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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 25, 2000, 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
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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. [X]
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 May 9,
2000 was $32,948,912. For purposes of this determination only, directors and
officers of the Registrant have been assumed to be affiliates. There were a
total of 4,435,058 shares of the Registrant's Common Stock outstanding as of May
9, 2000.
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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
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PART II Registrant's ANNUAL REPORT TO
Items 5, 6, 7 and 8 SHAREHOLDERS for the fiscal year
ended March 25, 2000.
PART III Registrant's PROXY STATEMENT for
Items 10, 11, 12 and 13 its 2000 annual meeting of shareholders to
be filed no later than 120 days
after the close of the fiscal year
ended March 25, 2000.
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PART I
The forward-looking statements included in this report including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," "intends" and words of similar import, which reflect
management's best judgment based on factors currently known, involve risks and
uncertainties. Actual results could differ materially from those anticipated in
these forward-looking statements 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 Giga-tronics" in Item 1 below and
in Item 7, "Management's Discussion and Analysis", incorporated by reference on
pages 15 through 16 of the Company's 2000 Annual Report to Shareholders.
ITEM 1. BUSINESS
General
Giga-tronics Incorporated (Giga-tronics) includes operations of
Giga-tronics Instrument division, ASCOR, Inc. (ASCOR), DYMATIX, which is a joint
venture of Viking Semiconductor Equipment, Inc. (Viking) and 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.
Giga-tronics was incorporated on March 5, 1980, and its principal
executive offices are located at 4650 Norris Canyon Road, San Ramon, California,
and its telephone number at that location is (925) 328-4650.
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. 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. Products include
die attachments, automatic die sorters, tape and reel equipment, and wafer
inspection equipment.
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. Ultracision is a
manufacturer of automation equipment for the test and inspection of silicon
wafers. Ultracision also produces a line of probers for the testing and
inspection of silicon devices.
Effective May 18, 1998, Giga-tronics acquired Microsource. All the
outstanding shares of Microsource were exchanged for $1,500,000 plus contingent
future payments based on earnings from Microsource from 1998 to 2000.
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.
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Giga-tronics 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.
Industry Segments
The Company manufactures products used in test, measurement and
handling. The Company operates primarily in four operating segments;
Giga-tronics Instruments, ASCOR Inc., Microsource Inc. and DYMATIX (formerly the
Semiconductor Equipment Group).
Products and Markets
Giga-tronics Instruments
The Giga-tronics Instrument 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 Inc.
The ASCOR Inc. 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 Inc.
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.
DYMATIX (formerly the Semiconductor Equipment Group)
The DYMATIX segment 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, DYMATIX manufacturers 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.
Sources and Availability of Raw Materials and Components
Substantially all of the components required by Giga-tronics 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 effect on the financial condition of the Company.
Seasonal Nature of Business
The business of the Company is not seasonal.
Working Capital Practices
Giga-tronics 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 2001, even though the outlook for
defense-related orders continues to be soft. Defense-related agencies accounted
for 16% of net sales in fiscal 2000, 24% in fiscal 1999 and 12% in fiscal 1998.
Commercial business accounted for 84% of net sales in fiscal 2000, 76% in fiscal
1999 and 88% in fiscal 1998. 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
decrease of product orders, and the resulting decline in defense sales revenues,
is indicative of the worldwide decline in governmental defense spending. Any
further decline in defense orders as a consequence of the foregoing
circumstance, or otherwise, could harm the business, operating results,
financial condition and cash flows of Giga-tronics.
Backlog of Orders
On March 25, 2000, the Company's backlog of unfilled orders was
$34,128,000, compared to $17,792,000 at March 27, 1999. As of March 25, 2000,
there were approximately $10,201,000 unfilled orders that were scheduled for
shipment beyond a year and as of March 27, 1999 there were no unfilled orders
scheduled for shipment beyond one year. 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 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.
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 U.S. 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 are expected
to increase. The Company's instrument, switch, oscillator and synthesizer
products compete with Hewlett Packard, Anritsu, Racal, IFR and Rohde & Schwarz
while the DYMATIX 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.
Sales and Marketing
Giga-tronics Instruments, ASCOR Inc. and Microsource Inc. market their
products through various distributors and representatives to government and
commercial customers, although not necessarily through the same distributors and
representatives. DYMATIX markets its equipment through separate distributors and
sales representatives to semiconductor manufacturers.
