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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended March 27, 1999, or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from________ to ________
Commission File No. 0-12719
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GIGA-TRONICS INCORPORATED
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(Exact name of registrant as specified in its charter)
California 94-2656341
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(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
4650 Norris Canyon Road, San Ramon, CA 94583
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (925) 328-4650
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No par value
--------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant calculated on the closing average bid and asked prices as of June 15,
1999 was $6,660,973. For purposes of this determination only, directors and
officers of the Registrant have been assumed to be affiliates. There were a
total of 4,361,902 shares of the Registrant's Common Stock outstanding as of
June 15, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference into the
parts indicated:
PART OF FORM 10-K DOCUMENT
----------------- ------------------------------------
PART II Registrant's ANNUAL REPORT TO
Items 5, 6, 7 and 8 SHAREHOLDERS for the fiscal year
ended March 27, 1999.
PART III Registrant's PROXY STATEMENT for
Items 10, 11, 12 and 13 its 1999 annual meeting of
shareholders to be filed no later
than 120 days after the close of the
fiscal year ended March 27, 1999.
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PART I
The forward-looking statements included in this report, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Actual results could differ materially from those anticipated in
the forward-looking statements included herein as a result of a number of
factors, including but not limited to those discussed under "Certain Factors
Which May Adversely Affect Future Operations Or An Investment In The Company" in
Item 1 below and in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," incorporated by reference on pages 7
through 9 of the Company's 1999 Annual Report to Shareholders.
ITEM 1. BUSINESS
General
Giga-tronics Incorporated (Giga-tronics) includes the operations of
Giga-tronics Instrument division, and its wholly owned subsidiaries, ASCOR, Inc.
(ASCOR), Viking Semiconductor Equipment, Inc. (Viking), Ultracision, Inc.
(Ultracision), and Microsource, Inc. (Microsource).
Giga-tronics designs, manufactures and markets through its Giga-tronics
Instrument division, a broad line of test and measurement equipment used in the
development, test and maintenance of wireless communications products and
systems, flight navigational equipment, electronic defense systems and automatic
testing systems. These products are used primarily in the design, production,
repair and maintenance of commercial telecommunications, radar, and electronic
warfare.
Effective July 23, 1996, Giga-tronics acquired ASCOR. ASCOR, located in
Fremont, California, designs, manufactures, and markets a line of switching and
connecting devices that link together many specific purpose instruments that
comprise a portion of automatic test systems. ASCOR offers a family of switching
and interface test adapters as standard VXI configured products, as well as
complete system integration services to the Automatic Test Equipment market.
Effective June 27, 1997, Giga-tronics completed a merger with Viking by
issuing approximately 420,000 shares of the Company's common stock in exchange
for all of the common stock of Viking. The merger was accounted for using the
pooling-of-interests method of accounting. Viking, which is now located in Santa
Clara, California, manufactures and markets a line of optical inspection
equipment used to manufacture and test semiconductor devices.
Effective December 2, 1997, Giga-tronics completed a merger with
Ultracision by issuing approximately 517,000 shares of the Company's common
stock in exchange for all of the common stock of Ultracision. The merger was
accounted for using the pooling-of-interests method of accounting. Ultracision
is a manufacturer of automation equipment for the test and inspection of silicon
wafers. Ultracision additionally produces a line of probers for the testing and
inspection of silicon devices.
Effective May 18, 1998, Giga-tronics Inc. completed an acquisition of
Microsource. All the outstanding shares of Microsource were exchanged for
$1,500,000 plus contingent future payments based on earnings from Microsource
for the next two years. The acquisition was accounted for using the purchase
method of accounting. Microsource develops and manufactures a broad line of YIG
(Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers,
which are used by its customers in manufacturing a wide variety of microwave
instruments or devices.
The Company intends to broaden its product lines and expand its market,
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.
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Industry Segments
The Company manufactures products used in test, measurement and
handling. The Company conducts its business primarily in four operating
segments; Giga-tronics Instruments, ASCOR, Microsource and the Semiconductor
Equipment Group (Viking and Ultracision).
Products and Markets
Giga-tronics Instruments
The Giga-tronics Instruments segment produces signal sources,
generators and sweepers, and power measurement instruments for use in the
microwave and RF frequency range (10 kHz to 75 GHz). Within each product line
are a number of different models and options allowing customers to select
frequency range and specialized capabilities, features and functions. The
end-user markets for these products can be divided into three broad segments:
commercial telecommunications, radar and electronic warfare. This segment's
instruments are used in the design, production, repair and maintenance and
calibration of other manufacturers' products, from discrete components to
complex systems.
ASCOR
The ASCOR segment produces switch modules, and interface adapters that
operate with a bandwidth from direct current (DC) to 18 GHz. This segment's
switch modules may be incorporated within its customer's automated test
equipment. The end-user markets for these products are primarily related to
electronic warfare, though the VXI architecture may become more accepted by the
telecommunications market.
Microsource
The Microsource segment develops and manufactures a broad line of YIG
(Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers,
which are used by its customers in manufacturing a wide variety of microwave
instruments or devices.
Semiconductor Equipment Group
The Semiconductor Equipment Group manufactures and markets a line of
optical inspection equipment used in the testing of semiconductor devices.
Products include die attachments, automatic die sorters, tape and reel
equipment, and wafer inspection equipment. Further, the Semiconductor Equipment
Group manufactures automation equipment for the test inspection and robotic
handling of silicon wafers in addition to a line of probers for the testing and
inspection of silicon devices. These products are used by Semiconductor
manufacturers and various other suppliers to the Semiconductor industry.
Sources and Availability of Raw Materials and Components
Substantially all of the components required by the Company to make its
assemblies are available from more than one source. The Company occasionally
uses sole source arrangements to obtain leading-edge technology, favorable
pricing or supply terms. Although extended delays in delivering components could
result in longer product delivery schedules, the Company believes that its
protection against this possibility stems from its practice of dealing with
well-established suppliers and maintaining good relationships with such
suppliers.
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Patents and Licenses
The Company attempts to obtain patents when appropriate. However, the
Company believes that its competitive position depends primarily on the creative
ability and technical competence of its personnel and the timely introduction of
new products rather than on the ownership or development of patents.
The Company licenses certain instrument operating system software from
third parties. The Company believes, based on industry practice, that any
additional licenses necessary could be obtained on conditions which would not
have a materially adverse financial effect on the Company.
Seasonal Nature of Business
The business of the Company is not seasonal.
Working Capital Practices
The Company does not believe that it has any special practices or
special conditions affecting working capital items that are significant for an
understanding of its business.
Importance of Limited Number of Customers
The Company had been a leading supplier of microwave and radio
frequency (RF) test instruments to various U.S. Government defense agencies, as
well as to their prime contractors. Management anticipates sales to U.S.
Government agencies will remain significant in fiscal 2000, even though the
outlook for defense-related orders continues to be soft. As a result of the
Microsource Inc. acquisition, the Company is more dependent on U.S. Government
defense agencies. This acquisition increased the percentage in fiscal 1999 of
defense-related agency sales from 9% without Microsource Inc. to 24% with their
inclusion. Defense-related agencies accounted for 24%, 12% and 28% of net sales
in fiscal 1999, 1998 and 1997, respectively. Commercial business accounted for
76%, 88% and 72%, of net sales in fiscal 1999, 1998 and 1997, respectively. In
the past several years, sales to the defense industry in general, and direct
sales to the United States and foreign government agencies in particular, have
declined. Giga-tronics believes this softening of product orders, and the
resulting decline in defense sales revenues, is indicative of the world-wide
decline in governmental defense spending. Any further decline in defense orders
as a consequence of the foregoing circumstance, or otherwise, could have a
material adverse effect on the business, operating results, financial condition
and cash flows of Giga-tronics.
Backlog of Orders
On March 27, 1999, Giga-tronics had a backlog of approximately
$17,792,000 compared to $6,492,000 at March 28, 1998. Included in the March 27,
1999 backlog is $11,066,000 for Microsource Inc. Orders for the Company's
products include program orders from both the U.S. Government and defense
contractors, with extended delivery dates. Accordingly, the backlog of orders
may vary substantially from quarter to quarter and the backlog entering any
single quarter may not necessarily be indicative of sales for any period.
Backlog includes only those customer orders for which a delivery
schedule has been agreed upon between the Company and the customer and, in the
case of U.S. Government orders, for which funding has been appropriated. The
Company believes that essentially all of the backlog will be shipped within the
next twelve months.
A portion of the year-end backlog consists of U.S. Government
contracts. These contracts contain customary provisions permitting termination
at the convenience of the Government upon payment of a negotiated cancellation
charge. The Company never has experienced a significant contract termination.
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Competition
Giga-tronics is engaged in a highly competitive field. Competition from
numerous existing companies is intense and potential new entrants could increase
competitive pressures. The Company's instrument, switch, oscillator and
synthesizer products compete with Hewlett Packard, Anritsu, Racal, IFR and Rhode
& Schwarz while the Semiconductor Equipment Groups products compete with various
other competitors. Many of these companies have substantially greater research
and development, manufacturing, marketing, financial, technological, personnel
and managerial resources than Giga-tronics. There can be no assurance that any
products developed by these competitors will not gain greater market acceptance
than any developed by Giga-tronics. Accordingly, Giga-tronics will be required
to continue to devote substantial resources and efforts to marketing and
research and development activities.
There can be no assurance that future technologies, processes or
product developments will not render Giga-tronics' current product offerings
obsolete or that Giga-tronics will be able to develop and introduce new products
or enhancements to existing products which satisfy customer needs in a timely
manner or achieve market acceptance. The failure to do so could adversely affect
Giga-tronics' business.
Sales and Marketing
The Giga-tronics Instruments, ASCOR and Microsource markets their
products direct and through various distributors and representatives to
government and commercial customers, although not necessarily through the same
distributors and representatives. The Semiconductor Equipment Group markets its
equipment direct and through separate distributors and sales representatives to
semiconductor manufacturers.
Product Development
Products of the type manufactured by the Company historically have had
relatively long product life cycles. However, the electronics industry is
subject to rapid technological changes at the component level. The future
success of the Company is dependent on its ability to steadily incorporate
advancements in component technologies into its new products.
Product development expense was approximately $5,313,000, $6,200,000
and $4,581,000 in fiscal 1999, 1998 and 1997, respectively. Activities included
the development of new products and the improvement of existing products. It is
management's intention to maintain expenditures for product development at
levels required to sustain its competitive position. All of the Company's
product development activities are internally funded and expensed as incurred
until technological feasibility is achieved. Giga-tronics expects to continue to
make significant investments in research and development.
Manufacturing
The assembly and testing of Giga-tronics Instrument's Microwave, RF and
power measurement products is done at its San Ramon facility. The assembly and
testing of ASCOR's switching and connecting devices is done at its Fremont
facility. The assembly and testing of Microsource's line of YIG (Yttrium, Iron,
Garnet) tuned oscillators, filters and microwave synthesizers is done at its
Santa Rosa facility. The assembly and testing of the Semiconductor Equipment
Group's products is done at its Santa Clara facility.
Environment
To the best of its knowledge, the Company is in compliance with all
federal, state and local laws and regulations involving the protection of the
environment.
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Employees
As of March 27, 1999, the Company employed 293 persons. Management
believes that the future success of the Company depends on its ability to
attract and retain skilled personnel. None of the Company's employees is
represented by a labor union, and the Company considers its employee relations
to be satisfactory.
Information about Foreign Operations
The Company sells to its international customers through a network of
foreign technical sales representative organizations. Sales to foreign customers
were approximately $7,665,000, $10,410,000 and $11,896,000 in fiscal 1999, 1998
and 1997, respectively. The Company has no foreign-based operations or material
amounts of identifiable assets in foreign countries. Its gross margins on
foreign and domestic sales are similar.
Certain Factors Which May Adversely Affect Future Operations Or An Investment In
The Company
With the addition of Microsource Inc. the Company's defense-related
orders have become more important. If the defense market should soften,
shipments in the current year could fall short of plan with a concurrent decline
in earnings. Current softness in the market for the Company's commercial
products has resulted in a leveling of the commercial backlog. If this trend
cannot be reversed in the near term, shipments in the current year could fall
short of plan with a continued decline in earnings. The Company at this time is
engaged in cost reduction activities and improvement in manufacturing
efficiencies which may partially offset any unfavorable impact caused by a
decline in revenues. Also, the Company believes that growth can be realized by
maintaining an effective new product development program, aggressively pursuing
new markets, and vigorously competing for defense business. In addition, the
Company intends to broaden its product lines and expand its markets.
Nevertheless, there is no assurance these efforts will lead to increased sales
in the near term.
During fiscal years 1999, 1998 and 1997, Giga-tronics made four
business acquisitions: Microsource, Ultracision, Viking and ASCOR. Giga-tronics
has acquired these companies with the expectation that the acquisitions would
result in long-term strategic benefits. The realization of the benefits sought
from these acquisitions depends on the ability of Giga-tronics to effectively
utilize the joint product development capabilities, sales and marketing
capabilities, administrative organizations and facilities of these companies.
There can be no assurance that these benefits will be achieved or that the
activities of these companies will be integrated in a coordinated, timely and
efficient manner. The combination of these entities also will require the
dedication of management resources, which will detract such persons' attention
from the day-to-day business of Giga-tronics. There can be no assurance the
integration will be completed without disrupting Giga-tronics businesses. The
inability of Giga-tronics to effectively utilize resources and to achieve
integration in a timely and coordinated fashion could result in a material
adverse effect on Giga-tronics' financial condition, operating results and cash
flows.
Prior to the acquisition of Viking and Ultracision, Giga-tronics had no
experience in the semiconductor manufacturing equipment industry. As a result,
integration of these companies may be difficult. The difficulties may be
increased by addressing possible differences in corporate cultures and
management philosophies. Finally, expenditures related to the development of new
products by these subsidiaries have, and may in the future, impact the financial
results of Giga-tronics. The future success of Giga-tronics may depend on its
ability to steadily incorporate advancements in semiconductor manufacturing
technologies into its new products. The impact of these new subsidiaries on the
operations of Giga-tronics remains uncertain.
The market for electronics equipment is characterized by rapidly
changing technology and evolving industry standards. Giga-tronics believes that
its future success will depend in part upon its ability to develop and
commercialize its existing products and to develop new products and applications
and in part to develop, manufacture and successfully introduce new products and
product lines with improved capabilities and to
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continue to enhance existing products. There can be no assurance that
Giga-tronics will successfully complete the development of current or future
products or that such products will achieve market acceptance.
The market price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results,
shortfalls in revenues or earning from levels expected by securities analysts
and other factors such as announcements of technological innovations or new
products by Giga-tronics or by competitors, government regulations or
developments in patent or other proprietary rights. In addition, the Nasdaq
National Market and other stock markets have experienced significant price
fluctuations in recent months. These fluctuations often have seemingly been
unrelated to the operating performance of the specific companies whose stocks
are traded. Broad market fluctuations, as well as general foreign and domestic
economic conditions, may adversely affect the market price of the Common Stock.
Giga-tronics stock at any time has historically traded on thin volume
on Nasdaq. Sales of a significant volume of stock could result in a depression
of Giga-tronics share price.
ITEM 2. PROPERTIES
As of March 27, 1999, Giga-tronics Instrument's executive, marketing,
sales and engineering offices and manufacturing facilities for its microwave and
RF signal generator and power measurement products are located in approximately
47,300 square feet in San Ramon, California, which the Company occupies under a
lease agreement expiring December 31, 2006.
ASCOR's marketing, sales and engineering offices and manufacturing
facilities for its switching and connecting devices are located in approximately
12,160 square feet in Fremont, California, under a lease that expired on January
31, 1999 and the Company is renting this facility on a month to month basis. The
Company will continue to rent this facility on a month to month basis until the
new facilities to be leased by the Company under a lease expiring in 2006 are
completed. These facilities will be approximately 18,600 square feet in Fremont,
California.
Microsource's marketing, sales and engineering offices and
manufacturing facilities for its YIG tuned oscillators, filters and microwave
synthesizers are located in an approximately 35,000 square foot facility in
Santa Rosa, California, which the Company occupies under a lease expiring May
31, 2003.
The Semiconductor Equipment Group's marketing, sales and engineering
offices and manufacturing facilities for its automation equipment for the
inspection of silicon wafers, prober line and optical inspection equipment used
in the manufacture and test of semiconductor devices are located in an
approximately 20,400 square foot facility in Santa Clara, California, under a
lease expiring on June 30, 2002.
