 7,191,422 5,503,397 389,375 5,892,772
Valuation allowance (6,746,144) (445,278) (7,191,422) (5,503,397) (389,375) (5,892,772)
----------- ----------- ----------- ----------- ----------- -----------
Net deferred tax asset -- -- -- -- -- --
=========== =========== =========== =========== =========== ===========
The Company has provided a full valuation allowance against its net
deferred tax asset at December 31, 1997 and 1996 due to the uncertainty
of its realization. The change in the valuation allowance for the years
ended December 31, 1997 and 1996 was $1,298,650 and $36,217,
respectively.
The differences between financial reporting and tax bases of assets and
liabilities relate primarily to accelerated depreciation and the
nondeductibility of certain reserves.
The Company's tax rate differs from the federal statutory rate of 34% due
primarily to state taxes, permanent differences primarily due to the
write-down of the investment in VertiCom, and the change in valuation
allowance.
The Company has net operating loss carryforwards of approximately
$17,046,000 for federal income tax purposes and $4,625,000 for California
state franchise tax purposes at December 31, 1997. The Company also has
available research and experimental tax credit carryforwards of
approximately $338,000 for federal income tax purposes and $72,000 for
California state franchise tax purposes at December 31, 1997. Such
carryforwards expire in varying amounts through the year 2008. The state
net operating loss carryforward is net of the 50% carryover limitation.
Changes in ownership will limit the amount of net operating loss
carryforwards available to offset future taxable income under IRS Code
Section 382 (see Note 16).
18
19
MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
12. CAPITAL STOCK:
PREFERRED STOCK:
Preferred shareholders are entitled to voting and dividend rights
(noncumulative) equal to those of common shareholders on the basis of
the number of common shares to which the preferred stock may be
converted. In the event of any liquidation, holders of preferred
shares have priority over holders of common shares in the amount of
their liquidation preference plus any unpaid dividends. Preferred
shares are convertible into shares of common stock at December 31,
1997, on the following basis: Series A,1:1; Series B,1:1; Series
C,1:2.2; Series D,1:2.4; Series E,1:1.6; Series F,1:1.
The conversion price is subject to adjustment based on certain
events, including issuance of additional common stock. At any time on
or after the date on which any common stock is sold to the public by
the Company (or selling shareholders, if any) in a public offering
registered under the Securities Act of 1933 at a per share gross
public offering price of not less than (i) $4.00 with respect to each
of the Series A Preferred Stock and Series B Preferred Stock (ii)
$5.90 with respect to the Series C Preferred Stock (iii) $8.17 with
respect to the Series D Preferred Stock, and (iv) $3.05 with respect
to the Series E Preferred Stock and Series F Preferred Stock, and
with respect to Series C Preferred Stock, Series D Preferred Stock,
Series E Preferred Stock, and Series F Preferred Stock, resulting in
gross proceeds to the Corporation of at least $5,000,000, then the
Corporation may, at its election, cause all or any portion of the
Preferred Stock to be converted at the Conversion Price with respect
to such Preferred Stock then in effect.
WARRANTS:
Warrants outstanding at December 31, 1997, are as follows:
NUMBER OF EXERCISE
WARRANT TYPE SHARES PRICE
------------ ------ -----
Series F Preferred Stock 685,166 $0.50
Common stock (Note 8) 7,357,885 $0.10
The Series F Preferred Stock warrants were issued in connection with
certain notes payable which are no longer outstanding. None of the
warrants were issued at an exercise price of less than the fair
market value of the underlying stock at the time of issuance. In
conjunction with the acquisition of the Company in May 1998 (see Note
16), 1,596,000 of the common stock warrants were exercised by
Giga-tronics. The remaining Series F Preferred and common stock
warrants were canceled April 21, 1998.
SHARES OUTSTANDING:
At December 31, 1997, a total of 21,810,341 shares of common stock
have been reserved for conversion of the preferred stock.
19
20
MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
13. STOCK OPTION PLANS:
The Company has incentive and nonqualified stock option plans which
provide for options to be granted to officers, directors and employees at
purchase prices that are equal to fair market value at the date of grant,
all as determined by the Board of Directors. Employee options are
exercisable upon grant. Options granted to members of the Board of
Directors are exercisable one year from the date of grant. The right of
exercise generally expires ten years from the date of grant. The Company
may repurchase stock issued under the plans at the exercise price. The
Company's repurchase option expires at the rate of 25 percent annually
from the date of grant, the date of employment or such other date
determined by the plan administrator. At December 31, 1997, 652,500
options outstanding are still subject to this repurchase arrangement.