Product Development
Products of the type manufactured by Giga-tronics 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 $4,180,000 in fiscal 2000,
$5,313,000 in fiscal 1999 and $6,200,000 in fiscal 1998. Activities included the
development of new products and the improvement of existing products. It is
management's intention to maintain or increase 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.
Giga-tronics expects to continue to make significant investments in
research and development. 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.
Manufacturing
The assembly and testing of Giga-tronics Instrument's microwave, RF and
power measurement products are done at its San Ramon facility. The assembly and
testing of ASCOR's switching and connecting devices are done at its Fremont
facility. The assembly and testing of Microsource's line of YIG (Yttrium, Iron,
Garnet) tuned oscillators, filters and microwave synthesizers are done at its
Santa Rosa facility. The assembly and testing of the DYMATIX products are 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.
Employees
As of March 25, 2000, Giga-tronics employed 301 individuals. Management
believes that the future success of the Company depends on its ability to
attract and retain skilled personnel. None of the
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Company's employees is represented by a labor union, and the Company considers
its employee relations to be good.
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 $14,468,000 in fiscal 2000, $7,665,000 in fiscal 1999 and
$10,410,000 in fiscal 1998.
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 Giga-tronics
Business climate may become volatile
Giga-tronics has a significant number of defense-related orders. If the
defense market should soften, shipments in the current year could decrease more
than current projected shipments with a concurrent decline in earnings. The
Company's commercial product backlog has a number of risks and uncertainties
such as the cancellation or deferral of orders. If this occurs, then shipments
in the current year could decrease more than current projected shipments
resulting in a decline in earnings. 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.
Giga-tronics' acquisitions may not be effectively integrated and their
integration may be costly
During fiscal years 2000, 1999 and 1998, Giga-tronics completed three
acquisitions: Microsource, Ultracision, and Viking. Giga-tronics 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 harm Giga-tronics' financial condition,
operating results and cash flow.
Giga-tronics has limited experience in the semiconductor manufacturing
equipment industry
Prior to its 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 the necessity of coordinating geographically separate organizations
and 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.
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Giga-tronics' markets involve rapidly changing technology and standards
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 application and in part to
develop, manufacture and successfully introduce new products and product lines
with improved capabilities and to 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.
Giga-tronics' common stock price is volatile
The market price of the Company's 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 periods. 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 prices.
ITEM 2. PROPERTIES
As of March 25, 2000, 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
18,756 square feet in Fremont, California, under a lease that expires on June
30, 2006.
Microsource's marketing, sales and engineering offices and manufacturing
facilities for its YIG tuned oscillators, filters and microwave synthesizers
are located in an approximately 49,090 square foot facility in Santa Rosa,
California, which the Company occupies under a lease expiring May 31, 2013.
The DYMATIX 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.
The Company believes that its facilities are adequate for its business
activities.
ITEM 3. LEGAL PROCEEDINGS
As of March 25, 2000, the Company has no material pending legal
proceedings. From time to time, Giga-tronics is involved in various disputes and
litigation matters that arise in the ordinary course of business.
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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 25, 2000.
Executive Officers of the Company are listed on page 11 of this Form
10-K.
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PART II
The Registrant's Annual Report to Shareholders for the year ended March
25, 2000, is filed as Exhibit 13.0 with the Form 10-K (the "2000 Annual
Report"). The information responsive to Items 5, 6, 7 and 8, which is contained
in the 2000 Annual Report, is specifically incorporated by reference in this
Form 10-K. With the exception of such information, the 2000 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 2000 Annual Report, see "Common Stock
Market Prices" which appears on page 31.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference from the 2000 Annual Report, see "Selected
Financial Data" which appears beginning on page 30.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Incorporated by reference from the 2000 Annual Report, see "Management's
Discussion and Analysis" which appears on pages 15 to 16.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Financial instruments that expose the company to market risk are cash and
short-term investments. The investments are held in recognized financial
instruments and have limited market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following items which appear in the 2000 Annual Report are incorporated by
reference:
Consolidated Balance Sheets...................................page 17
Consolidated Statements of Operations.........................page 18
Consolidated Statements of Shareholders' Equity...............page 19
Consolidated Statements of Cash Flows.........................page 20
Notes to Consolidated Financial Statements....................page 21 - 28
Independent Auditors' Report..................................page 29
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 its 2000
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 25, 2000.
GIGA-TRONICS INCORPORATED
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
George H. Bruns, Jr. 81 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 since
October 1997. Before joining Giga-tronics, 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., a
NASDAQ-traded software company.