ITEM 3. LEGAL PROCEEDINGS
As of March 27, 1999, the Company has no pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 27, 1999. Executive Officers of
the Company are listed on page 16 of this Form 10-K.
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PART II
The Registrant's Annual Report to Shareholders for the year ended March
27, 1999, is filed as Exhibit 13.0 with the Form 10-K (the "1999 Annual
Report"). The information responsive to Items 5, 6, 7 and 8, which is contained
in the 1999 Annual Report, is specifically incorporated by reference in this
Form 10-K. With the exception of such information, the 1999 Annual Report is not
deemed filed as part of this report.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from the 1999 Annual Report, see "Common
Stock Market Prices" which appears on page 24.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from the 1999 Annual Report, see "Selected
Financial Data" which appears beginning on page 23.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Incorporated by reference from the 1999 Annual Report, see
"Management's Discussion and Analysis" which appears on pages 7 to 9.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial instruments that expose the company to market risk are cash
and cash equivalents. The investments are held in recognized financial
instruments, have short term maturities and therefore have limited market risk.
While the Company has sales in foreign countries, all such sales are denominated
in U.S. dollars and therefore the company is not subject to foreign currency
risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following items which appear in the 1999 Annual Report are incorporated by
reference:
<TABLE>
<S> <C>
Consolidated Balance Sheets................................................ page 10
Consolidated Statements of Operations...................................... page 11
Consolidated Statements of Shareholders' Equity............................ page 12
Consolidated Statements of Cash Flows...................................... page 13
Notes to Consolidated Financial Statements................................. page 14 - 21
Independent Auditors' Report............................................... page 22
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors of the Company is set forth under the
heading "Election of Directors" of the Company's Proxy Statement for the 1999
Annual Meeting of Shareholders, incorporated herein by reference. This Proxy
Statement is to be filed no later than 120 days after the close of the fiscal
year ended March 27, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Company's compensation of its executive
officers is set forth under the heading "Executive Compensation" of the Proxy
Statement, incorporated herein by reference. This Proxy Statement is to be filed
no later than 120 days after the close of the fiscal year ended March 27, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is set forth under the heading "Stock Ownership of Certain
Beneficial Owners and Management" of the Proxy Statement, incorporated herein by
reference. This Proxy Statement is to be filed no later than 120 days after the
close of the fiscal year ended March 27, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements and schedules are filed or
incorporated by reference as a part of this report.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
1999 Annual Report
to Shareholders
Financial Statements (Page No.)
- -------------------- ------------------
<S> <C>
Consolidated Balance Sheets - 10
As of March 27, 1999 and
March 28, 1998
Consolidated Statements of Operations - 11
Years Ended March 27, 1999,
March 28, 1998 and March 29, 1997
Consolidated Statements of Shareholders' Equity - 12
Years Ended March 27, 1999,
March 28, 1998 and March 29, 1997
Consolidated Statements of Cash Flows - 13
Years Ended March 27, 1999,
March 28, 1998 and March 29, 1997
Notes to Consolidated Financial Statements 14 - 21
Independent Auditors' Report 22
</TABLE>
<TABLE>
<CAPTION>
Form 10-K
(a)(2) Schedules (Page No.)
- ----------------- ----------
<S> <C>
Report on Financial Statement Schedule and 14
Consent of Independent Auditors
Schedule II - Valuation and Qualifying 15
Accounts
</TABLE>
All other schedules are not submitted because they are not applicable
or not required or because the required information is included in the financial
statements or notes thereto.
Except for those portions thereof incorporated by reference in this
Form 10-K, the 1999 Annual Report and the Proxy Statement are not to be deemed
filed as part of this report.
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(a)(3) Exhibits
Reference is made to the Exhibit Index which is found on page 17 of
this Form 10-K Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 27,
1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GIGA-TRONICS INCORPORATED
By /s/ GEORGE H. BRUNS, JR.
----------------------------
George H. Bruns, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ GEORGE H. BRUNS, JR. Chairman of the Board 6/16/99
- ------------------------------------- and Chief Executive Officer --------------------
George H. Bruns, Jr. (Principal Executive Officer) (Date)
/s/ MARK H. COSMEZ II Vice President, Finance 6/16/99
- ------------------------------------- and Chief Financial Officer --------------------
Mark H. Cosmez II (Principal Accounting Officer) (Date)
/s/ JAMES A. COLE Director 6/18/99
- ------------------------------------- --------------------
James A. Cole (Date)
/s/ ROBERT C. WILSON Director 6/18/99
- ------------------------------------- --------------------
Robert C. Wilson (Date)
/s/ WILLIAM E. WILSON Director 6/17/99
- ------------------------------------- --------------------
William E. Wilson (Date)
</TABLE>
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Exhibit 23.0
REPORT ON FINANCIAL STATEMENT SCHEDULE AND CONSENT OF
INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Giga-tronics Incorporated
The audits referred to in our report dated May 4, 1999 included the
related financial statement schedule as of March 27, 1999 and for the years
ended March 27, 1999, March 28, 1998, and March 29, 1997, incorporated herein.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We consent to incorporation by reference in the registration statements
(Nos. 333-34719, 333-39403, and 333-48889) on Form S-8 and (No. 333-50091) on
Form S-3 of Giga-tronics Incorporated of our reports included herein or
incorporated herein by reference.
/s/
------------------------
KPMG LLP
Mountain View, California
June 17, 1999
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GIGA-TRONICS INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -----------------------------------------------------------------------------------------------------------------
Balance at Charged to Balance
Beginning of Cost and Deductions At End
Description Period Expenses (Recoveries) of Period
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended March 27, 1999
Allowances deducted from assets:
Accounts receivable:
For doubtful accounts(1) $292,644 $152,581 $ 10,612 $434,613
---------------------------------------------------------------------
Total $292,644 $152,581 $ 10,612 $434,613
=====================================================================
Year ended March 28, 1998
Accounts receivable:
For doubtful accounts(1) $323,983 $ 39,800 $ 71,139 $292,644
---------------------------------------------------------------------
Total $323,983 $ 39,800 $ 71,139 $292,644
=====================================================================
Year ended March 29, 1997
Accounts receivable:
For doubtful accounts(1) $293,827 $ 23,451 $ (6,705) $323,983
---------------------------------------------------------------------
Total $293,827 $ 23,451 $ (6,705) $323,983
=====================================================================
</TABLE>
(1) Allowance for accounts receivable collection exposure.
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GIGA-TRONICS INCORPORATED
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
George H. Bruns, Jr. 80 Chief Executive Officer since January, 1995, Chairman of the Board and a Director of the
Company. One of the founders of the Company in 1980 and has been a Director since inception.
Mr. Bruns is General Partner of The Bruns Company, a private venture investment and
management consulting firm. Mr. Bruns is Director of Testronics, Inc. of McKinney, Texas.
Mark H. Cosmez II 48 Vice President, Finance/Chief Financial Officer, Giga-tronics from October 1997. Before
joining the company, Mr. Cosmez was the Chief Financial Officer for Pacific Bell Public
Communications. Prior to 1997, he was the Vice President of Finance and Chief Financial
Officer for International Microcomputer Software Inc. (IMSI), a NASDAQ traded software
company. From 1994 to 1995, he was the corporate controller for The Software Toolworks Inc.
James R. Koehn 58 President, Giga-tronics Instrument division as of May 1998. From January 1995 to April 1998,
Mr. Koehn previously served as President of Marconi Instruments, Inc. of Fort Worth, Texas.
Prior to December 1994 he was a Vice President at Tektronix.
Jeffrey T. Lum 53 President, ASCOR, Inc. since November 1987. Founded the Company in 1987 and has been
President since inception. Before founding ASCOR, Mr. Lum was Vice President and founder of
Autek Systems Corporation.
Daniel S. Markowitz 48 President, Ultracision, Inc. and Viking Semiconductor Equipment, Inc. since April 1999.
Assistant to the Chairman of Giga-tronics, Inc. from September 1998 to March 1999. Vice
President, Automation Products, Ultracision, Inc. from February 1996 to August 1998. Mr.
Markowitz was the General Manager of Mar Engineering from September 1993 to January 1996.
Robert A. Smith 58 President, Microsource, Inc. from October 12, 1998. Before joining the Company, Mr. Smith
was the Executive Vice President of Haskel International, Inc. and the President of IPG from
1995 to 1998. From 1994 to 1995 he was the President and CEO of Industrial Tools, Inc.
</TABLE>
16
<PAGE> 17
GIGA-TRONICS INCORPORATED
INDEX TO EXHIBITS
2.1 Agreement and Plan of Reorganization, dated as of May 20, 1996 by and
among Giga-tronics Incorporated, ASCOR Acquisition Corp. and ASCOR,
Inc., previously filed on May 30, 1996, as Exhibit 2.1 to Form 10-K for
the fiscal year ended March 30, 1996.
2.2 Letter of Agreement between Giga-tronics Incorporated and ASCOR, Inc.,
dated May 20, 1996, as previously filed on May 30, 1996, as Exhibit 2.2
to Form 10-K for the fiscal year ended March 30, 1996.
2.3 Agreement and Plan of Reorganization, dated as of June 6, 1997, by and
among Giga-tronics Incorporated, GTV Acquisition Corp. and Viking
Semiconductor Equipment, Inc., as previously filed on June 13, 1997, as
Exhibit 2.3 to Form 10-K for the fiscal year ended March 29, 1997.
2.4 Agreement and Plan of Reorganization, dated as of December 2, 1997, by
and among Giga-tronics Incorporated, Giga Acquisition Corp. and
Ultracision, Inc. as previously filed on December 16, 1997, as Exhibit
2.1 to Form 8-K, and incorporated herein by reference.
2.5 Agreement and Plan of Reorganization as amended, dated as of December
22, 1997, by and among Giga-tronics Incorporated, Giga Micro Corp., and
Microsource Inc., as previously filed on June 1, 1998, as Exhibit 2.1
to Form 8-K and incorporated herein by reference.
3.1* Articles of Incorporation of Registrant, as amended.
3.2 By-laws of Registrant, as amended, previously filed on June 23, 1998 as
Exhibit 3.2 to Form 10-K for the fiscal year ended March 28, 1998, and
incorporated herein by reference.
10.1 1990 Restated Stock Option Plan and form of Incentive Stock Option
Agreement, previously filed on December 3, 1997 as Exhibit 19.1 to Form
S-8 and incorporated herein by reference.
10.2* Standard form Indemnification Agreement for Directors and Officers.
10.3 Lease between Giga-tronics Incorporated and Calfront Associates for
4650 Norris Canyon Road, San Ramon, CA, dated December 6, 1993,
previously filed as an exhibit to Form 10-K for the fiscal year ended
March 26, 1994.
10.4 Employee Stock Purchase Plan, previously filed on August 29, 1997, as
Exhibit 99.1 to Form S-8, and incorporated herein by reference.
10.5 Form of Incentive Stock Option Agreements for Ultracision, Inc., as
Amended by the Assumed Option Agreement, as previously filed on March
30, 1998 as Exhibit 99.3 to Form S-8 and incorporated herein by
reference.
13.0* 1999 Annual Report to Shareholders.
23.0 Report on Financial Statement Schedule and Consent of Independent
Auditors. (See page 14 of this Annual Report on Form 10-K.)
27.0* Financial Data Schedule.
* Attached as exhibits to this Form 10-K.
17
<PAGE> 1
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
GIGATRONICS, INC.
I.
The name of this corporation is GIGATRONICS, INC.
II.
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
The name and address in the State of California of this corporation's
initial agent for service of process is:
Mr. John Scheck
5 Garden Estates Court
Alamo, CA 94507
1.
<PAGE> 2
IV.
This corporation is authorized to issue only one class of shares of stock;
and the total number of shares which this corporation is authorized to issue is
250,000.
DATED: March 3, 1980.
/s/ H. C. NACHTRIEB
----------------------------
Harold C. Nachtrieb
I hereby declare that I am the person who executed the foregoing Articles
of Incorporation, which execution is my act and deed.
/s/ H. C. NACHTRIEB
----------------------------
2.
<PAGE> 3
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
GIGATRONICS, INC.
John Scheck and Stanley Keller certify that:
1. They are the President and Secretary, respectively, of
GIGATRONICS, INC., a California corporation (the "Corporation").
2. Article FOURTH of the Articles of Incorporation of the
Corporation is hereby amended to read in full as follows:
"FOURTH: This Corporation is authorized to issue two classes of
shares, which shall be known as Common Stock and Preferred Stock.
The total number of shares of Common Stock which this Corporation
is authorized to issue is 1,000,000 and the total number of
shares of Preferred Stock which this Corporation is authorized to
issue is 250,000. Upon the Amendment of this Article to read as
herein above set forth, each outstanding share is converted into
or reconstituted as one Common Share."
3. Article FIFTH is added to the Articles of Incorporation and
reads as follows:
"FIFTH: Shares of Preferred Stock may be issued from time to time
in one or more series. The Board of Directors shall determine the
designation of each series and the authorized number of shares in
each series. The Board of Directors is authorized to determine
and alter the rights, preferences, privileges, and restrictions
granted to or imposed upon any wholly unissued series of shares
of Preferred Stock and to increase or decrease (but not below the
number of shares of such series then outstanding) the number of
shares of any such series subsequent to the issue of shares of
that series.
<PAGE> 4
If the number of shares of any series of Preferred Stock shall be
so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution
initially fixing the number of shares of such series."
4. The foregoing Amendment of Articles of Incorporation has been
duly approved by the Board of Directors.
5. The foregoing Amendment of Articles of Incorporation has been
duly approved by the required vote of shareholders in accordance with Section
902 of the Corporations Code. The total number of outstanding shares of the
Corporation is 37,000. The number of shares voting in favor of Amendment
equaled or exceeded the vote required. The percentage vote required was more
than fifty percent (50%).
/s/ JOHN SCHECK
---------------------------------
John Scheck, President
/s/ STANLEY KELLER
---------------------------------
Stanley Keller, Secretary
The undersigned declare under penalty of perjury that the matters set
forth in the foregoing Certificate are true of their own knowledge. Executed at
Pleasant Hill, California on 14th day of January, 1981.
/s/ JOHN SCHECK
---------------------------------
John Scheck, President
/s/ STANLEY KELLER
---------------------------------
Stanley Keller, Secretary
-2-
<PAGE> 5
CERTIFICATE OF DETERMINATION
OF PREFERENCES OF PREFERRED STOCK
SERIES A OF
GIGATRONICS, INC.
The undersigned, John Scheck and Stanley Keller, do hereby certify:
1. That said John Scheck is, and at all times herein mentioned was,
the duly elected and acting President of GIGATRONICS, INC., a California
corporation, and that said Stanley Keller is, and at all times herein mentioned
was, the duly elected and acting Secretary of said corporation:
2. That at a meeting held January 7, 1981, the following resolutions
were duly adopted by the Board of Directors of said corporation:
WHEREAS, Articles Fourth and Fifth of the Articles of Incorporation
of this corporation provide for a class of its authorized shares known as
Preferred Stock, comprising 250,000 shares of no par value, issuable from
time to time in one or more series, and authorize the Board of Directors
to fix or alter the dividend rights, dividend rate, conversion rights,
voting rights, rights in terms of redemption (including sinking fund
provisions), the redemption price or prices, the liquidation preferences
of any wholly unissued class, or of a wholly unissued series of any class
of shares, or the number of shares constituting any unissued series of any
class and the designation of such series, or any of them; and to increase
or decrease (but not below the number of shares of such series then
outstanding) the number of shares of any such series subsequent to the
issuance of shares of that series; and
<PAGE> 6
WHEREAS, it is the desire of the Board of Directors of this
corporation pursuant to its authority as aforesaid, to fix the rights,
preferences, restrictions and other matters relating to a first series of
said Preferred Stock;
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does
hereby provide, pursuant to Article Fifth of the Articles of
Incorporation, for the issuance of a first series of Preferred Stock of
the Corporation, and it does hereby fix and determine the rights,
preferences, restrictions and other matters relating to said series of
Preferred Stock as follows:
I. TITLE OF SERIES
The first series of Preferred Stock shall be designated and known
as "Preferred Stock, Series A".
II. NUMBER OF SHARES
The number of shares constituting the Preferred Stock, Series A
shall be 35,500 shares.