During 1997, approximately 2,000 previously outstanding options with an
exercise price of $.75 were converted to options with an exercise price
of $.10. No compensation expense was associated with this conversion.
In 1997, total shares authorized for the stock option plans increased by
1,000,000 shares to 4,000,000.
The following table summarizes activity under the Company's stock option
plans for the years ended December 31, 1997 and 1996:
NUMBER WEIGHTED
OF AVERAGE
SHARES EXERCISE PRICE
---------- -----
Options outstanding at December 31, 1995 496,965 $0.10
Exercised (2,000) 0.10
Canceled (7,575) 0.10
Granted 500,000 0.10
---------- -----
Options outstanding at December 31, 1996 987,390 0.10
Exercised (665) 0.10
Canceled (20,100) 0.10
Granted 135,000 0.10
---------- -----
Options outstanding and exercisable at December 31, 1997 1,101,625 $0.10
========== =====
20
21
MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
13. STOCK OPTION PLANS, continued:
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------------------------------------------------
Range of Number Weighted Average Weighted Average Number Weighted Average
Exercise Outstanding at Remaining Exercise Exercisable Exercise
Prices 12/31/97 Contractual Life (Years) Price at 12/31/97 Price
- ------ ---------------- ---------------------------- -------------------- ----------------- --------------------
$0.10 1,101,625 7.42 $0.10 1,101,625 $0.10
The following information concerning the Company's stock option plans is
provided in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The Company accounts for the plans in accordance with APB
No. 25 and related Interpretations.
The fair value of each option grant-date has been estimated on the date
of grant using the minimum value method with the following weighted
average assumptions used for grants in 1997 and 1996:
1997 1996
-------- ---------
Risk-free interest rates 6.15% 6.15%
Expected life 10 years 10 years
No proforma income information is provided as the weighted-average
exercise price exceeds fair value.
On April 24, 1998, this Plan was canceled in conjunction with the
acquisition of the Company (see Note 16).
14. 401(k) TAX DEFERRED SAVINGS PLAN:
The Company has a 401(k) Tax Deferred Savings Plan covering eligible
employees who elect to participate. If it elects to do so, the Company
may contribute matching and discretionary contributions to the Plan. No
contributions were made by the Company in 1997 or 1996.
21
22
MICROSOURCE, INC.
NOTES TO FINANCIAL STATEMENTS
15. RELATED PARTY TRANSACTIONS:
At December 31, 1996, the Company owned 17% of VertiCom, Inc., a related
company through its investment in common stock, which had a zero carrying
value (see Note 3). At December 31, 1996, the Company had a receivable
from VertiCom of $754,728, representing reimbursable expenses incurred on
behalf of VertiCom. In March 1997, the Company converted $730,269 of
related party accounts receivable to 982,336 shares of Verticom Series A
Preferred Stock. The remaining $24,459 was written off during the year
ended December 31, 1997.
In 1997, the Company sold its Series A Preferred Stock investment in
VertiCom with a carrying value of $730,269, for $1,080,637 and recognized
a gain of $350,368.
In 1997 and 1996, respectively, the Company incurred $266,202 and
$656,347 of expenses that were reimbursed by VertiCom. In addition, the
Company had sales to VertiCom of $1,942 and $60,227 for the years ended
1997 and 1996, respectively.
During 1997, a former employee defaulted on a $150,000 shareholder note
receivable. The Company has established a reserve against this note and
related common stock at December 31, 1997. The Company recorded a loss of
$46,743 for the accrued interest related to this note.
Effective May 4, 1998, the notes receivable from shareholders of $47,548
and the related 500,500 shares issued for these notes were both canceled
in connection with the acquisition of the Company (see Note 16).
16. SUBSEQUENT EVENTS:
In May 1998, the majority of the Company's shareholders approved the sale
of the Company to Giga-tronics. Upon acquisition, Giga-tronics advanced
funds to the Company to repay its bank debt and notes payable to previous
shareholders. Advances of approximately $4,455,000 were made to the
Company from January 1, 1998 through June 1, 1998.
Giga-tronics intends to make advances to the Company, as necessary, to
support operating cash flow requirements, at a minimum, through July
1999.