James R. Koehn 59 President, Giga-tronics Instrument Division since May 1998. From
January 1995 to April 1998, Mr. Koehn served as President of Marconi
Instruments, Inc. of Fort Worth, TX. Prior to December 1994, he was
a Vice President at Tektronix Inc.
Jeffrey T. Lum 54 President, ASCOR, Inc. since November 1987. Mr. Lum founded ASCOR
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 49 President, Ultracision, Inc. and Viking Semiconductor Equipment Inc.
since April 1999. As a result of a joint venture between
Ultracision, Inc. and Viking Semiconductor Equipment Inc. he is also
the President of DYMATIX since inception. 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. Mar Engineering is
a manufacturer of precision machined components for the aerospace
industry.
Robert A. Smith 59 President of Microsource, Inc. since October 12, 1998. Before
joining the Company, Mr. Smith was the Executive Vice President of
Haskel International Inc. and the President of Industrial Products
Group from 1995 to 1998. Haskel International is a manufacturer of
high pressure pumping systems and components.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Company's compensation of its executive officers
is set forth under the heading "Executive Compensation" of the Company's Proxy
Statement for its 2000 Annual Meeting of
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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 25,
2000.
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 its Proxy Statement for the 2000 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 25,
2000.
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>
2000 Annual Report
to Shareholders
Financial Statements (Page No.)
- -------------------- ------------------
<S> <C>
Consolidated Balance Sheets - 17
As of March 25, 2000 and
March 27, 1999
Consolidated Statements of Operations - 18
Years Ended March 25, 2000,
March 27, 1999 and March 28, 1998
Consolidated Statements of Shareholders' Equity - 19
Years Ended March 25, 2000,
March 27, 1999 and March 28, 1998
Consolidated Statements of Cash Flows - 20
Years Ended March 25, 2000,
March 27, 1999 and March 28, 1998
Notes to Consolidated Financial Statements 21 - 28
Independent Auditors' Report 29
Form 10-K
(a)(2) Schedules (Page No.)
------------------
Report on Financial Statement Schedule and 16
Consent of Independent Auditors
Schedule II - Valuation and Qualifying 17
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 2000 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 pages 18 and 19
of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 25,
2000.
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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>
<CAPTION>
<S> <C> <C>
/s/ GEORGE H. BRUNS, JR. Chairman of the Board 5/19/00
- ---------------------------- and Chief Executive Officer ----------------------------
George H. Bruns, Jr. (Principal Executive Officer) (Date)
/s/ MARK H. COSMEZ II Vice President, Finance 5/22/00
- ---------------------------- and Chief Financial Officer ----------------------------
Mark H. Cosmez II (Principal Accounting Officer) (Date)
/s/ JAMES A. COLE Director 5/22/00
- ---------------------------- ----------------------------
James A. Cole (Date)
/s/ ROBERT C. WILSON Director 5/22/00
- ---------------------------- ----------------------------
Robert C. Wilson (Date)
/s/ WILLIAM E. WILSON Director 5/22/00
- ---------------------------- ----------------------------
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 2, 2000 included the
related financial statement schedule for the years ended March 25, 2000, March
27, 1999, and March 28, 1998, included 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 (Nos. 333-50091) on
Form S-3 of Giga-tronics Incorporated of our reports included herein and
incorporated herein by reference.
/s/ KPMG LLP
----------------------------
KPMG LLP
Mountain View, California
May 23, 2000
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<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 25, 2000
Allowances deducted from assets:
Accounts receivable:
For doubtful accounts(1) 434,613 36,624 217,347 253,890
Total 434,613 36,624 217,347 253,890
============ ============ ============ ============
Year ended March 27, 1999
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
============ ============ ============ ============
</TABLE>
(1) Allowance for accounts receivable collection exposure.
17
<PAGE> 18
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 as Exhibit 2.1 to Form 10-K for the fiscal year
ended March 30, 1996 and incorporated herein by reference.
2.2 Letter of Agreement between Giga-tronics Incorporated and ASCOR, Inc.,
dated May 20, 1996, as previously filed as Exhibit 2.2 to Form 10-K
for the fiscal year ended March 30, 1996 and incorporated herein by
reference.
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 as Exhibit 2.3 to
Form 10-K for the fiscal year ended March 29, 1997 and incorporated
herein by reference.
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 the Registrant, as amended, previously
filed as Exhibit 3.1 to Form 10-K for the fiscal year ended March 27,
1999 and incorporated herein by reference.
3.2 By-laws of Registrant, as amended, previously filed as Exhibit 3.2 to
Form 10-K for the fiscal year ended March 28, 1998, and incorporated
herein by reference.