III. DIVIDEND RIGHTS
The holders of the Preferred Stock, Series A shall be entitled to
receive, out of funds legally available therefor, dividends at the rate of One
Dollar Forty Cents ($1.40) per annum per share, payable in cash quarterly on
the fifteenth (15th) day of March, June, September and December in each year,
commencing March 15, 1981, when and as declared by the Board of Directors of
the Corporation. Such dividends shall not be cumulative; provided, however,
that if the Corporation's independent certified public accountant determines,
for any fiscal year, that the Corporation had after-tax earnings for such year,
legally available for the payment of dividends, dividends will cumulate in an
amount equal to the lesser of dividends payable but not declared during such
fiscal year and after-tax earnings for such fiscal year. Dividends so
cumulative will be paid or set apart for payment, but without interest, before
the payment of any dividend on the common stock of the Corporation (the "Common
Stock").
Dividends shall be paid by forwarding a check, postage prepaid, to
the address of each holder (or, in the
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<PAGE> 7
case of joint holders, to the address of either such holder) of Preferred
Stock, Series A as shown on the books of the Corporation, unless such holder
specifies another address by written notice to the Corporation. The forwarding
of such check shall satisfy all obligations of the Corporation with respect to
such dividends, unless such check is not paid upon timely presentation.
The holders of the Preferred Stock, Series A shall be entitled to
dividends as set forth in this Section III and no more. At any time after all
dividends on the Preferred Stock, Series A shall have been declared and paid or
set apart for payment in accordance with the provisions of this Section III,
dividends may be paid on outstanding Common Stock out of any funds legally
available therefor.
IV. LIQUIDATION RIGHTS
In the event of any liquidation, dissolution and winding up of the
Corporation, whether voluntary or not, the holders of Preferred Stock, Series A
shall be entitled to receive an amount per share equal to Twenty Dollars ($20)
plus all dividends to which they are entitled before any amount shall be paid
to holders of the Common Stock, and shall not be entitled to receive any
portion of the remaining assets of the Corporation.
V. VOTING RIGHTS
The holders of the Preferred Stock, Series A shall have one vote for
each full share of Common Stock into which their respective shares of Preferred
Stock, Series A, are convertible on all matters on which holders of Common
Stock are entitled to vote, and, except as expressly provided by law, shall
have no other rights to vote with respect to any matter.
VI. CONVERSION TO COMMON STOCK
The Preferred Stock, Series A shall be convertible into Common Stock
as follows:
A. DEFINITIONS. For purposes of this Section VI, the following
definitions shall apply:
(1) "Series A Issuance Date" shall mean the first date on which
the Corporation issues any shares of Preferred Stock, Series A.
-3-
<PAGE> 8
(2) "Conversion Price" shall mean the price, determined pursuant
to this Section VI, at which shares of Common Stock shall be deliverable
upon conversion of Preferred Stock, Series A.
(3) "Current Conversion Price" shall mean the Conversion Price
immediately before the occurrence of any event, which, pursuant to Section
VI.C, causes a redetermination of the Conversion Price.
(4) "Convertible Securities" shall mean any indebtedness or
shares of stock convertible into or exchangeable for Common Stock.
(5) "Options" shall mean any rights or options to subscribe for
or purchase Common Stock or Convertible Securities.
(6) "Common Stock Outstanding" shall include all Common Stock
issuable upon exercise of all outstanding Options and conversion of all
outstanding Convertible Securities.
(7) "Distribution" shall have the meaning of the term
"distribution to its shareholders" in the California Corporations Code as
in effect on the date of this certificate.
B. RIGHT TO CONVERT; INITIAL CONVERSION PRICE. Each holder of the
Preferred Stock. Series A may, at any time, upon surrender of the certificates
therefor, convert any or all of his Preferred Stock, Series A into fully paid
and non-assessable shares of Common Stock at the Conversion Price, each share
of Preferred Stock, Series A being taken at Twenty Dollars ($20) for the
purpose of such conversion. The Conversion Price shall initially be Twenty
Dollars ($20) per share of Common Stock. Such initial Conversion Price shall be
subject to adjustment from time to time in certain instances as herein-after
provided. No adjustments with respect to conversion shall be made on account of
any dividends that may be cumulated but unpaid on the Preferred Stock, Series A
surrendered for conversion, but no dividends shall thereafter be paid on the
Common Stock unless such cumulated but unpaid dividends have first been paid to
the holders at the time of conversion of the Preferred Stock, Series A.
Before any holder of Preferred Stock, Series A shall be entitled to
convert the same into Common Stock, he shall surrender the certificate or
certificates therefor, duly
-4-
<PAGE> 9
endorsed, to the office of the Corporation or any transfer agent for such
Preferred Stock, Series A, and shall give written notice to the Corporation at
such office that he elects to convert the same. The Corporation shall, as soon
as practicable thereafter, issue and deliver at such office to such holder of
Preferred Stock, Series A, or to his nominee or nominees, certificates for the
number of full shares of Common Stock to which he shall be entitled, together
with cash in lieu of any fraction of a share as hereinafter provided, and, if
less than all of the shares of Preferred Stock, Series A represented by such
certificate are converted, a certificate representing the shares of Preferred
Stock, Series A not converted. Such conversion shall be deemed to have been
made as of the date of such surrender of the Preferred Stock, Series A to be
converted, and the person or persons entitled to receive the Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders or such Common Stock on such date.
C. ADJUSTMENTS TO CONVERSION PRICE. Subject to Section VI.C.9, the
Conversion Price in effect from time to time shall be subject to adjustment in
certain cases as follows:
1. ISSUANCE OF SECURITIES. In case the Corporation shall at any
time after the Series A Issuance Date (i) issue or sell any Common Stock
without consideration, or for a consideration per share less than the
Current Conversion price, or (ii) pay or make a dividend or other
Distribution on the Common Stock (other than in cash out of its retained
earnings, in Common Stock, in Convertible Securities, or in Options) then,
and thereafter successively upon each such issuance, sale, dividend or
other Distribution, the Current Conversion Price shall simultaneously with
such issuance, sale, dividend or other Distribution be adjusted to a
Conversion Price (calculated to the nearest cent) determined by dividing
(a) an amount equal to (i) the total number of shares of
Common Stock Outstanding when the Current Conversion Price became
effective multiplied by the Current Conversion Price, plus (ii) the
aggregate of the amount of all consideration, if any, received by the
Corporation for the issuance or sale of Common Stock since the Current
Conversion Price became effective, minus (iii) the aggregate amount of
all dividends or Distributions on Common Stock (other than in cash out
of its retained earnings, in shares of Common Stock, in Convertible
Securities or in Options), paid by the Corporation since the Current
Conversion Price became effective, by
-5-
<PAGE> 10
(b) the total number of shares of Common Stock Outstanding
immediately after such issuance, sale, dividend, or other Distribution,
except that the Current Conversion Price shall not be reduced if the amount of
such reduction would be less than fifty cents ($.50), and in no event shall the
Conversion Price exceed the Initial Conversion Price.
For the purposes of this subsection VI.C.1, the following provisions
shall also be applicable:
(i) CASH CONSIDERATION. In case of the issuance or sale of
additional Common Stock for cash, the consideration received by the
Corporation therefor shall be deemed to be the amount of cash received
by the Corporation for such shares (or, if such shares are offered by
the Corporation for subscription, the subscription price, or, if such
shares are sold to underwriters or dealers for public offering without
a subscription offering, the initial public offering price), without
deducting therefrom any compensation or discount paid or allowed to
underwriters or dealers or others performing similar services or for
any expenses incurred in connection therewith.
(ii) NON-CASH CONSIDERATION. In case of the issuance (otherwise
than upon conversion or exchange of Convertible Securities) or sale of
additional Common Stock, Options or Convertible Securities for a
consideration other than cash or a consideration a part of which shall
be other than cash, the fair value of such consideration as determined
by the Board of Directors of the Corporation in the good faith
exercise of its business judgment, irrespective of the accounting
treatment thereof, shall be deemed to be the value, for purposes of
this Section VI, of the consideration other than cash received by the
Corporation for such securities.
(iii) OPTIONS AND CONVERTIBLE SECURITIES. In case the Corporation
shall in any manner issue or grant any Options or any Convertible
Securities, the total minimum number of shares
-6-
<PAGE> 11
of Common Stock issuable upon the exercise of such Options or
upon conversion or exchange of the total maximum amount of such
Convertible Securities at the time such Convertible Securities
first become convertible or exchangeable shall (as of the date of
issue or grant of such Options or, in the case of the issue or
sale of Convertible Securities other than where the same are
issuable upon the exercise of Options, as of the date of such
issue or sale) be deemed to be issued and to be outstanding for
the purpose of this subsection VI.C.1 and to have been issued for
the price per share for which shares of Common Stock are issuable
upon the exercise of such Options or upon conversion or exchange
of such Convertible Securities at the time such Convertible
Securities first become convertible or exchangeable; provided
that, subject to the provisions of subsection VI.C.2, no further
adjustment of the Conversion Price shall be made upon the actual
issuance of any such Common Stock or Convertible Securities or
upon the conversion or exchange of any such Convertible
Securities.
(iv) DIVIDENDS IN COMMON STOCK, OPTIONS, OR CONVERTIBLE
SECURITIES. In the case of the issuance of additional Common
Stock, Options, or Convertible Securities as a dividend or as a
Distribution on Common Stock, the aggregate number of shares of
Common Stock issued (or deemed issued pursuant to Section
VI.C.1(iii)) in payment of such dividend or Distribution shall be
deemed to have been issued on the record date for such dividend
or Distribution and shall be deemed to have been issued without
consideration.
(v) OTHER DIVIDENDS. In case of the payment or making of a
dividend or other Distribution on Common Stock in property
(excluding Common Stock, Convertible Securities and Options, but
including all other securities), such dividend or other
Distribution shall be deemed to have been paid or made on the
record date for such dividend or other Distribution and in the
amount of such dividend or other Distribution in property on such
record date, as determined by the Board of Directors of the
Corporation.
-7-
<PAGE> 12
(vi) RECLASSIFICATION. The reclassification of securities
other than Common Stock into securities including Common Stock
shall be deemed to involve the issuance for a consideration other
than cash of such Common Stock at the close of business on the
date fixed for the determination of shareholders entitled to
receive such Common Stock.
(vii) RECORD DATE. In the event that there shall be no
record date for the determination of shareholders entitled to any
dividend or Distribution declared by the Corporation, the first
business day during which the stock transfer books of the
Corporation shall be closed for the purpose of such determination
shall be deemed to be the record date for the determination of
shareholders entitled to such dividend or Distribution.
2. CHANGE IN OPTION PRICE OR CONVERSION RATE. In the event that
the purchase price provided for in any Option referred to in subsection
VI.C.1(iii), or the rate at which any Convertible Securities referred to in
subsection VI.C.1(iii) are convertible into or exchangeable for shares of
Common Stock shall change at any time (other than under or by reason of
provisions designed to protect against dilution), the Current Conversion
Price in effect at the time of such event shall forthwith be readjusted to
the Conversion Price that would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold. In the event
that the purchase price provided for in any such Option referred to in
subsection VI.C.1(iii), or the additional consideration (if any) payable
upon the conversion or exchange of any Convertible Securities referred to
in subsection VI.C.1(iii), or the rate at which any Convertible Securities
referred to in subsection VI.C.1(iii) are convertible into or exchangeable
for shares of Common Stock, shall be reduced at any time under or by reason
of provisions with respect thereto designed to protect against dilution,
then in case of the delivery of shares of Common Stock upon the exercise of
any such Option or upon conversion or exchange of any such Convertible
Security, the Current Conversion Price then in effect hereunder shall, upon
issuance of such shares of Common Stock, be adjusted to such amount as
would have
-8-
<PAGE> 13
obtained had such Option or Convertible Security never been issued and had
adjustments been made only upon the issuance of the shares of Common Stock
delivered as aforesaid.
3. TERMINATION OF OPTION OR CONVERSION RIGHTS. In the event of
the termination or expiration of any right to purchase Common Stock under
any Option or of any right to convert or exchange Convertible Securities,
the Current Conversion Price shall, upon such termination, be changed to
the Conversion Price that would have been in effect at the time of such
expiration or termination had such Option or Convertible Security, to the
extent outstanding immediately prior to such expiration or termination,
never been issued, and the shares of Common Stock issuable thereunder shall
no longer be deemed to be Common Stock Outstanding.
4. STOCK SPLITS. In the event the outstanding Common Stock
shall be subdivided into a greater number of shares of Common Stock, the
Current Conversion Price shall, simultaneously with the effectiveness of
such subdivision, be proportionately reduced, and conversely, in case the
outstanding Common Stock shall be combined into a smaller number of shares
of Common Stock, the Current Conversion Price shall, simultaneously with
the effectiveness of such combination, be proportionately increased. For
the purposes of subsections VI.C.1 and VI.C.4, a distribution of Common
Stock to holders of Common Stock in which the number of shares distributed
is 25 percent (25%) or more of the number of shares of Common Stock upon
which the distribution is to be made shall be deemed to be a subdivision of
Common Stock, and a distribution of a lesser number of shares of Common
Stock shall be deemed to be a stock dividend.
5. SUCCESSIVE CHANGES. The above provisions of this Section VI
shall similarly apply to successive issuances, sales, dividends or other
Distributions, subdivisions and combinations on or of the Common Stock
after the Series A Issuance Date.
6. MERGER; SALE OF CORPORATION. Subject to Section IV, in the
event, after the Series A Issuance Date, of any consolidation of the
Corporation with, or merger of the Corporation with or into another
corporation (other than a consolidation or merger in which the Corporation
is the continuing corporation and which does
-9-
<PAGE> 14
not result in any reclassification of, or change in, the outstanding
shares of Common Stock), or in case of any sale or transfer to another
corporation of all or substantially all of the assets of the Corporation,
each share of Preferred Stock, Series A shall be treated for all purposes
as if it had been converted into Common Stock on the earlier of (i) the
record date, if any, for voting by holders of Common Stock on such event
and (ii) the date of such event.
7. OTHER EVENTS ALTERING CONVERSION PRICE. Upon the occurrence
of any event not specifically denominated in this Section VI as altering
the Conversion Price that, in the reasonable exercise of the business
judgment of the Board of Directors of the Corporation requires, on
equitable principles, the alteration of the Conversion Price, the
Conversion Price will be equitably altered.
8. MISCELLANEOUS CONVERSION PRICE MATTERS. The Corporation
shall at all times reserve and keep available out of its authorized but
unissued Common Stock the full number of shares of Common Stock deliverable
upon conversion of all the then outstanding Preferred Stock, Series A, and
shall, at its own expense, take all such actions and obtain all such
permits and orders as may be necessary to enable the Corporation lawfully
to issue such Common Stock upon the conversion of such Preferred Stock. No
fractions of Common Stock shall be issued upon the conversion of Preferred
Stock, Series A, and in lieu thereof the Corporation shall pay the holder
an amount in cash equal to the fair market value of such fractional
interest as determined by the Board of Directors of the Corporation in the
exercise of its good faith business judgment.
9. EXCLUDED EVENTS. Notwithstanding anything in this Section VI
to the contrary, the Conversion Price shall not be adjusted by virtue of
the issuance or sale of an aggregate of not more than 20,000 shares of
Common Stock to employees of the Corporation at a price which is less than
the Conversion Price at the time of such issuance or sale (all as
determined in accordance with this Section VI).
D. MANDATORY CONVERSION. At any time on or after the earlier of (a)
the date on which any Common Stock is sold to the public by the Corporation (or
selling shareholders, if any) in a public offering registered under the
Securities Act of 1933 at a per share public offering price of not less
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<PAGE> 15
than twice the Conversion Price (as defined in Section VI.A(2) hereof) then in
effect, or (b) the expiration of three (3) years after the Series A Issuance
Date (as defined in Section VI.A.(3), then, in either case, the Corporation,
may, at its election, cause all or any portion of the Preferred Stock, Series A
to be converted at the Conversion Price then in effect.
The Corporation shall give notice of its election to cause
conversion under this Section VI.D by mail, postage prepaid, at least 15 days
prior to the date specified for conversion, to each holder of record of the
Preferred Stock, Series A at the address of such holder as the same shall appear
on the books of the Corporation, which notice shall specify said conversion
date, the Conversion Price, the number of shares of Common Stock to be issued
upon such conversion, the amount of the cash adjustment to be paid in respect of
a fractional share of Common Stock and the amount of any dividend cumulated and
unpaid prior to such conversion date. On and after said conversion date,
notwithstanding that any certificate for the Preferred Stock, Series A shall not
have been surrendered for conversion, the shares of Preferred Stock, Series A
evidently thereby shall be deemed to be no longer outstanding, and all rights
with respect thereto shall forthwith cease and terminate except only the rights
of the holder (i) to receive the shares of Common Stock to which he shall be
entitled upon conversion thereof, (ii) to receive the amount of cash payable in
respect of any fractional share of Common Stock to which he shall be entitled,
and (iii) with respect to dividends cumulated but unpaid on such Preferred
Stock, Series A prior to such conversion date.