22
23
GIGA-TRONICS INCORPORATED AND MICROSOURCE, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The accompanying unaudited pro forma condensed combined financial
statements present pro forma financial information for the Company giving effect
to the Company's acquisition of 100% of the outstanding Common Stock of
Microsource on May 18, 1998 (the "Transaction"). The unaudited pro forma
condensed combined balance sheet as of March 28, 1998 is presented as if the
transaction had occurred as of that date. The unaudited pro forma condensed
combined statement of operations for the year ended March 28, 1998 is presented
as if the transaction had occurred on March 30, 1997. The pro forma results of
operations for the year ended March 28, 1998 is based on Giga-tronics fiscal
year end of March 28; Microsource's fiscal year end has been changed from
December 31, 1997 to March 31, 1998 to conform with the year end of Giga-tronics
by including the results of operations for the 3 month period ending March 31,
1998 and subtracting the three month period ending March 31, 1997. The
accompanying unaudited pro forma condensed combined financial information and
notes thereto do not purport to represent what the Company's results of
operations or financial position would have been if such Transaction had in fact
occurred on such dates and should not be viewed as predictive of the Company's
financial results or condition in the future. The unaudited pro forma condensed
combined financial information should be read in conjunction with the
consolidated financial statements of the Company and subsidiaries in the
Company's Annual Report on Form 10-K for the year ended March 28, 1998.
23
24
GIGA-TRONICS INCORPORATED AND MICROSOURCE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 28, 1998
(In Thousands)
Pro Forma
Adjustments Pro Forma
Giga-tronics (See Note 2) Combined
------------ ------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 4,611 $ (2,603) $ 2,008
Investments 5,724 -- 5,724
Notes receivable 860 (860) --
Trade accounts receivable, net 6,924 1,390 8,314
Inventories, net 8,064 3,661 11,725
Prepaid expenses 997 254 1,251
Deferred income taxes 2,092 -- 2,092
-------- -------- --------
Total current assets 29,272 1,842 31,114
Property and equipment, net 2,745 4,370 7,115
Patents and licenses 577 -- 577
Other assets 78 1,323 1,401
-------- -------- --------
Total assets $ 32,672 $ 7,535 $ 40,207
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ -- $ 1,500 $ 1,500
Current portion of long term debt -- 913 913
Notes payable -- 682 682
Accounts payable 2,659 985 3,644
Accrued commissions 516 33 549
Accrued payroll and benefits 939 340 1,279
Accrued warranty 673 63 736
Customer advances 612 2,004 2,616
Other current liabilities 697 498 1,195
-------- -------- --------
Total current liabilities 6,096 7,018 13,114
Long term debt, excluding current portion -- -- --
Obligations under capital lease and other long term
obligations 58 517 575
Deferred income taxes 57 -- 57
-------- -------- --------
Total liabilities 6,211 7,535 13,746
Shareholders' equity
Preferred stock of no par value;
Common stock of no par value; 11,532 -- 11,532
Unrealized gain (loss) on investments (18) -- (18)
Retained earnings 14,947 -- 14,947
-------- -------- --------
Total shareholders' equity 26,461 -- 26,461
-------- -------- --------
Total liabilities and shareholders' equity $ 32,672 $ 7,535 $ 40,207
======== ======== ========
See accompanying notes to unaudited condensed combined financial statements.
24
25
GIGA-TRONICS INCORPORATED AND MICROSOURCE, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 28, 1998
(In Thousands except per share amounts)
Pro Forma Pro Forma
Giga-tronics Microsource Adjustments Combined
----------- ----------- ----------- -----------
Net sales $ 36,813 $ 6,262 $ -- $ 43,075
Cost of sales 21,024 8,119 88(a) 28,231
----------- ----------- ----------- -----------
Gross profit (loss) 15,789 (1,857) (88) 13,844
Product development 6,200 1,332 46(a) 7,578
Selling, general and administrative 8,537 2,063 20(a) 10,620
Amortization of intangibles 435 -- 265(b) 700
----------- ----------- ----------- -----------
Operating expenses 15,172 3,395 331 18,898
Operating income (loss) 617 (5,252) (419) (5,054)
Other income (expense) 22 722 29(c) 773
Interest income, net 457 -- -- 457
----------- ----------- ----------- -----------
Earnings (loss) before income taxes 1,096 (4,530) (390) (3,824)
Provision (benefit) for income taxes 329 1 -- 330
----------- ----------- ----------- -----------
Net earnings (loss) $ 767 $ (4,531) $ (390) $ (4,154)
=========== =========== =========== ===========
Earnings (loss) per common share - basic $ 0.18 $ (0.96)
=========== ===========
Weighted average basic
Common shares outstanding 4,319,000 4,319,000
=========== ===========
See accompanying notes to unaudited condensed combined financial statements.