4.1 Rights Agreement dated as of November 6, 1998 between Giga-tronics
Incorporated and ChaseMellon Shareholder Services LLC, as previously
filed on November 9, 1998 as Exhibit 4.1 to Form 8-K and incorporated
herein by reference.
10.1 1990 Restated Stock Option Plan and form of Incentive Stock Option
Agreement, previously filed on November 3, 1997 as Exhibit 99.1 to
Form S-8 (33-39403) and incorporated herein by reference.
10.2 Standard form Indemnification Agreement for Directors and Officers,
previously filed on June 21, 1999, as Exhibit 10.2 to Form 10-K for
the fiscal year ended March 27, 1999 and incorporated herein by
reference.
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 Exhibit 10.12 to Form 10-K for the fiscal year
ended March 26, 1994 and incorporated herein by reference.
10.4 Employee Stock Purchase Plan, previously filed on August 29, 1997, as
Exhibit 99.1 to Form S-8 (33-34719), and incorporated herein by
reference.
10.5 Ultracision, Inc. 1986 Stock Option Plan, filed on March 30, 1998 as
Exhibit 99.1 to Form S-8 (33-48869), incorporated herein by reference.
10.6 Ultracision, Inc. 1987 Stock Option Plan, filed on March 30, 1998 as
Exhibit 99.2 to Form S-8 (33-48869), incorporated herein by reference.
18
<PAGE> 19
10.7 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 (33-48869) and incorporated
herein by reference.
13.0* 2000 Annual Report to Shareholders.
23.0* Report on Financial Statement Schedule and Consent of Independent
Auditors. (See page 16 of this Annual Report on Form 10-K.)
27.0* Financial Data Schedule
* Attached as exhibits to this Form 10-K.
19
<PAGE> 1
EXHIBIT 13.0
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS FOR FISCAL 2000 AS COMPARED TO 1999
New orders received in 2000 were $64,013,000, an increase of 74% from
$36,786,000 in 1999. At year end 2000, the Company's backlog of unfilled orders
was $34,128,000, compared to $17,792,000 at the end of 1999. As of year end
2000, there were approximately $10,201,000 unfilled orders that were scheduled
for shipment beyond a year and as of year end 1999 there were no unfilled orders
scheduled for shipment beyond a year. Primarily, the increase in backlog is
attributable to strong order levels at Microsource and at the Giga-tronics
Instruments division.
Net sales for 2000 were $47,577,000, a 26% increase from $37,636,000 in
1999. Every segment of the business improved revenue during the fiscal year. In
fiscal 2000, Microsource increased revenues 68% or $6,085,000, DYMATIX (formerly
the Semiconductor Equipment Group) improved 43% or $2,180,000, in revenue, while
Giga-tronics Instruments increased 8% or $1,455,000, in sales and ASCOR improved
3% or $221,000, in sales.
Cost of sales increased 22% in 2000 to $31,767,000 from $26,102,000 in
1999. The increase in fiscal 2000 is attributable to increased shipments of
products during the fiscal year coupled with higher costs for labor and material
for the products shipped.
Operating expenses declined 6% in 2000 over 1999. Product development
costs declined $1,133,000 in fiscal 2000 to $4,180,000 as the development of new
products returned to previous levels. Selling, general and administrative
expenses increased $237,000 to $9,655,000 in 2000 due to higher commissions on
higher revenues. Amortization of intangibles decreased $82,000 to $480,000 as a
result of reduced amortization of patents and licenses.
Other income decreased in fiscal 2000 primarily due to the fiscal 1999
gain from the sale of a surplus building following facilities consolidation at
DYMATIX for which there was no corresponding sale in fiscal 2000. Net interest
income in 2000 decreased 51% from 1999 due to lower average cash available for
investment. The average cash decline resulted principally from low cash level at
the beginning of the year. The provision for income taxes in 2000 was $494,000,
or 30%, of the pre-tax earnings.
Giga-tronics recorded net earnings of $1,139,000, or $0.24 per share, in
2000 versus a loss of $1,858,000, or $0.43 per share, in 1999. The improvement
in 2000 earnings was due to the Company's higher sales levels in 2000 as
compared to 1999.
RESULTS OF OPERATIONS FOR FISCAL 1999 AS COMPARED TO 1998
Giga-tronics acquired Microsource, Inc., a manufacturer of YIG
oscillators and communications related synthesizers, on May 18, 1998 in a
purchase transaction. Performance from that date through March 27, 1999 is
included in the Company's operating results. Management believes this
acquisition positioned Giga-tronics 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 in 1998. 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.