VII. WARRANT.
Subject to the terms and conditions hereinafter set forth, each
holder of Preferred Stock, Series A, is hereby granted the right (a "Warrant"),
to purchase, upon (but only upon and in no event after) conversion into Common
Stock of the shares of Preferred Stock, Series A to which such Warrant relates,
one share of Common Stock for each five shares of Preferred Stock, Series A,
held, at a price ("Exercise Price") of Twenty Dollars ($20.00) per share of
Common Stock.
The Warrants are exercisable at the office of the Corporation, or
such other office or agency as the Corporation may from time to time designate,
upon surrender of the certificate or the holder's Preferred Stock, Series A
for conversion into shares of Common Stock and payment of the Exercise Price
for the shares of Common Stock to be purchased
-11-
<PAGE> 16
on such exercise, in United States currency, either in cash, or by certified or
official bank check payable to the order of the Corporation.
A Warrant may be exercised only in full, only upon conversion of
all Preferred Stock, Series A held by the holder making such exercise, and only
upon exercise of all Warrants relating to such holder's shares of Preferred
Stock, Series A.
Shares of Common Stock sufficient to provide for the exercise of
the Warrants shall at all times be reserved by the Corporation for issuance
upon exercise. All shares of Common Stock issuable upon the exercise of the
Warrants shall be validly issued, fully paid and non-assessable.
VIII. CERTAIN TAXES.
The Corporation shall pay any and all issuance and other taxes
(excluding any federal or state income taxes) that may be payable in respect of
any issuance or delivery of shares of Common Stock on conversion of Preferred
Stock, Series A, or on exercise of any Warrant. The Corporation shall not,
however, be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of shares of Common Stock in a
name other than that in which the shares of Preferred Stock, Series A to which
such issuance relates were registered, and no such issuance or delivery shall be
made unless and until the person requesting such issuance has paid to the
Corporation the amount of any such tax, or it is established to the satisfaction
of the Corporation that such tax has been paid.
RESOLVED FURTHER, that the President or any Vice President and the
Secretary or any Assistant Secretary of this Corporation be, and they hereby
are, authorized and directed to prepare and file a Certificate of Determination
of Preferences in accordance with the foregoing resolution and the provisions
of California law and to take such actions as they may deem necessary or
appropriate to carry out the intent of the foregoing resolution.
-12-
<PAGE> 17
3. That the authorized number of shares of Preferred Stock of said
corporation is 250,000 and that no such Preferred Stock has been issued.
IN WITNESS WHEREOF, the undersigned have executed this Certificate
this 14th day of January, 1981.
/s/ JOHN SCHECK
--------------------------------
John Scheck, President
/s/ STANLEY KELLER
--------------------------------
Stanley Keller, Secretary
Each of the undersigned declares under penalty of perjury that the
matters set forth in the foregoing Certificate of Determination are true and
correct.
Executed at Pleasant Hill, California, on January 14, 1981.
/s/ JOHN SCHECK
--------------------------------
John Scheck
/s/ STANLEY KELLER
--------------------------------
Stanley Keller
-13-
<PAGE> 18
CERTIFICATE OF CORRECTION OF
CERTIFICATE OF DETERMINATION OF PREFERENCES
OF PREFERRED STOCK, SERIES A OF
GIGATRONICS, INC.
The undersigned, John Scheck and Stanley Keller, do hereby certify:
1. That said John Scheck is, and at all times herein mentioned was,
the duly elected and acting President of GIGATRONICS, INC., a California
corporation, and that said Stanley Keller is, and at all times herein mentioned
was, the duly elected and acting Secretary of said corporation:
2. That on January 15, 1981, the Corporation filed with the
Secretary of State a Certificate of Determination of Preferences of Preferred
Stock, Series A which contained an inadvertent error.
3. That clause VI.C.1(i) of such Certificate, as corrected, reads
as follows:
"(i) issue or sell any Common Stock without consideration, or for a
consideration per share other than the Current Conversion price, or"
IN WITNESS WHEREOF, the undersigned have executed this Certificate
this 26th day of January, 1981.
/s/ JOHN SCHECK
--------------------------------
John Scheck, President
/s/ STANLEY KELLER
--------------------------------
Stanley Keller, Secretary
<PAGE> 19
Each of the undersigned declares under penalty of perjury that the
matters set forth in the foregoing Certificate or Determination are true and
correct.
Executed at Pleasant Hill, California, on January 26, 1981.
/s/ JOHN SCHECK
--------------------------------
John Scheck
/s/ STANLEY KELLER
--------------------------------
Stanley Keller
-2-
<PAGE> 20
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF DETERMINATION OF
PREFERENCES OF PREFERRED STOCK,
SERIES A OF GIGATRONICS, INC.
JOHN SCHECK and STANLEY KELLER certify that:
1. They are the President and the Secretary, respectively, of
GIGATRONICS, INC., a California corporation.
2. On January 15, 1981, the Corporation filed with the Secretary of
State a Certificate of Determination of Preferences of Preferred Stock, Series
A, as amended by an amendment thereto filed on January 27, 1981 (the
"Certificate").
3. Clause VII of the Certificate is amended to read in its entirety as
follows:
"VII. WARRANT.
Subject to the terms and conditions hereinafter set forth, each holder of
Preferred Stock, Series A, is hereby granted the right (a "Warrant"), to
purchase at any time prior to conversion into Common Stock of the shares of
Preferred Stock, Series A to which such Warrant relates, one share of Common
Stock for each five shares of Preferred Stock, Series A, held, at a price
("Exercise Price") of Twenty Dollars ($20.00) per share of Common Stock.
The Warrants are exercisable at the office of the Corporation, or such
other of office or agency as the Corporation may from time to time designate,
upon delivery of the Certificate for the holder's Preferred Stock, Series A to
be marked by the Corporation indicating exercise of the Warrants and payment of
the Exercise Price for the shares of Common Stock to be purchased on such
exercise, in United States currency, either in cash, or by certified or
official bank check payable to the order of the Corporation.
A Warrant may be exercised only in full and only upon exercise of all
Warrants relating to such holder's shares of Preferred Stock, Series A.
Shares of Common Stock sufficient to provide for the exercise of the
Warrants shall at all times be reserved by the Corporation for issuance upon
exercise. All shares of Common Stock issuable upon the exercise of the Warrants
shall be validly issued, fully paid and non-assessable."
<PAGE> 21
4. The foregoing amendment of the Certificate has been duly approved by
the Board of Directors.
5. The foregoing amendment of the Certificate has been duly approved by
the required vote of shareholders in accordance with Sections 902 and 903 of
the Corporations Code. The total number of outstanding shares of the Common
Stock of the Corporation is 51,798. The total number of outstanding shares of
Preferred Stock of the Corporation is 25,500. The number of shares voting in
favor of the amendment exceeded the vote required. The percentage vote required
was more than fifty percent (50%) of the Common Stock and more than fifty
percent (50%) of the Preferred Stock.
/s/ JOHN SCHECK
---------------------------------
John Scheck, President
/s/ STANLEY KELLER
---------------------------------
Stanley Keller, Secretary
The undersigned declare under penalty of perjury that the matters set
forth in the foregoing certificate are true of their own knowledge. Executed at
Pleasant Hill, California on June 7, 1982.
/s/ JOHN SCHECK
---------------------------------
John Scheck
/s/ STANLEY KELLER
---------------------------------
Stanley Keller
<PAGE> 22
NAME CHG. TO: GIGA-TRONICS INCORPORATED
CERTIFICATE OF AMENDMENT
OF ARTICLES OF INCORPORATION
OF GIGATRONICS, INC.
OFFICERS' CERTIFICATE
JOHN W. SCHECK and STANLEY S. KELLER hereby certify:
1. That they are the President and Secretary, respectively, of
GIGATRONICS, INC. (the "Company").
2. That Article FIRST of the Articles of Incorporation of this
corporation is hereby amended to read as follows:
"FIRST. The name of this corporation is GIGA-TRONICS
INCORPORATED."
3. That Article FOURTH of the Articles of Incorporation of this
corporation is hereby amended to read as follows:
"FOURTH. This corporation is authorized to issue two classes of
shares, to be designated respectively "Common Stock" and "Preferred
Stock." The number of shares of Preferred Stock which this corporation
is
<PAGE> 23
authorized to issue is 1,000,000 shares. The number of shares of
Common Stock which this Corporation is authorized to issue is
40,000,000 shares. Upon the amendment of this Article FOURTH to
read as hereinabove set forth, each share of Common Stock
outstanding as of the date of filing hereof is split up and
converted into forty (40) shares of Common Stock."
4. That at a special meeting of the Board of Directors of the
Company, held on April 25, 1983, the foregoing amendment was duly approved
by the Board of Directors.
5. That said amendment was approved and adopted by the
outstanding shares of Series A Preferred Stock and Common Stock of the
Company in accordance with Section 903 of the California Corporations Code
at the annual meeting of the Company's shareholders on April 25, 1983. The
numbers of shares of Series A Preferred Stock and Common Stock eligible to
vote on such amendment were 25,500 and 82,398, respectively. As required
for approval of such amendment, a majority of the shares of each class were
voted in favor of such amendment.
2.
<PAGE> 24
IN WITNESS WHEREOF, the undersigned have hereunto subscribed their
names this 27th day of April, 1983.
/s/ JOHN W. SCHECK
--------------------------------
John W. Scheck
President
/s/ STANLEY S. KELLER
--------------------------------
Stanley S. Keller
Secretary
The undersigned, JOHN W. SCHECK and STANLEY S. KELLER, President and
Secretary, respectively, of GIGATRONICS, INC. each declare under penalty of
perjury that the matters set forth in the foregoing Certificate are true of
their own knowledge.
Executed in the City and County of San Francisco, in the State of
California, this 27th day of April, 1983.
/s/ JOHN W. SCHECK
--------------------------------
John W. Scheck
President
/s/ STANLEY S. KELLER
--------------------------------
Stanley S. Keller
Secretary
3
<PAGE> 25
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
GIGA-TRONICS INCORPORATED
The undersigned, John W. Scheck and Stanley S. Keller, hereby
certify that:
1. They are duly elected and acting President and Secretary,
respectively, of Giga-tronics Incorporated, a California corporation.
2. A new Article VI is added to the Articles of Incorporation,
reading in full as follows:
"VI.
Section 1. The liability of the directors of this
corporation for monetary damages shall be eliminated to
the fullest extent permissible under California law.
Section 2. This corporation is authorized to provide
indemnification of agents (as defined in Section 317 of
the California Corporations Code) through bylaw provisions,
agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California Corporations
Code, subject only to applicable limits set forth in Section
204 of the California Corporations Code with respect to actions
for breach of duty to the corporation and its shareholders."
3. The foregoing amendment has been duly approved by resolution of
the Board of Directors of this corporation.
<PAGE> 26
4. The foregoing amendment has been approved by the holders of the
requisite number of shares of this corporation in accordance with Section 902
and 903 of the California General Corporation Law. The total number of
outstanding shares entitled to vote with respect to the foregoing amendment was
3,154,020 shares of Common Stock. The number of shares voting in favor of the
foregoing amendment equaled or exceeded the vote required, such required vote
being a majority of the outstanding shares of Common Stock.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
August 12, 1988.
/s/ John W. Scheck
-----------------------------
John W. Scheck, President
/s/ Stanley S. Keller
-----------------------------
Stanley S. Keller, Secretary
Each of the undersigned declares under penalty of perjury that the matters
set forth in the foregoing certificate are true and correct. Executed at
Pleasant Hill, California, on August 12, 1988.
/s/ John W. Scheck
-----------------------------
John W. Scheck, President
/s/ Stanley S. Keller
-----------------------------
Stanley S. Keller, Secretary
<PAGE> 27
CERTIFICATE OF DETERMINATION
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
GIGA-TRONICS INCORPORATED
We, George H. Bruns, Jr., Chairman of the Board, and Mark H. Cosmez II,
Secretary of Giga-tronics Incorporated, a corporation organized and existing
under the General Corporation Law of the State of California, in accordance
with the provisions of Section 401 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
the Articles of Incorporation of said Corporation, the said Board of Directors
on October 14, 1998 adopted the following resolution creating a series of Two
Hundred Fifty Thousand (250,000) shares of Preferred Stock designated as Series
A Junior Participating Preferred Stock, none of which has been issued:
RESOLVED, that pursuant to the authority vested in the Board of Directors
of this Corporation in accordance with the provisions of its Articles of
Incorporation, a series of Preferred Stock of the Corporation be and it hereby
is created, and that the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations or restrictions
thereof are as follows:
Section 1. That pursuant to the authority granted to and vested in the
Board by Article Fourth of the Articles of Incorporation of the Corporation,
the Board hereby creates a series of Preferred Stock (which term is used
throughout this resolution with the meaning given in said Article Fourth) with
a par value of $1.00 per share, of the Corporation, hereby designates said
Series of Preferred Stock as the "Series A Junior Participating Preferred
Stock" (the "Junior Preferred Stock") and hereby designates the number of shares
to constitute such series, fixes the terms, preferences, voting powers,
restrictions and qualifications thereof, and authorizes the issue thereof all
in accordance with the provisions of Section 2 of this resolution.
Section 2. That the total number of shares to constitute the Junior
Preferred Stock is hereby designated as 250,000 shares, and the terms,
preferences, voting powers, restrictions and qualifications of the Junior
Preferred Stock are hereby fixed as follows:
2.1. AUTHORIZED SHARES. The total authorized amount of the Junior
Preferred Stock shall be 250,000 shares, with a par value of $1.00 per share.
Such number of shares may be increased or decreased by resolution of the Board
of Directors; PROVIDED, that no decrease shall reduce the number of shares of
Junior Preferred Stock to a number less than the number of shares then
outstanding plus the number of shares reserved for issuance upon the exercise
of outstanding options, rights or warrants or upon the conversion of any
outstanding securities issued by the Corporation convertible into Junior
Preferred Stock.
2.2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the Junior
Preferred Stock with respect to dividends, the holders of shares of Junior
Preferred Stock, in preference to the holders of Common Stock of the Corporation
(the "Common Stock"), and of any other junior stock, shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
<PAGE> 28
available for the purpose, quarterly dividends payable in cash on the first day
of March, June, September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Junior Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $.25 per share or (b) subject
to the provision for adjustment hereinafter set forth, 100 times the aggregate
per share amount of all cash dividends, and 100 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions, other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Junior Preferred Stock. In
the event the Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount to which holders of shares of Junior Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Junior Preferred Stock as provided in paragraph (A) of this Section 2.2
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, a dividend of $.25 per share on the
Junior Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Junior Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the
date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination
of holders of shares of Junior Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Junior Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all
such shares at the time outstanding. The Board of Directors may fix a record
date for the determination of holders of shares of Junior Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be not more than 60 days prior to the date fixed for the
payment thereof.
2.3. VOTING RIGHTS. The holders of shares of Junior Preferred Stock shall
have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Junior Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to the vote of the stockholders of the
Corporation. In the event the Corporation shall at any time after
2
<PAGE> 29
November 10, 1998 declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the number of
votes per share to which holders of shares of Junior Preferred Stock were
entitled immediately prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) Except as otherwise provided herein, in the Articles of
Incorporation, in any other resolution of the Board of Directors of the
Corporation creating a series of Preferred Stock, or by law, the holders of
shares of Junior Preferred Stock and the holders of shares of Common Stock and
any other capital stock of the Corporation having general voting rights shall
vote together as one class on all matters submitted to a vote of stockholders
of the Corporation.
(C) Except as set forth herein, holders of Junior Preferred Stock
shall have no voting rights.
2.4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Junior Preferred Stock as provided in Section 2.2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Junior Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Junior Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Junior
Preferred Stock, except dividends paid ratably on the Junior Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Junior Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Junior Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Junior Preferred Stock, or any shares of stock
ranking on a parity with the Junior Preferred Stock except in accordance with a
purchase offer made in writing or by publication as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and classes,
shall determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the
3
<PAGE> 30
Corporation could, under paragraph (A) of this Section 2.4 purchase or
otherwise acquire such shares at such time and in such manner.