25
26
GIGA-TRONICS INCORPORATED AND MICROSOURCE, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION
On May 18, 1998, Giga-tronics Incorporated, acquired 100% of the outstanding
common stock of Microsource, Inc. a California corporation ("Microsource"), by
merging Giga Micro Corp., a wholly-owned subsidiary of the Registrant, with and
into Microsource, with Microsource as the surviving corporation. The purchase
price (the "Purchase Price") consisted of $1,500,000 plus contingent payments
based upon future net income of Microsource during the two fiscal years after
the effective time of the merger. By virtue of the merger, Microsource became a
direct, wholly-owned subsidiary of Giga-tronics and all of Microsource's
outstanding capital stock prior to the merger was converted into rights to
receive a pro rata portion of the Purchase Price. The acquisition of Microsource
has been accounted for by the purchase method. Additionally, all outstanding
options and warrants to purchase shares of Microsource common stock which were
not exercised prior to closing were cancelled.
Note 2: ALLOCATION OF PURCHASE PRICE
The total purchase price of $1,500,000 has been allocated on a preliminary bases
to the net assets acquired based on the estimated fair value below:
Accounts receivable $ 1,390,000
Net Inventory 3,661,000
Prepaid expenses 254,000
Property Plant & Equipment 4,370,000
Goodwill 1,323,000
Assumption of Line of Credit (1,500,000)
Assumption of bank term loans and short term Capital leases (913,000)
Assumption of Notes to Related Parties (682,000)
Assumption of Accounts Payable (985,000)
Accrued Commissions assumed (33,000)
Accrued Payroll Assumed (340,000)
Accrued Warranty Assumed (63,000)
Customer Advances Assumed (2,004,000)
Other current liabilities Assumed (498,000)
Assumption of Long Term lease and other obligations (517,000)
-----------
3,463,000
Less Advances to Microsource, net, and transaction cost (1,963,000)
-----------
1,500,000
===========
Advances to Microsource include $1,800,000 of additional advances, net, made
between March 31, 1997 and May 18, 1998. In addition the Company incurred
transaction costs of $163,000.
Note 3: PRO FORMA ADJUSTMENT
a) Represents increased depreciation on the step up basis (to fair Market Value)
on property plant and equipment.
b) Represents amortization of goodwill created as a result of the acquisition of
Microsource, Inc. The Goodwill will be amortized over a 5 year period.
c) Represents interest accrued by Microsource on notes due to Giga-tronics for
which no income had previously been recorded by Giga-tronics.
26
27
MICROSOURCE, INC.
UNAUDITED CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
ASSETS March 31, 1998 December 31,1997
-------------- ----------------
Current Assets:
Cash $ 51,436 $ 156,617
Accounts receivable, trade net of allowance for bad
debts of $14,532 and $68,840 for 1998 and 1997, 703,399 1,535,735
respectively
Revenue in excess of billings -- 5,289
Inventories 4,477,814 4,328,477
Prepaid expenses and other current assets 149,820 180,045
------------ ------------
Total current assets 5,382,469 6,206,163
Property and equipment-net 1,852,097 2,003,531
Other assets 209,753 136,788
------------ ------------
$ 7,444,319 $ 8,346,482
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,601,788 $ 1,253,683
Accrued liabilities 998,385 683,482
Customer deposits 1,769,189 1,861,465
Bank line-of-credit 1,500,000 1,500,000
Notes payable to related parties 1,542,051 1,432,051
Current maturities of capital lease obligations 26,925 80,147
Current maturities of equipment loans 131,460 95,863
Current portion of long-term debt 561,893 1,021,871
------------ ------------
Total current liabilities 8,131,691 7,928,562
------------ ------------
Capital lease obligations, less current maturities 51,875 56,864
Equipment loans, less current maturities 253,273 276,265
Long-term debt 249,288 --
Other liabilities 233,609 245,051
------------ ------------
Total liabilities 8,919,736 8,506,742
------------ ------------
Commitments
Shareholders' equity (deficit):
Preferred stock, no par value, aggregate liquidation
Preference of $19,809,100 19,268,100 19,268,100
Common stock 189,905 237,470
Notes receivable from shareholders -- (47,548)
Accumulated deficit (20,933,422) (19,618,282)
------------ ------------
Total shareholders' equity (deficit) (1,475,417) (160,260)
------------ ------------
$ 7,444,319 $ 8,346,482
============ ============
See accompanying notes to the unaudited condensed financial statements.