The increase in backlog is primarily 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 DYMATIX (formerly the Semiconductor Equipment Group) as
well as Giga-tronics Instrument products. In 1999, DYMATIX sales declined $6.2
million. Revenues for Giga-tronics' semiconductor product lines were impacted by
the substantial downturn of the semiconductor industry together with the severe
economic problems in Asia. The Giga-tronics Instrument sales reductions 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 began 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.
15
<PAGE> 2
Other income increased primarily due to the gain from the sale of a
surplus building following facilities consolidation of the Company's
semiconductor equipment operations. 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.
FINANCIAL CONDITION AND LIQUIDITY
As of March 25, 2000, Giga-tronics had $3,455,000 in cash, cash
equivalents, and investments, compared to $2,686,000 as of March 27, 1999 and
$10,335,000 as of March 28, 1998. Cash provided by operations amounted to
$2,065,000 in 2000, compared to cash used by operations of $2,365,000 in 1999,
and $1,099,000 in 1998. Cash provided by operations in 2000 is attributed to
operating income in the year. In 1999, 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.
Giga-tronics continues to maintain a strong financial position, with
working capital at year end of $21,645,000 compared to $18,021,000 in 1999 and
$23,484,000 in 1998. The Company's current ratio of 3.2 decreased from the 1999
and 1998 current ratio of 3.3 and 5.1, respectively. The increase in working
capital is primarily a result of the increased operations of the Company.
Additions to property and equipment were $1,361,000 in 2000, compared to
$953,000 in 1999 and $779,000 in 1998. Fiscal 2000 spending reflects continuing
investments to support new product development, increased productivity, and
improved product quality. Other cash inflows in 2000 consists of $174,000 of
common stock in connection with the exercise of stock options. 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 were 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. It is 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
BUSINESS CLIMATE MAY BECOME VOLATILE
Giga-tronics' has a significant number of defense-related orders. If the
defense market should decline, shipments in the current year could be less than
anticipated and cause a decrease in earnings. The Company's commercial product
backlog has a number of risks and uncertainties such as the cancellation or
deferral of orders. If this occurs, then shipments in the current year could
fall short of plan resulting in a decline in earnings.
GIGA-TRONICS ACQUISITIONS MAY NOT BE EFFECTIVELY INTEGRATED AND THEIR
INTEGRATION MAY BE COSTLY
As part of its business strategy, Giga-tronics intends to broaden its
product lines and expand its markets, in part through the acquisition of other
business entities. In fiscal 1999 the Company acquired Microsource, Inc. in a
transaction accounted for as a purchase. Giga-tonics is subject to various risks
in connection with this 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 management to maximize the financial and strategic position of the
Company by the successful incorporation of acquired technology and rights into
its 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 Giga-tronics will
or will not occur, that if an acquisition does occur, that it will not
materially harm 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 common stock. Any
such issuance may result in dilution to all Giga-tronics shareholders, and sales
of such shares in significant volume by the shareholders of acquired companies
may depress the price of its 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 2000 Report
10-K under "Item 1. Business" and "Certain Factors Which May Affect Future
Operation Or An Investment In Giga-tronics" as filed with the Securities and
Exchange Commission.