2.5. REACQUIRED SHARES. Any shares of Junior Preferred Stock purchased or
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and cancelled promptly after the acquisition thereof. All such shares shall
upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock, subject
to the conditions and restrictions on issuance set forth herein, in the
Articles of Incorporation, in any other resolution of the Board of Directors of
the Corporation creating a series of Preferred Stock, or as otherwise required
by law.
2.6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (1)
to the holders of shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Junior Preferred Stock
unless, prior thereto, the holders of shares of Junior Preferred Stock shall
have received $1.00 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, provided that the holders of shares of Junior Preferred Stock
shall be entitled to receive an aggregate amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount to be distributed per share to holders of shares of Common
Stock, or (2) to the holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the Junior
Preferred Stock, except distributions made ratably on the Junior Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the aggregate amount
to which holders of shares of Junior Preferred Stock were entitled immediately
prior to such event under the proviso in clause (1) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
2.7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in any such case each share of Junior
Preferred Stock shall at the same time be similarly exchanged or changed into an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 100 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Junior
Preferred Stock, shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
2.8. REDEMPTION. The shares of Junior Preferred Stock shall not be
redeemable.
4
<PAGE> 31
2.9. RANK. The Junior Preferred Stock shall rank junior with respect to
the payment of dividends and the distribution of assets to all series of the
Corporation's Preferred Stock that specifically provide that they shall rank
prior to the Junior Preferred Stock. Nothing herein shall preclude the Board
from creating any series of Preferred Stock ranking on a parity with or prior
to the Junior Preferred Stock as to the payment of dividends or the
distribution of assets.
2.10. AMENDMENT. The Articles of Incorporation of the Corporation shall not
be amended in any manner which would materially alter or change the powers,
preferences or special rights of the Junior Preferred Stock so as to affect
them adversely without the affirmative role of the holders of at least
two-thirds of the outstanding Junior Preferred Stock, voting together as a
single series.
2.11. FRACTIONAL SHARES. The Junior Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and have the benefit of all other rights of
holders of the Junior Preferred Stock.
5
<PAGE> 32
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated: November 6, 1998
/s/ George H. Bruns, Jr.
-------------------------------------------
George H. Bruns, Jr., Chairman of the Board
/s/ Mark H. Cosmez II
-------------------------------------------
Mark H. Cosmez II, Secretary
<PAGE> 1
EXHIBIT 10.2
INDEMNIFICATION AGREEMENT
THIS AGREEMENT, made and entered into the _____ day of ________________, 199__
between Giga-tronics Incorporated, a California corporation ("Corporation"),
and ______________________________ ("Officer"),
WITNESSETH THAT:
WHEREAS, Officer of the Corporation, performs a valuable service in such
capacity of Corporation; and
WHEREAS, the Articles of Incorporation of the Corporation authorizes and
permits contracts between Corporation and its officers with respect to
indemnification of such officers; and
WHEREAS, in accordance with the authorization as provided by the
California General Corporation Law, as amended ("Code"), Corporation may
purchase and maintain a policy or policies of Directors and Officers Liability
Insurance ("D&O Insurance"), covering certain liabilities which may be incurred
by its directors and officers in the performance as officers and directors of
Corporation; and
WHEREAS, as a result of recent developments affecting the terms, scope and
availability of D&O Insurance there exists general uncertainty as to the extent
of protection afforded officers and directors by such D&O Insurance and by
statutory and by-law indemnification provisions; and
WHEREAS, in order to induce Officer to continue to serve as an officer of
Corporation, Corporation has determined and agreed to enter into this contract
with Officer;
NOW, THEREFORE, in consideration of Officer's continued service as an
officer after the date hereof, the parties hereto agree as follows:
1. INDEMNITY OF OFFICER. Corporation hereby agrees to hold harmless
and indemnify Officer to the full extent authorized by the
provisions of the Code, as it may be amended from time to time.
2. ADDITIONAL INDEMNITY. Subject only to the limitations set forth in
Section 3 hereof, Corporation hereby further agrees to hold harmless
and indemnify Officer:
(a) Against any and all expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by Officer in connection with any
threatened, pending or completed action, suit or proceedings,
whether civil, criminal, administrative or investigative
(including an action by or in the right of
<PAGE> 2
-2-
Corporation) to which Officer is, was, or at any time becomes
a party, or is threatened to be made a party, by reason of the
fact that Officer is, was or at any time becomes a director,
officer, employee or agent of Corporation, or is or was
serving or at any time serves at the request of Corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprises; and
(b) otherwise to the fullest extent as may be provided to Officer
by Corporation under the non-exclusivity provision of the
Articles of Incorporation of Corporation and the Code.
(3) LIMITATIONS ON ADDITIONAL INDEMNITY.
(a) No indemnity pursuant to Section 2 hereof shall be paid by
Corporation for any of the following:
(i) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of such losses
for which the Officer is indemnified pursuant to Section
1 hereof or pursuant to any D & O Insurance purchased
and maintained by Corporation;
(ii) in respect to remuneration paid to Officer if it shall
be determined by a final judgment or other final
adjudication that such remuneration was in violation of
law;
(iii) on account of any suit in which judgement is rendered
against Officer for an accounting of profits made from
the purchase or sale by Officer of securities of
Corporation pursuant to the provisions of Section 16(b)
of the Securities Exchange Act of 1934 and amendments
thereto or similar provisions of any federal, state or
local statutory law;
(iv) on account of Officer's acts or omissions that involve
intentional misconduct or a knowing and culpable
violation of laws;
(v) on account of any proceeding (other than a proceeding
referred to in Section 8(b) hereof) initiated by the
Officer unless such proceeding was authorized by the
Directors of the Corporation;
<PAGE> 3
-3-
(vi) if a final decision by a Court having jurisdiction in the
matter shall determine that such indemnification is not
lawful; or
(vii) on account of any action, suit or proceeding commenced by
the Officer against the Corporation or against any officer,
director or shareholder of the Corporation unless
authorized in the specific case by action of the Board of
Directors;
(b) In addition to those limitations set forth above in paragraph (a)
of this Section 3, no indemnity pursuant to Section 2 hereof in an
action by or in the right of Corporation shall be paid by
Corporation for any of the following:
(i) on account of acts or omissions that Officer believes to
be contrary to the best interests of the Corporation or its
shareholders or that involve the absence of good faith on
the part of Officer;
(ii) with respect to any transaction from which Officer derived
an improper personal benefit;
(iii) on account of acts or omissions that show a reckless
disregard for Officer's duty to the Corporation or its
shareholders in circumstances in which Officer was aware,
or should have been aware, in the ordinary course of
performing an officer's duties, of a risk of serious injury
to Corporation or its shareholders;
(iv) on account of acts or omissions that constitute an
unexcused pattern of inattention that amounts to an
abdication of Officer's duty to the Corporation or its
shareholders;
(v) to the extent prohibited by section 310 of the California
Corporations Code, "Contracts In Which Officer Has Material
Financial Interest;"
(vi) to the extent prohibited by Section 316 of the California
Corporations Code, "Corporate Actions Subjecting Officers
To Joint and Several Liability" (for prohibited
distributions, loans and guarantees);
<PAGE> 4
-4-
(vii) in respect to any claim, issue or matter as to which
Officer shall have been adjudged to be liable to
Corporation in the performance of Officer's duty to
Corporation and its shareholders, unless and only to the
extent that the court in which such proceeding is or was
pending shall determine upon application that, in view of
all the circumstances of the case, Officer is fairly and
reasonably entitled to indemnity for expenses and then only
to the extent that the court shall determine;
(viii) of amounts paid in settling or otherwise disposing of a
pending action without court approval; or
(ix) of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
4. CONTRIBUTION. If the indemnification provided in 1 and 2 is unavailable
and may not be paid to Officer for any reason other than those set forth
in Section 3 (excluding subsections 3(b) (viii) and (ix), then in respect
of any threatened, pending or completed action, suit or proceeding in
which Corporation is jointly liable with Officer (or would be if joined
in such action, suit or proceeding), Corporation shall contribute to the
amount of expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred and paid or
payable by Officer in such proportion as is appropriate to reflect (i)
the relative benefits received by Corporation on the one hand and Officer
on the other hand from the transaction from which such action, suit or
proceeding arose, and (ii) the relative fault of Corporation on the one
hand and of Officer on the other in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as
well as any other relevant equitable considerations. The relative fault
of Corporation on the one hand and the Officer on the other shall be
determined by reference to, among other things, the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent the circumstances resulting in such expenses, judgments, fines or
settlement amounts. Corporation agrees that it would not be just and
equitable if contribution pursuant to this Section 4 were determined by
pro rata allocation or any other method of allocation which does not take
account of the foregoing equitable consideration.
<PAGE> 5
-5-
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of Corporation
contained herein shall continue during the period Officer is a director,
officer, employee or agent of Corporation (or is or was serving at the
request of Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise) and shall continue hereafter so long as Officer shall be
subject to any possible claim or threatened, pending or completed action,
suit or proceeding, whether civil, criminal or investigative by reason of
the fact that Officer was an officer of Corporation or serving in any
other capacity referred to herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by Officer of
notice of the commencement of any action, suit or proceeding, Officer
will, if a claim in respect thereof is to be made against Corporation
under this Agreement, notify Corporation of the commencement thereof; but
the omission so to notify Corporation will not relieve it from any
liability which it may have to Officer otherwise than under this
Agreement. With respect to any such action, suit or proceeding as to which
Office notifies Corporation of the commencement thereof;
(a) Corporation will be entitled to participate therein at its own
expense;
(b) except as otherwise provided below, to the extent that it may wish,
Corporation jointly with any other indemnifying party similarly
notified will be entitled to assume the defense thereof, with counsel
satisfactory to Officer. After notice from Corporation to Officer of
its election so as to assume the defense thereof, Corporation will
not be liable to Officer under this Agreement for any legal or other
expenses subsequently incurred by Officer in connection with the
defense thereof other than reasonable costs of investigation or as
otherwise provided below. Officer shall have the right to employ its
counsel in such action, suit or proceeding but the fees and expenses
of such counsel incurred after notice from Corporation of its
assumption of the defense thereof shall be at the expense of Officer
unless (i) the employment of counsel by Officer has been authorized
by Corporation, (ii) Officer shall have reasonably concluded that
there may be a conflict of interest between Corporation and Officer
in the conduct of the defense of such action, in each of which cases
the fees and expenses of counsel shall be at the
<PAGE> 6
-6-
expense of Corporation. Corporation shall not be entitled to assume
the defense of any action, suit or proceeding brought by or on behalf
of Corporation or as to which Officer shall have made the conclusion
provided for in (ii) above; and
(c) Corporation shall not be liable to indemnify Officer under this
Agreement for any amounts paid in settlement of any action or claim
effected without its written consent. Corporation shall not settle
any action or claim in any manner which would impose any penalty or
limitation on Officer without Officer's written consent. Neither
Corporation nor Officer will unreasonably withhold its consent to
any proposed settlement.
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Officer employs his own counsel pursuant to Section
6(b)(i) through (iii) above, Corporation shall advance to Officer,
prior to any final disposition of any threatened or pending action,
suit or proceeding, whether civil, criminal, administrative or
investigative, any and all reasonable expenses (including legal fees
and expenses) incurred in investigating or defending any such action,
suit or proceeding within ten (10) days after receiving copies of
invoices presented to Officer for such expenses; and
(b) Officer agrees that Officer will reimburse Corporation for all
reasonable expenses paid by Corporation in defending any civil or
criminal action, suit or proceeding against Officer in the event and
only to the extent it shall be ultimately determined by a final
judicial decision (from which there is no right of appeal) that
Officer is not entitled, under applicable law, the by-laws, this
Agreement or otherwise, to be indemnified by Corporation for such
expenses.
8. ENFORCEMENT.
(a) Corporation expressly confirms and agrees that it has entered into
this Agreement and assumed the obligations imposed on Corporation
hereby in order to induce Officer to continue as an Officer of
Corporation, and acknowledges that Officer is relying upon this
Agreement in continuing in such capacity.
<PAGE> 7
-7-
(b) In the event Officer is required to bring any action to enforce
rights or to collect monies due under this Agreement and is
successful in such action, Corporation shall reimburse Officer
for all of Officer's reasonable fees and expenses in bringing and
pursuing such action.
9. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any
provision hereof shall be held to be valid or unenforceable for any
reason, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions hereof.
10. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of California.
11. BINDING EFFECT. This Agreement shall be binding upon Officer and upon
Corporation, its successors and assigns, and shall inure to the
benefit of Officer, his heirs, personal representatives and assigns
and to the benefit of Corporation, its successors and assigns.
12. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing
signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
GIGA-TRONICS, INCORPORATED
By ___________________________________________
[Name] [Title]
___________________________________________
[Name] [Officer]
<PAGE> 1
EXHIBIT 13.0
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS FOR FISCAL 1999 AS COMPARED TO 1998
The Company acquired Microsource, Inc. a manufacturer of YIG
oscillators and communications related synthesizers on May 18, 1998 in a
purchase transaction. Its performance from that date through March 27, 1999 is
included in the Company's operating results. This acquisition positions the
Company to expand its market for microwave instruments and devices.
New orders received in 1999 were $36,786,000, an increase of 11% from
$33,092,000 in 1998. These orders included $7,900,000 for Microsource for which
there were no comparable orders. At year end 1999, the Company's backlog of
unfilled orders was $17,792,000, compared to $6,492,000 at the end of 1998.
Primarily, the increase in backlog is attributable to addition of the
Microsource backlog which was $11,066,000 at year end.
Net sales for 1999 were $37,636,000, a 2% increase from 1998. The
increase is due to the addition of Microsource sales of $9,000,000 offset by
reduced sales volume for the Semiconductor Equipment Group as well as
Giga-tronics Instrument products. In 1999, Semiconductor Group sales declined
$6.2 million. Revenues at the Company's semiconductor product lines were
impacted by the substantial downturn of the semiconductor industry together with
the severe economic problems in Asia. The Giga-tronics Instruments sales
reduction of $3.4 million were due to the aging of the product lines, delay in
new product releases, and weakness in the wireless industry. ASCOR sales
improved $1.4 million in 1999 over 1998.
Cost of sales increased 24% in 1999 to $26,102,000 from $21,024,000 in
1998. The increase in 1999 is attributable to the addition of Microsource as
well as inventory write offs associated with the Company's decision to
discontinue a particular semiconductor equipment line. The cost of sales for
Microsource during fiscal 1999 was $6,978,000.
Operating expenses increased 1% in 1999 over 1998, which includes
Microsource operating expenses of $2,152,000. Product development costs declined
$.9 million in 1999 to $5.3 million as the development of new products begins to
return to previous levels. Selling, general and administrative expenses
increased in 1999 due to the addition of Microsource which had expenses of
$1,602,000. Amortization of intangibles increased as a result of the addition of
the amortization of goodwill for Microsource offset by reduced amortization of
patents and licenses.
Other income increased primarily due to the gain from the sale of a
surplus building following facilities consolidation of the Company's
Semiconductor Equipment subsidiaries. Net interest income in 1999 declined 75%
from 1998 due to lower cash available for investment. The cash decline resulted
principally from the extinguishment of debt, reduction of accounts payable and
acquisition costs associated with the acquisition of the Microsource subsidiary.
The benefit for income taxes in 1999 was $1,148,000 or 38% of the pre-tax loss.
The Company recorded a net loss of $1,858,000, or $0.43 per share, in
1999 versus earnings of $767,000, or $0.18 per share in 1998. The decline in
1999 earnings was due to the Company's lower gross profits in 1999 of
$11,534,000 as compared to $15,789,000 in 1998.
RESULTS OF OPERATIONS FOR FISCAL 1998 AS COMPARED TO 1997
Orders received in 1998 were $33,092,000, a decrease of 6% from 1997.
At year end 1998, the Company's backlog of unfilled orders was $6,492,000,
compared to $10,192,000 at the end of 1997. The majority of the decline in
backlog is attributable to the semiconductor product line. Several large
semiconductor orders were shipped in 1998.
Net sales for 1998 were $36,813,000, a 3% decrease from 1997. In 1998,
Giga-tronics Instruments sales declined by $1.7 million. Aging of the product
lines, lack of new product releases, and the continued decline in
defense-related programs was the principal cause of the revenue decline. ASCOR
fiscal 1998 sales also declined $1.7 million due to the timing of large
procurements and declining military programs. These declines were partially
offset by an increase of $2.2 million of Semiconductor Equipment Group sales.
The 1998 growth in the semiconductor products reflects the introduction of
several new products and increased manufacturing output.