27
28
MICROSOURCE, INC.
UNAUDITED CONDENSED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
1998 1997
----------- -----------
Revenues
Net revenues $ 1,506,419 $ 2,397,635
----------- -----------
Operating costs and expenses:
Cost of revenues 1,870,948 1,439,544
Research and development 330,571 307,324
Marketing 145,411 142,552
General and administrative 414,722 272,429
----------- -----------
2,761,652 2,161,849
----------- -----------
Operating Income (loss) (1,255,233) 235,786
Interest expense, net (118,393) (73,397)
Other income 58,486 (715,699)
----------- -----------
Loss before provision of income taxes (1,315,140) (553,310)
Income tax expense -- --
----------- -----------
Net loss $(1,315,140) $ (553,310)
=========== ===========
See accompanying notes to the unaudited condensed financial statements.
28
29
MICROSOURCE, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
1998 1997
----------- -----------
Cash flows from operating activities:
Net loss $(1,315,140) $ (553,310)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 179,229 193,537
Decrease in accounts receivable, trade, net 832,336 29,169
Increase in revenue in excess of billings 5,289 --
Decrease in accounts receivable, related party -- 754,728
Increase in inventories (149,337) (299,933)
Decrease in prepaid expenses and other current assets 30,225 18,400
Increase in notes receivable from shareholders (17) (2,306)
Increase (decrease) in accounts payable and other
accrued liabilities 663,008 (5,916)
Decrease in customer deposits (92,276) (130,855)
Decrease in billings in excess of costs -- (220,427)
Increase in other assets and liabilities (84,407) (30,584)
----------- -----------
Net cash provided by (used in) operating activities 68,910 (247,497)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (27,795) (79,036)
----------- -----------
Net cash provided by (used in) investing activities (27,795) (79,036)
----------- -----------
Cash flows from investing activities:
Proceeds from issuance of notes payable to related
parties 110,000 --
Repayments on notes payable to related parties -- (210,000)
Borrowings under line of credit -- 400,000
Payments under capital lease obligations and
equipment loans (45,606) (29,704)
Proceeds from issuance of long-term debt -- 408,793
Repayments on long-term debt (210,690) (155,274)
Proceeds from issuance of common stock -- 2,001
----------- -----------
Net cash (used in) provided by financing activities (146,296) 415,816
----------- -----------
Net (decrease) increase in cash (105,181) 89,283
Cash, beginning of period 156,617 155,432
----------- -----------
Cash, end of period $ 51,436 $ 244,715
=========== ===========
See accompanying notes to the unaudited condensed financial statements.
29
30
MICROSOURCE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation
The unaudited condensed financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading. These
condensed financial statements should be read in conjunction with the audited
financial statements and the notes thereto for the year ended December 31, 1997.
The unaudited condensed financial statements included herein reflect all
adjustments that are, in the opinion of management, necessary to state fairly
the results for the periods presented. The results for such periods are not
necessarily indicative of the results to be expected for the full fiscal year
ending March 27, 1999, or any other future periods.
(2) Inventories
Inventories are stated at the lower of average cost or market. As of March 31,
1998, inventories consist of the following:
Raw materials and components $ 4,626,047
Work in process 1,622,876
-----------
6,248,923
Reserve for obsolete and slow moving inventory (1,771,109)
-----------
$ 4,477,814
===========
(3) Revenue Recognition
Revenue is recognized upon product shipment, except for the pre-production
portion of long term contracts which is recognized on a percentage of completion
method.
30
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GIGA-TRONICS INCORPORATED
(Registrant)
Date: 07/27/98 /s/ George H. Bruns, Jr.
---------------- ----------------------------------------
George H. Bruns, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: 07/27/98 /s/ Mark H. Cosmez II
---------------- ----------------------------------------
Mark H. Cosmez II
Vice President, Finance and
Chief Financial Officer
(Principal Accounting Officer)
31