<PAGE> 3
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In thousands except share data) March 25, 2000 March 27, 1999
-------------- --------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 3,455 $ 2,686
Trade accounts receivable, net of allowance 9,194 6,434
of $253 and $435 respectively
Inventories, net 14,692 13,249
Income tax receivable -- 725
Prepaid expenses 444 383
Deferred income taxes 3,570 2,309
-------------- --------------
TOTAL CURRENT ASSETS 31,355 25,786
Property and equipment
Leasehold improvements 382 311
Machinery and equipment 14,673 13,460
Office furniture and fixtures 1,023 1,060
-------------- --------------
Property and equipment, gross cost 16,078 14,831
Less accumulated depreciation and amortization 10,678 9,179
-------------- --------------
PROPERTY AND EQUIPMENT, NET 5,400 5,652
PATENTS AND LICENSES 112 349
GOODWILL, NET 564 1,194
DEFERRED INCOME TAXES -- 169
OTHER ASSETS 95 109
-------------- --------------
TOTAL ASSETS $ 37,526 $ 33,259
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,065 $ 3,022
Accrued commissions 625 369
Accrued payroll and benefits 1,638 1,346
Accrued warranty 553 467
Customer advances 1,536 1,648
Obligation under capital lease 118 112
Other current liabilities 1,175 801
-------------- --------------
TOTAL CURRENT LIABILITIES 9,710 7,765
OBLIGATIONS UNDER CAPITAL LEASE, NET OF CURRENT PORTION 127 210
DEFERRED INCOME TAXES 1,011 --
DEFERRED RENT 529 574
-------------- --------------
TOTAL LIABILITIES 11,377 8,549
SHAREHOLDERS' EQUITY
Preferred stock of no par value
Authorized 1,000,000 shares; no shares outstanding
at March 25, 2000 and March 27, 1999 -- --
Common stock of no par value;
Authorized 40,000,000 shares; 4,431,008 shares at
March 25, 2000 and 4,361,902 shares at
March 27, 1999 issued and outstanding 11,921 11,621
Retained earnings 14,228 13,089
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 26,149 24,710
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 37,526 $ 33,259
============== ==============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
17
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended March 25, March 27, March 28,
(In thousands except share data) 2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
NET SALES $47,577 $37,636 $36,813
Cost of sales 31,767 26,102 21,024
------- ------- -------
GROSS PROFIT 15,810 11,534 15,789
Product development 4,180 5,313 6,200
Selling, general and administrative 9,655 9,418 8,537
Amortization of intangibles 480 562 435
------- ------- -------
Operating expenses 14,315 15,293 15,172
------- ------- -------
OPERATING INCOME (LOSS) 1,495 (3,759) 617
Other income (expense) 79 632 22
Interest income, net 59 121 457
------- ------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES 1,633 (3,006) 1,096
Provision (benefit) for income taxes 494 (1,148) 329
------- ------- -------
NET EARNINGS (LOSS) $ 1,139 $(1,858) $ 767
======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE -- BASIC $ 0.26 $ (0.43) $ 0.18
======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE -- DILUTED $ 0.24 $ (0.43) $ 0.18
======= ======= =======
WEIGHTED AVERAGE BASIC COMMON SHARES
OUTSTANDING 4,379 4,338 4,319
------- ------- -------
WEIGHTED AVERAGE DILUTED COMMON SHARES
OUTSTANDING 4,693 4,338 4,377
------- ------- -------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
18
<PAGE> 5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except share data)
<TABLE>
<CAPTION>
Other
Common Stock Comprehensive Comprehensive Retained
Shares Amount Income (Loss) Income (loss) Earnings Total
----------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 29, 1997 4,316,188 $ 11,463 $ -- $ 11 $ 14,180 $ 25,654
Comprehensive Income
Net earnings -- -- 767 -- 767 767
Unrealized gain 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 Loss -- -- (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
Comprehensive Income
Net Earnings -- -- 1,139 -- 1,139 1,139
============
Stock issuance under stock
Option plans 69,106 174 -- -- -- 174
Tax benefit associated with exercise
of stock options -- 126 -- -- -- 126
----------------------------------------------------------- ----------------------
BALANCE AT MARCH 25, 2000 4,431,008 $ 11,921 $ -- $ -- $ 14,228 $ 26,149
=========================================================== ======================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
19
<PAGE> 6
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------
Years ended
(In thousands) March 25, 2000 March 27, 1999 March 28, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS PROVIDED FROM OPERATIONS:
Net earnings (loss) $ 1,139 $ (1,858) $ 767
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operations:
Provision for bad debt (182) 142 (31)
Depreciation and amortization 2,111 2,208 1,407
Tax benefit from employee stock options 126 -- --
Tax benefit of pre acquisition NOL utilization 394 -- --
Gain on sales of fixed assets (20) (521) (3)
Deferred income taxes (81) (443) (120)
Changes in operating assets and liabilities:
Trade accounts receivable (2,578) 1,738 (2,337)
Inventories (1,443) (1,710) 196
Prepaid expenses (61) 74 (522)
Accounts payable 1,043 (622) 204
Accrued commissions 256 (180) 206
Accrued payroll and benefits 292 67 (118)
Accrued warranty 86 (269) (67)
Accrued other expenses 535 (209) (212)
Customer advances (112) (968) (469)
Income taxes receivable/payable 560 186 --
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) OPERATIONS 2,065 (2,365) (1,099)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments -- (2,268) (36,294)
Maturities of investments -- 8,010 37,751
Proceeds from sale of property and equipment 7 1,291 --
Additions to property and equipment (1,361) (953) (779)
Payment for purchase of Microsource, including (8) (605) --
transaction costs
Advances to Microsource -- (940) --
Issuance of notes receivable -- -- (860)
Other assets 14 (17) 57
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,348) 4,518 (125)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 174 89 69
Dividends paid -- -- (27)
Payment on line of credit -- (1,500) (189)
Payment on notes payable and other long term liabilities (45) (2,497) (985)
Payments on capital lease and other long term obligations (77) (170) (32)
-------------- -------------- --------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 52 (4,078) (1,164)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 769 (1,925) (2,388)
-------------- -------------- --------------
BEGINNING CASH AND CASH EQUIVALENTS 2,686 4,611 6,999
ENDING CASH AND CASH EQUIVALENTS 3,455 2,686 4,611
============== ============== ==============
Supplementary disclosure of cash flow information:
Cash paid for income taxes $ 86 $ 7 $ 951
Cash paid for interest -- -- 58
Non-cash investing and financing activities:
Purchases under capital lease obligations 50 -- --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
20
<PAGE> 7
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1 BUSINESS COMBINATIONS
On May 18, 1998, Giga-tronics Incorporated acquired Microsource, Inc.