Cost of sales decreased to $21,024,000 or 8% in 1998 from $23,404,000
in 1997. The decrease in cost of sales is attributable to lower labor content,
lower depreciation, and lower controllable manufacturing expenses as a result of
cost cutting measures to control expenses.
Operating expenses increased 16% in 1998 over 1997. Product development
costs increased $1.6 million in 1998 to $6.2 million in an effort to develop new
products in each of the Company's product lines. The increased product
development spending in 1998 has resulted in the introduction of several new
products, with additional new products anticipated for release in 1999 or later.
Selling, general and administrative expenses increased in 1998 due to $643,000
of transaction costs associated with the mergers of Viking Semiconductor
Equipment, Inc. and Ultracision, Inc.
Net interest income in 1998 declined 14% from 1997 due to lower cash
available for investment. The cash decline resulted from extinguishing the debt
of the acquired subsidiaries, increased funding for new product development, and
acquisition costs. The provision for income taxes in 1998 was $329,000 or 30% of
pre-tax income and the provision for income taxes in 1997 was $539,000 or 26% of
pre-tax income.
7
<PAGE> 2
The Company recorded net earnings of $767,000, or $0.18 per share, in
1998, a 47% decrease in earnings per share from $0.34 in 1997. The decline in
1998 earnings was due to the 35% increase in product development spending and
transaction costs for the mergers.
FINANCIAL CONDITION AND LIQUIDITY
As of March 27, 1999, the Company had $2,686,000 in cash, cash
equivalents, and investments, compared to $10,335,000 as of March 28, 1998 and
$14,209,000 as of March 29, 1997. Cash used by operations amounted to $2,365,000
in 1999, compared to cash used by operations of $1,099,000 in 1998, and cash
provided by operations of $3,285,000 in 1997. In 1999, the losses by operations
were the significant reason for the increase in use of cash by operations. In
1998, the increase in product development costs of $1,619,000 and the merger
transaction costs of $643,000 were the significant reasons for the use of cash
by operations. Cash provided by operations in 1997 is attributed to operating
income in the year and reductions in accounts receivable.
The Company continues to maintain a strong financial position, with
working capital at year end of $18,021,000 compared to $23,484,000 and
$22,692,000 in 1998 and 1997, respectively. The Company's current ratio of 3.3
decreased from the 1998 and 1997 current ratio of 5.1 and 4.3, respectively. The
decrease in working capital and current ratio is primarily a result of the
Microsource acquisition.
Additions to property and equipment were $953,000 in 1999, compared to
$779,000 and $1,166,000 in 1998 and 1997, respectively. This spending reflects
continuing investments to support new product development, increased
productivity, and improved product quality. Other cash outflows for 1999 were
payments on credit lines and notes payable of the acquired Microsource
subsidiary of $4,042,000. Other cash inflows in 1999 were $89,000 of common
stock in connection with the exercise of stock options, $1,291,000 from the sale
of the Company's building and $5,742,000 from maturities of investments, net of
purchases, which are principally marketable securities classified as available
for sale.
Management believes that the Company has adequate resources to meet its
operating and capital expenditure needs for the foreseeable future. The Company
has a seven million dollar unsecured line of credit, none of which has been
used. The Company may continue to increase product development expenditures in
the near term for the purpose of broadening its product base, especially in
Giga-tronics Instruments. It has been the Company's intention to broaden its
product lines and expand its market, both by internal development of new
products and through the acquisition of other business entities.
YEAR 2000 (Y2K) ISSUES
The Company is aware of and is addressing the issues associated with
the programming code in existing computer systems as the year 2000 approaches.
The Year 2000 problem is pervasive and complex, as many computer systems,
manufacturing equipment and industrial control systems will be affected in some
way by the rollover of the two-digit year value to 00. Systems that do not
properly recognize such data could generate erroneous information or cause a
system to fail. The Year 2000 issue creates risk for the Company from unforeseen
problems in its own systems and from third parties with which the Company deals
on financial transactions worldwide. Failures of the Company's and/or third
parties' computer systems, manufacturing equipment and industrial control
systems could have a material adverse impact on the Company's ability to conduct
its business.
The Company is in the process of analyzing internal systems as well as
all external systems (such as vendor, customer, banking systems, etc.) upon
which the Company is dependent, to identify and evaluate any potential Year 2000
issues. The Company is committed to achieving Year 2000 compliance; however,
with a significant portion of the problem external and therefore outside the
direct control of the Company, there can be no assurances that the Company will
be fully or even significantly Year 2000 compliant at the critical juncture. In
addition, as full testing of Year 2000 functionality must occur in a simulated
environment, the Company will not be able to test full system Year 2000
interfaces and capabilities prior to the Year 2000.
The Company has completed an inventory of internal systems, hardware,
software, manufacturing equipment and embedded chips in industrial control
instruments. Each of these items was identified as mission critical, mission
essential, mission impaired or mission non-critical. The Company is in the
process of prioritizing and evaluating mission critical and mission essential
items, identifying fixes and resources as appropriate, and performing and
testing corrective measures. While the Company believes that its evaluation has
been comprehensive, there can be no assurance that all systems critical to Year
2000 compliance have been identified, or that the corrective actions identified
will be completed on time.
The Company has upgraded 4 of the 5 packaged financial systems it
currently uses to vendor certified Year 2000 compliant versions. The Company is
in the process of evaluating the plans regarding the last financial system that
is not Year 2000 compliant.
8
<PAGE> 3
The Company has completed an inventory of current products and their
hardware, software, and embedded chips. Each of the Company's products was
evaluated as to whether it maintained the date and if the date handling was Year
2000 compliant. All of the Company's current products, which maintained the
date, were found to be Year 2000 compliant. Several of the Company's non-current
products were found not to be Year 2000 compliant but the Company has determined
either a manual work around or has an upgrade path to resolve the Year 2000
problem for such non-current products.
Currently, the Company is inventorying key suppliers of goods and
services to the Company, and considering the potential impact on the Company and
its customers of Year 2000 compliance by these suppliers. The Giga-tronics
Instruments division has mailed surveys to more than 600 of its suppliers, and
is in the process of evaluating responses and sending follow-up letters. The
ASCOR subsidiary has mailed surveys to more than 50 of its suppliers, and is in
the process of evaluating responses and sending follow-up letters. The
Microsource subsidiary has mailed surveys to more than 450 of its suppliers, and
is in the process of evaluating responses and sending follow-up letters. Surveys
to the suppliers of the Company's other subsidiaries and divisions are scheduled
to go out during the next fiscal quarter. The Company plans to determine if its
suppliers pose a threat to it for non compliance. If these suppliers pose a
threat, the Company plans to disqualify the non-complaint suppliers, look for
alternative sources and re-qualify new suppliers to help mediate potential
business disruptions. While the Company believes that it will be able to qualify
alternative suppliers as needed, until all supplier and customer survey
responses have been received and evaluated, the Company can not fully evaluate
the extent of potential problems and the costs associated with corrective
actions.
To date, the Company has not incurred significant costs associated with
Year 2000 compliance. The Company estimates the cost to complete its current
compliance program will not be significant. Of these costs, less than $50,000 is
associated with the upgrade of packaged software systems used by the Company's
subsidiaries most of which has been expended. These are systems that would not
otherwise have been replaced or upgraded at this time. The Company may incur
significant additional costs depending largely on the response from the
Company's suppliers and the extent to which supplier re-qualification is needed.
Cost estimates will also be evaluated as the status of the overall compliance
program is updated. Currently, the Company has no other contingency plan for
Year 2000 compliance. There can be no assurance that actual costs will not be
materially higher than currently anticipated. Most of these costs are not likely
to be incremental costs to the Company, but rather will represent the
re-deployment of existing information technology resources. The Company is
unable to determine what effect the failure of systems because of Year 2000
issues by the Company or its suppliers or customers will have, but any
significant failures could have an adverse material effect on the Company's
results of operations and financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
With the addition of Microsource, Inc. the Company's defense-related orders have
become more important. If the defense market should soften, shipments in the
current year could fall short of plan with a concurrent decline in earnings.
Current softness in the market for the Company's commercial products has
resulted in a leveling of the commercial backlog. If this trend cannot be
reversed in the near term, shipments in the current year could fall short of
plan with a continued decline in earnings.
As part of its business strategy, the Company intends to broaden its product
lines and expand its markets, in part through the acquisition of other business
entities. The Company had acquired Viking Semiconductor Equipment, Inc. and
Ultracision, Inc. in fiscal 1998 in transactions accounted for as a
pooling-of-interests and Microsource, Inc. in fiscal 1999 in a transaction
accounted for as a purchase. The Company is subject to various risks in
connection with these and any future acquisitions. Such risks include, among
other things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's business, the
inability of the Company's management to maximize the financial and strategic
position of the Company by the successful incorporation of acquired technology
and rights into the Company's product offerings, the maintenance of uniform
standards, controls, procedures and policies, and the potential loss of key
employees of acquired companies. No assurance can be given that any acquisition
by the Company will or will not occur, that if an acquisition does occur, that
it will not materially and adversely affect the Company or that any such
acquisition will be successful in enhancing the Company's business. The Company
currently contemplates that future acquisitions may involve the issuance of
additional shares of the Company's common stock. Any such issuance may result in
dilution to all shareholders of the Company, and sales of such shares in
significant volume by the shareholders of acquired companies may depress the
price of the Company's common stock.
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 differences include,
but are not limited to, those discussed herein and in the Company's 1999 Report
10-K under "Item 1. Business" as filed with the Securities and Exchange
Commission.
9
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
March 27, 1999 March 28, 1998
-------------- --------------
(In thousands except share data)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,686 $ 4,611
Investments -- 5,724
Notes receivable -- 860
Trade accounts receivable, net of allowance
of $435 and $293 respectively 6,434 6,924
Inventories, net 13,249 8,064
Income tax receivable 725 732
Prepaid expenses 383 265
Deferred income taxes 2,309 2,092
-------- --------
TOTAL CURRENT ASSETS 25,786 29,272
Property and equipment
Land -- 279
Building and leasehold improvements 311 782
Machinery and equipment 13,460 8,880
Office furniture and fixtures 1,060 689
-------- --------
Property and equipment, gross cost 14,831 10,630
Less accumulated depreciation and amortization 9,179 7,885
-------- --------
PROPERTY AND EQUIPMENT, NET 5,652 2,745
PATENTS AND LICENSES 349 577
GOODWILL, NET 1,194 --
DEFERRED INCOME TAXES 169 --
OTHER ASSETS 109 78
-------- --------
TOTAL ASSETS $ 33,259 $ 32,672
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,022 $ 2,659
Accrued commissions 369 516
Accrued payroll and benefits 1,346 939
Accrued warranty 467 673
Customer advances 1,648 612
Obligation under capital lease 112 27
Other current liabilities 801 362
-------- --------
TOTAL CURRENT LIABILITIES 7,765 5,788
OBLIGATIONS UNDER CAPITAL LEASE 210 24
DEFERRED INCOME TAXES -- 57
DEFERRED RENT 574 342
-------- --------
TOTAL LIABILITIES 8,549 6,211
SHAREHOLDERS' EQUITY
Preferred stock of no par value
Authorized 1,000,000 shares; no shares outstanding
at March 27, 1999 and March 28, 1998 -- --
Common stock of no par value;
Authorized 40,000,000 shares; 4,361,902 shares at
March 27, 1999 and 4,326,299 shares at
March 28, 1998 issued and outstanding 11,621 11,532
Accumulated other comprehensive income -- (18)
Retained earnings 13,089 14,947
-------- --------
TOTAL SHAREHOLDERS' EQUITY 24,710 26,461
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,259 $ 32,672
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
10
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years ended
--------------------------------------------------------------
March 27, 1999 March 28, 1998 March 29, 1997
-------------- -------------- --------------
(In thousands except share data)
<S> <C> <C> <C>
NET SALES $ 37,636 $ 36,813 $ 38,031
Cost of sales 26,102 21,024 23,404
-------- -------- --------
GROSS PROFIT 11,534 15,789 14,627
Product development 5,313 6,200 4,581
Selling, general and administrative 9,418 8,537 7,956
Amortization of intangibles 562 435 559
-------- -------- --------
Operating expenses 15,293 15,172 13,096
-------- -------- --------
OPERATING INCOME (LOSS) (3,759) 617 1,531
Other income (expense) 632 22 (16)
Interest income, net 121 457 533
-------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES (3,006) 1,096 2,048
Provision (benefit) for income taxes (1,148) 329 539
-------- -------- --------
NET EARNINGS (LOSS) $ (1,858) $ 767 $ 1,509
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE - BASIC $ (0.43) $ 0.18 $ 0.35
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE - DILUTED $ (0.43) $ 0.18 $ 0.34
======== ======== ========
WEIGHTED AVERAGE BASIC
COMMON SHARES OUTSTANDING 4,338 4,319 4,300
-------- -------- --------
WEIGHTED AVERAGE DILUTED
COMMON SHARES OUTSTANDING 4,338 4,377 4,376
-------- -------- --------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
11
<PAGE> 6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------------------ Comprehensive Comprehensive Retained
Shares Amount Income (Loss) Income (Loss) Earnings Total
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands except share data)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 30, 1996 4,259,965 $ 11,059 $ -- $ (47) $ 12,463 $ 23,475
Comprehensive Income
Net earnings -- -- 1,509 -- 1,509 1,509
Unrealized gain on investments, net
of income tax expenses of $31 -- -- 58 58 -- 58
-----
Comprehensive Income -- -- 1,567 -- -- --
=====
Stock issuance under stock
option plans 81,857 345 -- -- -- 345
Stock repurchase (25,634) (42) -- -- (19) (61)
Dividends declared -- -- -- -- (27) (27)
Tax benefit associated with exercise
of stock options -- 101 -- -- -- 101
Adjustment to conform year-end
of subsidiary -- -- -- -- 254 254
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 29, 1997 4,316,188 11,463 -- 11 14,180 25,654
Comprehensive Income
Net earnings -- -- 767 -- 767 767
Unrealized loss on investments, net
of income tax benefit of $16 -- -- (29) (29) -- (29)
-----
Comprehensive Income -- -- 738 -- -- --
=====
Stock issuance under stock
option plans 10,111 69 -- -- -- 69
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 28, 1998 4,326,299 11,532 -- (18) 14,947 26,461
Comprehensive Income
Net loss -- -- (1,858) -- (1,858) (1,858)
Unrealized gain on investments, net
of income tax benefit of $10 -- -- 18 18 -- 18
------
Comprehensive Income -- -- (1,840) -- -- --
======
Stock issuance under stock
option plans 35,603 89 -- -- -- 89
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 27, 1999 4,361,902 $ 11,621 $ -- $ -- $ 13,089 $ 24,710
================================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
12
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Years ended
March 27, 1999 March 28, 1998 March 29, 1997
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS PROVIDED FROM OPERATIONS:
Net earnings (loss) $ (1,858) $ 767 $ 1,509
Adjustments to reconcile net earnings to
net cash provided by (used in) operations:
Provision for bad debts 142 (31) 17
Depreciation and amortization 2,208 1,407 1,599
Gain on sales of fixed assets (521) (3) 54
Deferred income taxes (443) (120) (411)
Changes in operating assets and liabilities:
Trade accounts receivable 1,738 (2,337) 1,698
Inventories (1,710) 196 525
Prepaid expenses 74 (522) (202)
Accounts payable (622) 204 (732)
Accrued commissions (180) 206 (51)
Accrued payroll and benefits 67 (118) 133
Accrued warranty (269) (67) 10
Accrued other expenses (209) (212) (347)
Customer advances (968) (469) (401)
Income taxes payable 186 -- (116)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATIONS (2,365) (1,099) 3,285
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (2,268) (36,294) (28,105)
Maturities of investments 8,010 37,751 26,266
Proceeds from sale of property and equipment 1,291 -- --
Additions to property and equipment (953) (779) (1,166)
Payment for purchase of Microsource, including transaction costs (605) -- --
Advances to Microsource (940) -- --
Issuance of notes receivable -- (860) --
Other assets (17) 57 120
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 4,518 (125) (2,885)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 89 69 446
Repurchase of common stock -- -- (61)
Dividends paid -- (27) (21)
Payment on line of credit (1,500) (189) (66)
Payment on notes payable and long term debt (2,497) (985) (414)
Payments on capital lease and other long term obligations (170) (32) 20
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (4,078) (1,164) (96)
CHANGE IN SUBSIDIARY FISCAL YEAR END -- -- 254
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,925) (2,388) 558
-------- -------- --------
BEGINNING CASH AND CASH EQUIVALENTS 4,611 6,999 6,441
ENDING CASH AND CASH EQUIVALENTS 2,686 4,611 6,999
======== ======== ========
Supplementary disclosure of cash flow information:
Cash paid for income taxes $ 7 $ 951 $ 1,123
Cash paid for interest -- 58 131
Non-cash investing and financing activities:
Purchases under capital lease obligations -- -- 36
Dividends declared -- -- 27
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
13
<PAGE> 8
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1 BUSINESS COMBINATIONS
In June 1997, Giga-tronics Incorporated (Giga-tronics) completed a
merger with Viking Semiconductor Equipment, Inc. (Viking) by issuing
approximately 420,000 shares of the Company's common stock in exchange
for all of the common stock of Viking. The merger has been accounted
for using the pooling-of-interests method of accounting and
accordingly, the consolidated financial statements for periods prior to
the combination have been restated to include the accounts and results
of operations of Viking. Viking 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 equipment, and wafer inspection equipment.
Prior to the combination, Viking's fiscal year ended May 31. In
recording the pooling-of-interests combination, Viking's financial
statements for the twelve months ended March 31, 1997 were combined
with Giga-tronics' financial statements for the year ended March 29,
1997, and Viking's financial statements for the year ended May 31, 1996
were combined with Giga-tronics' financial statements for the year
ended March 30, 1996. An adjustment has been made to retained earnings
as of March 29, 1997 to eliminate the effect of including Viking's
results of operations for the two month period ended May 31, 1996, in
both the years ended March 29, 1997 and March 30, 1996. Viking's
unaudited results of operations for the two month period ended May 31,
1996 included sales of $323,000 and a net loss of $254,000.
In December 1997, Giga-tronics completed a merger with Ultracision,
Inc. (Ultracision) by issuing approximately 517,000 shares of the
Company's common stock in exchange for all of the common stock of
Ultracision. Ultracision is a manufacturer of automation equipment for
the test and inspection of silicon wafers. Ultracision additionally
produces a line of probers for the testing and inspection of silicon
devices. The merger has been accounted for using the
pooling-of-interests method of accounting and accordingly, the
consolidated financial statements for periods prior to the combination
have been restated to include the accounts and results of operations of
Ultracision. Prior to the combination, Ultracision's fiscal year ended
March 31.
On May 18, 1998, Giga-tronics Incorporated acquired Microsource, Inc.
(Microsource) of Santa Rosa, California. Microsource develops and
manufactures a broad line of YIG tuned oscillators, filters, and
microwave synthesizers. The acquisition was accounted for using the
purchase method of accounting, and accordingly, the results of
operations of Microsource have been included in the Company's
consolidated financial statements from May 18, 1998. 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. The excess of the purchase price over the fair
value of the net identifiable assets of $1,509,000 was recorded as
goodwill and other intangibles (primarily, patents) and is being
amortized on a straight-line basis over five years. The additional
payments, if any, over the next two years contingent on future net
income of Microsource will be accounted for as additional goodwill.
The total purchase price of $1,500,000 has been allocated to the net
assets acquired based on the estimated fair value as follows (in
thousands):
<TABLE>
<S> <C>
Current assets $ 5,119
Property and equipment 4,370
Goodwill and other intangibles 1,509
Current liabilities (7,018)
Capital lease and other long term obligations, net (517)
-------
3,463
-------
Less advances to Microsource, net, and transaction costs (1,963)
-------
$ 1,500
=======
</TABLE>
Results of operations previously reported by the separate entities
prior to the mergers and the pro-forma combined amounts are summarized
below.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Year ended March 28, 1998 (unaudited) Pro-forma Pro-forma
Giga-tronics Microsource Adjustments Combined
<S> <C> <C> <C> <C>
Net sales $ 36,813 $ 6,262 $ -- $ 43,075
Net earnings (loss) 767 (4,531) (390) (4,154)
Net earnings (loss) per share $ 0.18 $ -- $ -- $ (0.96)
----------------------------------------------------------------------------------------------------------------
</TABLE>
Pro-forma adjustment represents increased depreciation on the step-up
basis (to fair market value) on property, plant and equipment, the
amortization of goodwill created as a result of the acquisition of
Microsource, and interest accrued by Microsource on the notes due to
Giga-tronics for which no income had previously been recorded by
Giga-tronics.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY The accompanying consolidated financial statements include
the accounts of Giga-tronics and its wholly owned subsidiaries.
Giga-tronics and its subsidiary companies design, manufacture and
market a broad line of test and measurement equipment used in the
development, test, and maintenance of wireless communications products
and systems, flight navigational equipment, electronic defense systems,
and automatic testing systems. The Company also manufactures and
markets a line of test, measurement, and handling equipment used in the
manufacturing of semiconductor devices. The Company's products are sold
worldwide to customers in the test and measurement and semiconductor
industries. The Company has no foreign operations, and all non-U.S.
sales are made in U.S. dollars.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements
include the accounts of Giga-tronics and its wholly-owned subsidiaries.
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.
14
<PAGE> 9
FISCAL YEAR The Company's financial reporting year consists of either a
52 week or 53 week period ending on the last Saturday of the month of
March. Fiscal years 1999, 1998 and 1997 each contained 52 weeks, and
fiscal year 1996 contained 53 weeks.
REVENUE RECOGNITION Revenues are recognized when products are shipped.
Upon shipment, the Company also provides for the estimated cost that
may be incurred for product warranties.
CASH EQUIVALENTS 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.
INVESTMENTS The Company's investments in debt securities are classified
as available-for-sale securities and are reported at fair value.
Unrealized gains and losses are reported as a separate component of
shareholders' equity. The cost of securities sold is determined based
on the specific identification method.
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 for machinery, and five to forty years for buildings.
Leasehold improvements and assets acquired under capital leases are
amortized using the straight-line method over the shorter of the
estimated useful lives of the respective assets or the lease term.
Recoverability of property and equipment is measured by comparison of
its carrying amount, including the unamortized portion of goodwill
allocated to property and equipment to future cash flows the property
and equipment are expected to generate. The Company assesses the
recoverability of enterprise level goodwill by determining whether the
unamortized goodwill balance can be recovered through undiscounted
future cash flows of the acquired operation. To date, the Company has
made no adjustments to the carrying value of its property and equipment
or goodwill due to asset impairment.
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.
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
27, 1999 and March 28, 1998 accumulated amortization on patents and
licenses was $3,329,000 and $2,735,000, respectively.
PRODUCT DEVELOPMENT COSTS Product development costs are charged to
operations in the year incurred.
SOFTWARE DEVELOPMENT COSTS Development costs included in the research
and development of new products and enhancements to existing products
are expensed as incurred until technical feasibility in the form of a
working model has been established. To date, software development has
been concurrent with the establishment of technology feasibility, and
accordingly, no costs have been capitalized.
STOCK-BASED COMPENSATION The Company uses the intrinsic value method to
account for stock-based compensation.
EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share are computed
using the weighted average number of common shares outstanding during
the period. Diluted earnings per share incorporate the incremental
shares issuable upon the assumed exercise of stock options.
Antidilutive options are not included in the computation of diluted
earnings per share.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK Financial
instruments, which potentially subject the Company to credit risk as of
March 27, 1999, consist principally of cash, cash equivalents and trade
accounts receivable. The Company's cash equivalents consist principally
of money market funds and the cash deposits are held in recognized
depository institutions. 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 cash equivalents, trade accounts receivable, notes
receivable, notes payable, accounts payable and other accrued expenses
approximates fair market value because of the short maturity of these
financial instruments.
COMPREHENSIVE INCOME The Company has adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which established standards for reporting and
disclosures of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. Financial statements for earlier periods have been
reclassified for comparative purposes.
SEGMENT REPORTING The Company has adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" which
supersedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise."
RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards
Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities.
It requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized
in earnings in the period of change. The Company must adopt SFAS No.
133 by July 1, 1999. Management does not believe the adoption of SFAS
No. 133 will have a material effect on the financial position or
operations of the Company.
RECLASSIFICATIONS Certain amounts in the accompanying 1998 financial
statements have been reclassified in order to conform to the
presentation of the 1999 financial statements.
15
<PAGE> 10
3 CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash, cash equivalents, and short-term investments consisted of the
following at March 27, 1999 and March 28, 1998:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
March 27, 1999 Cash and Cash Equivalents Short-term Investments
(In thousands) ----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ------ --------- -----
<S> <C> <C> <C> <C>
Cash $1,093 $1,093 $ -- $ --
Money market funds 1,593 1,593 -- --
Municipal obligations -- -- -- --
------ ------ ------- -----
Total debt securities $2,686 $2,686 $ -- $ --
====== ====== ======= =====
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
March 28, 1998 Cash and Cash Equivalents Short-term Investments
(In thousands) ----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ------ --------- -----
<S> <C> <C> <C> <C>
Cash $1,190 $1,190 $ -- $ --
Money market funds 1,421 1,421 214 214
Municipal obligations 2,000 2,000 5,538 5,510
------ ------ ------- ------
Total debt securities $4,611 $4,611 $ 5,752 $5,724
====== ====== ======= ======
</TABLE>
There were realized gains (losses) of ($37,000) and $1,000 on sales of
available-for-sale securities in fiscal 1999 and fiscal 1998,
respectively. Unrealized losses on available-for-sale securities were
$28,000 as of March 28, 1998, and were included, net of income taxes,
as a separate component of Shareholder equity.
As of March 28, 1998, all of the Company's short-term investments had
maturities within one year. These securities had interest rates that
ranged from 2.3% to 6.1%.
4 INVENTORIES
<TABLE>
<CAPTION>
------------------------------------------------------------------
Years ended
(In thousands) March 27, 1999 March 28, 1998
------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 6,386 $ 3,943
Work-in-progress 6,124 2,999
Finished goods 739 1,122
------- -------
$13,249 $ 8,064
======= =======
</TABLE>
5 NOTES RECEIVABLE
Notes receivable at March 28, 1998 consisted of $860,000 due from
Microsource with interest payable at 10% per annum. Additionally, the
Company received warrants equal to 10% of the face value of the note
per month, at an exercise price of $0.10 per share. The note was
collateralized by the fixed assets of Microsource with principal and
interest due and payable on May 29, 1998. On May 18, 1998, the Company
exercised the warrants and received principal and interest payments on
the note as part of its acquisition of Microsource.
6 SELLING EXPENSES
Selling expenses consist primarily of commissions paid to various
marketing agencies. Commission expense totaled $2,051,000, $2,155,000,
and $2,014,000 in fiscal 1999, 1998, and 1997, respectively.
Advertising costs, which were expensed as incurred, totaled $558,000,
$431,000, and $425,000 for fiscal 1999, 1998, and 1997, respectively.
16
<PAGE> 11
7 SIGNIFICANT CUSTOMERS AND INDUSTRY SEGMENT INFORMATION
The Company has five reportable segments: Giga-tronics Instruments
division, ASCOR, Microsource, the Semiconductor Equipment Group and
Corporate. Giga-tronics Instruments division produces a broad line of
test and measurement equipment used in the development, test and
maintenance of wireless communications products and systems, flight
navigational equipment, electronic defense systems and automatic
testing systems. ASCOR designs, manufactures, and markets a line of
switching devices that link together many specific purpose instruments
that comprise automatic test systems. Microsource develops and
manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned
oscillators, filters and microwave synthesizers, which are used in a
wide variety of microwave instruments or devices. The Semiconductor
Equipment Group, which includes Viking Semiconductor Equipment, Inc.
and Ultracision, Inc., manufactures and markets optical inspection
equipment used to test semiconductor devices and automation equipment
for the test and inspection of silicon wafers. Corporate handles the
financing needs of each segment and lends funds to each segment as
required.
The accounting policies for the segments are the same as those
described in the "Summary of Significant Accounting Policies." The
Company evaluates the performance of its segments and allocates
resources to them based on earnings before income taxes (pre-tax income
(loss)). Segment net sales includes sales to external customers.
Segment pre-tax loss includes an allocation for corporate expenses,
amortization of goodwill, and interest expense from borrowings from
Corporate. Corporate expenses are allocated to the reportable segments
based principally on full time equivalent headcount. The interest
expense is charged at 3/4% over prime which is currently 8 1/2% for
cash required by each segment. Goodwill associated with acquisitions
are recorded as assets of the individual segments. Assets include
accounts receivable, inventories, land, building and equipment, cash,
deferred income taxes, prepaid expenses, goodwill and other long-term
assets. The Company accounts for inter-segment sales and transfers at
terms that allow a reasonable profit to the seller. During the periods
reported there were no inter-segment sales or transfers.
The Company's reportable operating segments are strategic business
units that offer different products and services. They are managed
separately because each business utilizes different technology and
requires different marketing strategies. All of the businesses except
for Giga-tronics Instruments were acquired. The Company's chief
operating decision maker is considered to be the Company's Chief
Executive Officer ("CEO"). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated
information about revenues and pre-tax income by operating segment. The
tables below present information for the fiscal years ended in 1999,
1998 and 1997:
March 27, 1999 (In thousands):
<TABLE>
<CAPTION>
Giga-tronics Semiconductor
Instruments ASCOR Microsource Group Corporate Total
------------ -------- ----------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 17,061 $ 6,484 $ 8,984 $ 5,107 $ -- $ 37,636
Interest income 35 10 -- 2 120 167
Interest expense -- 31 455 287 (727) 46
Amortization & depreciation 924 152 1,004 128 -- 2,208
Pre-tax income (loss) (805) 546 (777) (2,791) 821 (3,006)
Assets 10,130 4,426 11,495 5,763 1,445 33,259
</TABLE>
March 28, 1998 (In thousands):
<TABLE>
<CAPTION>
Giga-tronics Semiconductor
Instruments ASCOR Microsource Group Corporate Total
------------ -------- ----------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 20,441 $ 5,070 $ -- $ 11,302 $ -- $ 36,813
Interest income -- 40 -- 5 470 515
Interest expense 5 -- -- 183 (130) 58
Amortization & depreciation 1,110 163 -- 134 -- 1,407
Pre-tax income (loss) 1,626 62 -- (1,192) 600 1,096
Assets 12,778 3,425 -- 7,326 9,143 32,672
</TABLE>
March 29, 1997 (In thousands):
<TABLE>
<CAPTION>
Giga-tronics Semiconductor
Instruments ASCOR Microsource Group Corporate Total
------------ -------- ----------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 22,149 $ 6,740 $ -- $ 9,145 $ -- $ 38,034
Interest income -- 42 -- 28 571 641
Interest expense -- 31 -- 81 (4) 108
Amortization & depreciation 1,307 137 -- 155 -- 1,599
Pre-tax income (loss) 820 795 -- (142) 575 2,048
Assets 10,575 3,694 -- 6,597 12,752 33,618
</TABLE>
Sales to agencies of the U.S. Government and defense-related customers
accounted for 24%, 12%, and 28% of the Company's sales in fiscal 1999,
1998, and 1997, respectively. Export sales accounted for 20%, 28%, and
31% of the Company's sales in fiscal 1999, 1998, and 1997,
respectively. Export sales by geographical area are shown below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Years ended
(In thousands) March 27, 1999 March 28, 1998 March 29, 1997
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Americas $ 445 $ 345 $ 422
Europe 3,446 3,990 3,467
Asia 3,371 5,747 7,547
Rest of world 403 328 460
------- ------- -------
$ 7,665 $10,410 $11,896
======= ======= =======
</TABLE>
17
<PAGE> 12
8 EARNINGS (LOSS) PER SHARE
Shares used in per share computations for the years ended March 27,
1999, March 28, 1998 and March 29, 1997 are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Years ended
(In thousands except per share data) March 27, 1999 March 28, 1998 March 29, 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss) $ (1,858) $ 767 $1,509
=========== ========= ======
Weighted average:
Common shares outstanding 4,338 4,319 4,300
Common share equivalents -- 58 76
----------- --------- ------
Common shares assuming dilution 4,338 4,377 4,376
=========== ========= ======
Net earnings per share of common stock $ (0.43) $ 0.18 $ 0.35
=========== ========= ======
Net earnings per share of common stock
assuming dilution $ (0.43) $ 0.18 $ 0.34
=========== ========= ======
Stock options not included in computation 537 177 38
=========== ========= ======
</TABLE>
The number of stock options not included in the computation of diluted
EPS for the period ended March 27, 1999 is a result of the Company's
loss from continuing operations and therefore the options are
antidilutive. The number of stock options not included in the
computation of diluted EPS for the periods ending March 28, 1998 and
March 29, 1997 reflects stock options where the exercise prices were
greater than the average market price of the common shares and are
therefore antidilutive.