(Microsource) of Santa Rosa, California. Microsource develops and
manufactures a broad line of YIG (Yttrium, Iron, Garnet) 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).
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>
<CAPTION>
<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>
The purchase price was subsequently adjusted to give effect to the
contingent payment of $8,000, net paid to Microsource shareholders
based on the subsidiary's fiscal year 2000 operating results. In
addition, the purchase price allocation was adjusted to give effect
in fiscal year 2000 to the recognition of deferred tax assets of
$394,000 for which no value was assigned at the date of the
acquisition.
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) of 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
21
<PAGE> 8
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Fiscal Year The Company's financial reporting year consists of either
a 52 week or 53 week period ending on the last Saturday of the month
of March. Fiscal years 2000, 1999 and 1998 each contained 52 weeks.
Revenue Recognition Revenues are recognized when the earnings process
has been completed and products are shipped or when services are
performed. 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.
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 equipment and office fixtures.
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 leases, 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 25, 2000 and March 27, 1999 accumulated amortization on patents
and licenses was $2,084,000 and $1,848,000, respectively.
Goodwill Goodwill is being amortized using the straight-line method
over a period of five years. As of March 25, 2000 and March 27, 1999
accumulated amortization on goodwill was $1,725,000 and $1,481,000
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 technological feasibility in the form
of a working model has been established. To date, software
development has been concurrent with the establishment of
technological 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.
<PAGE> 9
Financial Instruments and Concentration of Credit Risk Financial
instruments, which potentially subject the Company to credit risk as
of March 25, 2000, consist principally of cash, cash equivalents and
trade accounts receivable. The Company's cash equivalents consist
principally of money market funds and certificates of deposits which
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 and
accounts payable approximates fair market value because of the short
maturity of these financial instruments.
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 in the first quarter of fiscal 2002. Management
does not believe the adoption of SFAS No. 133 will have a material
effect on the financial position or operations of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101. SAB 101 presents certain of the SEC's staff views on applying
generally accepted accounting principles for revenue recognition in
financial statements. The Company has not determined the impact
implementation of SAB No. 101 will have on its consolidated results
of operations.
The FASB issued Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of APB
No. 25" (FIN No. 44) in March 2000. The interpretation clarifies the
application of Opinion 25 for only certain issues such as the
following: (a) the definition of employee for the purposes of
applying Opinion 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence
of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. The Company must adopt
FIN No. 44 by July 1, 2000. The Company does not believe that the
interpretation will have a material effect on its consolidated
results of operations, financial position, or liquidity.
3 CASH AND CASH EQUIVALENTS
Cash and cash equivalents consisted of the following at March 25,
2000 and March 27, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
March 25, 2000 Cash and Cash Equivalents
(In thousands) -------------------------
Amortized Fair
Cost Value
<S> <C> <C>
Cash $ 1,067 $ 1,067
Money market funds 1,933 1,933
Other marketable securities 455 455
-------------- --------------
Total debt securities $ 3,455 $ 3,455
============== ==============
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
March 27, 1999 Cash and Cash Equivalents
(In thousands) -------------------------
Amortized Fair
Cost Value
<S> <C> <C>
Cash $ 1,093 $ 1,093
Money market funds 1,593 1,593
-------------- --------------
Total debt securities $ 2,686 $ 2,686
============== ==============
</TABLE>
4 INVENTORIES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Years ended
(In thousands) March 25, 2000 March 27, 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 8,095 $ 6,386
Work-in-progress 5,746 6,124
Finished goods 294 305
Loaned Inventory 557 434
-------------- --------------
$ 14,692 $ 13,249
============== ==============
</TABLE>
<PAGE> 10
5 SELLING EXPENSES
Selling expenses consist primarily of commissions paid to various
marketing agencies. Commission expense totaled $2,360,000,
$2,051,000, and $2,155,000 in fiscal 2000, 1999, and 1998,
respectively. Advertising costs which are expensed as incurred
totaled $511,000, $558,000, and $431,000 for fiscal 2000, 1999, and
1998, respectively.