Dividends declared in fiscal year 1997 were $27,000. These dividends
were associated with Ultracision prior to the merger. Dividends paid
were $27,000 and $21,000 in 1998 and 1997, respectively, to Ultracision
shareholders.
9 INCOME TAXES
Following are the components of the provision (benefit) for income
taxes:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Years ended
(In thousands) March 27, 1999 March 28, 1998 March 29, 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ (720) $ 413 $ 761
State 4 20 239
------- ------- -------
(716) 433 1,000
Deferred:
Federal (205) 50 (325)
State (227) (154) (136)
------- ------- -------
(432) (104) (461)
Provision (benefit) for income taxes $(1,148) $ 329 $ 539
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
Years ended
(In thousands) March 27, 1999 March 28, 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Current tax assets, net $ 2,309 $ 2,092
Noncurrent tax asset (liabilities), net 169 (57)
------- -------
Net deferred taxes $ 2,478 $ 2,035
======= =======
Future state tax effect (238) (138)
Allowance for doubtful accounts 187 125
Fixed asset depreciation 188 (57)
Inventory reserves and additional costs capitalized 2,797 1,598
Deferred revenue 52 53
Accrued vacation 251 153
Accrued warranty 162 249
Other accrued liabilities 269 143
Net operating loss carryforward 6,576 --
Unrealized loss (gain) on equity securities (18) 9
Valuation allowances (7,748) (100)
------- -------
$ 2,478 $ 2,035
======= =======
---------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 13
Income tax expense (benefit) differs from the amounts computed by
applying the U.S. federal income tax rate to pre-tax income as a result
of the following:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
Years ended
(In thousands except percentages) March 27, 1999 March 28, 1998 March 29, 1997
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax (benefit) $(1,022) 34.0% $ 372 34.0% $ 697 34.0%
Beginning of year change in deferred
tax asset valuation allowance -- -- (85) (7.8) (272) (13.3)
State income tax, net of federal benefit (146) 4.9 (87) (8.0) 67 3.3
Nontax deductible expenses 14 (0.4) 210 19.2 64 3.1
Interest income exempt from federal tax (19) 0.6 (83) (7.5) (23) (1.1)
Tax credits (58) 1.9 (24) (2.2) (95) (4.6)
Goodwill and patent amortization 84 (2.8) -- -- -- --
Other (1) -- 26 2.3 101 4.9
-------------------- -------------------- --------------------
Effective income tax (benefit) $(1,148) 38.2% $ 329 30.0% $ 539 26.3%
==================== ==================== ====================
</TABLE>
The change in valuation allowance from March 28, 1998 to March 27, 1999
was $7,648,000. The change in valuation allowance from March 29, 1997
to March 28, 1998 was $272,000. The change from March 30, 1996 to March
29, 1997 was $453,000.
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized. The ultimate
realization of deferred tax assets is dependent upon generation of
future taxable income during the periods in which those temporary
differences became deductible. Management considers projected future
taxable income and tax planning strategies in making this assessment.
Based on the historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets become
deductible, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences, net
of valuation allowances as of March 27, 1999.
From the acquisition of Microsource, the Company acquired approximately
$7,600,000 of deferred tax assets which were fully offset by a
valuation allowance. Subsequent recognition of tax benefits relating to
the valuation allowance for deferred tax assets of Microsource will be
allocated to goodwill and the remainder will be allocated to income tax
benefit.
10 STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN The Company has established a stock option plan which
provides for the granting of up to 700,000 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. During fiscal 1999, the Company offered options holders
the opportunity to have outstanding options repriced to current fair
value, with the related vesting period starting over. The Company
cancelled and reissued (repriced) 405,250 options pursuant to the
repricing. Holders of options may be granted stock appreciation rights
(SAR's), 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. As of March 27, 1999, no SAR's have
been granted under the option plan. As of March 27, 1999, the total
number of shares of common stock available for issuance is 623,500. All
outstanding options have a term of five years. With the merger of
Ultracision, the Company also assumed 56,370 options granted under the
Ultracision option plans. These options vest 100% after two years and
have a term of five years.
Following is a summary of stock option activity:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Per Share Weighted
Average Fair Value Options Weighted Average
of Options Granted Exercisable Shares Exercise Price
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding as of March 30, 1996 48,350 172,932 $4.885
-------------------------------------------------------------------------------------------------------------------
Exercised (55,550) 4.945
Forfeited (51,750) 4.874
Granted $ 3.426 253,238 7.628
-------------------------------------------------------------------------------------------------------------------
Outstanding as of March 29, 1997 12,150 318,870 7.058
-------------------------------------------------------------------------------------------------------------------
Exercised (950) 4.000
Forfeited (16,250) 4.115
Granted $ 3.822 89,000 7.410
-------------------------------------------------------------------------------------------------------------------
Outstanding as of March 28, 1998 106,682 390,670 7.268
-------------------------------------------------------------------------------------------------------------------
Exercised (1,400) 2.660
Forfeited (561,456) 6.399
Granted $ 2.914 807,750 2.818
-------------------------------------------------------------------------------------------------------------------
Outstanding as of March 27, 1999 48,814 635,564 $2.391
-------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 14
In accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company is required to disclose the effects on net
earnings and earnings per share as if it had elected to use the fair
value method to account for employee stock-based compensation plans.
Had the Company recorded a charge for the fair value of options granted
consistent with SFAS No. 123, net earnings (loss) and net earnings
(loss) per share would have changed to the pro-forma amounts shown
below:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
Years ended
(In thousands except per share data) March 27, 1999 March 28, 1998 March 29, 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss)
As reported $ (1,858) $ 767 $ 1,509
Pro-forma (2,234) 404 1,361
Net earnings (loss) per share - basic
As reported (0.43) 0.18 0.35
Pro-forma (0.52) 0.09 0.32
Net earnings (loss) per share - diluted
As reported (0.43) 0.18 0.34
Pro-forma (0.52) 0.09 0.31
</TABLE>
Pro-forma net earnings (loss) reflects only options granted in 1999,
1998, 1997 and 1996. 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 April 1, 1995
is not considered.
For purposes of computing pro-forma net earnings (loss), the fair value
of each option grant and Employee Stock Purchase Plan purchase right is
estimated on the date of grant using the Black Scholes option pricing
model. The assumptions used to value the option grants and purchase
rights are stated below:
<TABLE>
<CAPTION>
Years ended March 27, 1999 March 28, 1998 March 29, 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expected life of options 4 years 4 years 3 to 4 years
Expected life of purchase rights 6 mos 6 mos 6 mos
Volatility 60% 60% 56%
Risk-free interest rate 4.53 to 5.66 5.50 to 6.25 5.11 to 6.60
Dividend yield zero zero zero
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding and Exercisable as of March 27, 1999, by Price Range
------------------------------------------------------------------------------------------------------------
Number Weighted Average Weighted Number Weighted
Range of of Options Remaining Average of Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.09 522,250 4.70 $ 2.094 -- $ --
From $2.12 to $4.00 89,314 3.75 2.686 30,814 2.693
$7.75 24,000 1.79 7.750 18,000 7.750
------- ------- ------- ------- -------
From $2.09 to $7.75 635,564 4.46 $ 2.391 48,814 $ 4.558
======= ======= ======= ======= =======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN Under the Company's Employee Stock
Purchase Plan (the Purchase Plan), employees meeting specific
employment qualifications are eligible to participate and can purchase
shares semi-annually through payroll deductions at the lower of 85% of
the fair market value of the stock at the commencement or end of the
offering period. The Purchase Plan permits eligible employees to
purchase common stock through payroll deductions for up to 10% of
qualified compensation. As of March 27, 1999, 86,636 shares remain
available for issuance under the Purchase Plan. The weighted average
fair value of the purchase rights granted in 1999 was $2.495.
401(K) PLAN The Company has established 401(k) plans which cover
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. Participants vest ratably in
Company contributions over a four-year period. Company contributions to
the plans for fiscal 1999, 1998, and 1997 were approximately $153,000,
$151,000, and $148,000, respectively.
20
<PAGE> 15
11 COMMITMENTS
The Company leases a 47,300 square foot facility located in San Ramon,
California, under a twelve-year lease (as amended) that commenced in
April 1994. The Company leased a 12,160 square foot facility located in
Fremont, California, under an operating lease agreement, which expired
on January 31, 1999. The Company will continue to rent this facility on
a month to month basis until the completion of a new facility. The new
facility will be approximately 18,600 square feet in Fremont,
California with a lease commencing upon completion of the building and
expiring five years thereafter. The Company leases a 20,400 square foot
facility located in Santa Clara, California, under a seven-year lease
that commenced in July 1995. The Company leases a 35,000 square foot
facility located in Santa Rosa, California, under a ten-year lease that
commenced in July 1993. These facilities accommodate all of the
Company's present operations. The Company also has acquired equipment
under capital and operating leases. The future minimum lease payments
for equipment leases and facilities are shown below and assume the new
facility lease will commence on July 1, 1999:
<TABLE>
<CAPTION>
---------------------------------------------------
Fiscal years
(In thousands)
---------------------------------------------------
<S> <C>
2000 $1,408
2001 1,595
2002 1,646
2003 1,218
2004 954
Thereafter 1,889
</TABLE>
The aggregate rental expense was $1,462,000, $959,000, and $937,000, in
fiscal 1999, 1998, and 1997, respectively.
As of March 27, 1999, Property and Equipment includes equipment under
capital lease of $502,000 and related accumulated depreciation of
$111,000. As of March 28, 1998 and March 29, 1997, equipment under
capital lease was not significant. The future minimum lease payments
for capital equipment leases are shown below.
<TABLE>
<CAPTION>
------------------------------------------------------------
Fiscal years
(In thousands)
------------------------------------------------------------
<S> <C>
2000 $178
2001 150
2002 105
2003 10
----
Total 443
Less interest costs 121
----
Present value of minimum lease payments 322
Less current portion 112
----
Long term portion of capital lease obligations $210
====
</TABLE>
12 LINE OF CREDIT
The Company signed an agreement with a bank for an unsecured revolving
line of credit loan for $7,000,000 with interest payable at prime rate
or at LIBOR plus 1 1/2 percent. This credit line has not been utilized
by the Company and expires July 31, 1999. The line of credit requires
the Company be in compliance with certain financial covenants as of
March 29, 1999. The Company was in violation of one such covenant,
which such violation has subsequently been waived by the bank.
21
<PAGE> 16
I N D E P E N D E N T A U D I T O R S' R E P O R T
The Board of Directors and Shareholders
Giga-tronics Incorporated:
We have audited the accompanying consolidated balance sheets of
Giga-tronics Incorporated and subsidiaries as of March 27, 1999 and March 28,
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for years ended March 27, 1999, March 28, 1998, and March
29, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Giga-tronics
Incorporated and subsidiaries as of March 27, 1999, and March 28, 1998, and the
results of their operations and their cash flows for the years ended March 27,
1999, March 28, 1998, and March 29, 1997, in conformity with generally accepted
accounting principles.
/s/
KPMG LLP
Mountain View, California
May 4, 1999
22
<PAGE> 17
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS:
- ------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) March 27, March 28, March 29, March 30, March 25,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net sales $ 37,636 $ 36,813 $ 38,031 $ 40,804 $ 33,980
Gross profit 11,534 15,789 14,627 15,916 11,988
Operating expenses 15,293 15,172 13,096 13,714 13,336
Interest income, net 121 457 533 221 157
Earnings (loss) before income taxes (3,006) 1,096 2,048 2,623 (1,170)
Net earnings (loss) (1,858) 767 1,509 2,193 (695)
Net earnings (loss) per share - basic $ (0.43) $ 0.18 $ 0.35 $ 0.52 $ (0.16)
Net earnings (loss) per share - diluted $ (0.43) $ 0.18 $ 0.34 $ 0.51 $ (0.16)
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL POSITION:
- ------------------------------------------------------------------------------------------------------------------------
(In thousands except ratio) March 27, March 28, March 29, March 30, March 25,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Current ratio 3.32 5.06 4.32 3.15 2.75
Working capital $ 18,021 $ 23,484 $ 22,692 $ 19,638 $ 16,080
Total assets 33,259 32,672 33,618 33,448 30,981
Shareholders' equity $ 24,710 $ 26,461 $ 25,654 $ 23,475 $ 21,131
Shares of common stock - basic 4,338 4,319 4,300 4,232 4,249
Shares of common stock - diluted 4,338 4,377 4,376 4,297 4,249
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE DATA:
- ---------------------------------------------------------------------------------------------------------------------------
March 27, March 28, March 29, March 30, March 25,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Percent of net sales
Gross profit 30.6 42.9 38.5 39.0 35.3
Operating expenses 40.6 41.2 34.4 33.6 39.2
Interest income, net 0.3 1.2 1.4 0.5 0.5
Earnings (loss) before income taxes (8.0) 3.0 5.4 6.4 (3.4)
Net earnings (loss) (4.9) 2.1 4.0 5.4 (2.0)
</TABLE>
23
<PAGE> 18
SELECTED FINANCIAL DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 1999
------------------------------------------------------------------------
First Second Third Fourth Year
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 8,677 $ 9,030 $ 11,343 $ 8,586 $ 37,636
Gross profit 3,313 2,834 3,690 1,697 11,534
Operating expenses 3,806 3,950 3,672 3,865 15,293
Interest income, net 112 6 2 1 121
Earnings (loss) before income taxes (377) (1,076) 47 (1,600) (3,006)
Net earnings (loss) (264) (753) 34 (875) (1,858)
Net earnings (loss) per share - basic $ (0.06) $ (0.17) $ 0.01 $ (0.20) $ (0.43)
Net earnings (loss) per share - diluted $ (0.06) $ (0.17) $ 0.01 $ (0.20) $ (0.43)
Equivalent shares of common stock - basic 4,326 4,331 4,344 4,350 4,338
Equivalent shares of common stock - diluted 4,326 4,331 4,362 4,350 4,338
</TABLE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 1998
------------------------------------------------------------------------
First Second Third Fourth Year
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 9,081 $ 9,574 $ 9,514 $ 8,644 $ 36,813
Gross profit 4,177 4,342 3,916 3,354 15,789
Operating expenses 3,659 3,913 3,913 3,687 15,172
Interest income, net 124 98 97 138 457
Earnings (loss) before income taxes 664 530 107 (205) 1,096
Net earnings (loss) 465 371 72 (141) 767
Net earnings (loss) per share - basic $ 0.11 $ 0.09 $ 0.02 $ (0.03) $ 0.18
Net earnings (loss) per share - diluted $ 0.11 $ 0.08 $ 0.02 $ (0.03) $ 0.18
Equivalent shares of common stock - basic 4,316 4,318 4,320 4,322 4,319
Equivalent shares of common stock - diluted 4,359 4,378 4,413 4,322 4,377
</TABLE>
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 28, 1998 exceeded 1,000. The table below
shows the high and low closing bid quotations for the common stock during the
indicated fiscal periods.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
1999 High Low 1998 High Low
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter (3/29-6/27) 7 4 3/4 (3/30-6/28) 8 1/2 6 9/16
Second quarter (6/28-9/26) 5 2 13/32 (6/29-9/27) 10 6 7/8
Third quarter (9/27-12/28) 3 1/4 2 (9/28-12/27) 11 3/8 7 3/4
Fourth quarter (12/29-3/27) 3 7/16 2 1/8 (12/28-3/28) 9 3/4 6 1/4
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000719274
<NAME> GIGA-TRONICS INCORPORATED
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-27-1999
<PERIOD-START> MAR-29-1998
<PERIOD-END> MAR-27-1999
<CASH> 2,686
<SECURITIES> 0
<RECEIVABLES> 6,869
<ALLOWANCES> 435
<INVENTORY> 13,249
<CURRENT-ASSETS> 25,786
<PP&E> 14,831
<DEPRECIATION> 9,179
<TOTAL-ASSETS> 33,259
<CURRENT-LIABILITIES> 7,765
<BONDS> 0
0
0
<COMMON> 11,621
<OTHER-SE> 13,089
<TOTAL-LIABILITY-AND-EQUITY> 33,259
<SALES> 37,636
<TOTAL-REVENUES> 37,636
<CGS> 26,102
<TOTAL-COSTS> 41,395
<OTHER-EXPENSES> (632)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (121)
<INCOME-PRETAX> (3,006)
<INCOME-TAX> (1,148)
<INCOME-CONTINUING> (1,858)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,858)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