6 SIGNIFICANT CUSTOMERS AND INDUSTRY SEGMENT INFORMATION
The Company has five reportable segments: Giga-tronics Instruments
Division, ASCOR, Microsource, DYMATIX, and Corporate. Giga-tronics
Instrument 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. DYMATIX, 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 prime which is
currently 9 % for cash required by each segment. Goodwill associated
with acquisitions are recorded as assets of the individual segments.
Assets include accounts receivable, inventories, 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 significant 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
2000, 1999 and 1998:
March 25, 2000 (In thousands):
<TABLE>
<CAPTION>
Giga-tronics
Instruments ASCOR Microsource DYMATIX Corporate Total
----------- ----- ----------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue $ 18,516 $ 6,705 $ 15,069 $ 7,287 $ -- $ 47,577
Interest income -- 34 1 -- 70 105
Interest expense (25) (15) (634) (329) 957 (46)
Amortization & depreciation 699 153 1,164 95 -- 2,111
Pre-tax income 361 53 132 168 919 1,633
Assets 13,546 5,299 11,874 5,396 1,411 37,526
</TABLE>
March 27, 1999 (In thousands):
<TABLE>
<CAPTION>
Giga-tronics
Instruments ASCOR Microsource DYMATIX 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>
<PAGE> 11
March 28, 1998 (In thousands):
<TABLE>
<CAPTION>
Giga-tronics
Instruments ASCOR Microsource DYMATIX 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>
The Company's Giga-tronics Instruments, ASCOR, and Microsource
segments sell to agencies of the U.S. Government and U.S.
defense-related customers. In fiscal 2000, 1999, and 1998 U.S.
Government and U.S. defense-related customers accounted for 16%, 24%,
and 12% of sales, respectively.
Export sales accounted for 30%, 20%, and 28% of the Company's sales
in fiscal 2000, 1999, and 1998, respectively. Export sales by
geographical area are shown below:
<TABLE>
<CAPTION>
Years ended
(In thousands) March 25, 2000 March 27, 1999 March 28, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Americas $ 1,989 $ 445 $ 345
Europe 6,448 3,446 3,990
Asia 4,981 3,371 5,747
Rest of world 1,050 403 328
-------------- -------------- --------------
$ 14,468 $ 7,665 $ 10,410
============== ============== ==============
</TABLE>
7 EARNINGS (LOSS) PER SHARE
Shares used in per share computations for the years ended March 25,
2000, March 27, 1999, and March 28, 1998 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years ended
(In thousands except per share data) March 25, 2000 March 27, 1999 March 28, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net earnings (loss) $ 1,139 $ (1,858) $ 767
============== ============== ==============
Weighted average:
Common shares outstanding 4,379 4,338 4,319
Common share equivalents 314 -- 58
-------------- -------------- --------------
Common shares assuming dilution 4,693 4,338 4,377
============== ============== ==============
Net earnings per share of common stock $ 0.26 $ (0.43) $ 0.18
============== ============== ==============
Net earnings per share of common stock assuming
dilution $ 0.24 $ (0.43) $ 0.18
============== ============== ==============
Stock options not included in computation 24 537 177
============== ============== ==============
</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 25, 2000 and
March 28, 1998 reflects stock options where the exercise prices were
greater than the average market price of the common shares and are
therefore antidilutive.
8 INCOME TAXES
Following are the components of the provision (benefit) for income
taxes:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years ended
(In thousands) March 25, 2000 March 27, 1999 March 28, 1998
Current:
<S> <C> <C> <C>
Federal $ 46 $ (720) $ 413
State 7 4 20
-------------- -------------- --------------
53 (716) 433
Deferred:
Federal (180) (205) 50
State 100 (227) (154)
-------------- -------------- --------------
(80) (432) (104)
Charge in lieu of taxes attributable to employer stock
option plans 127 -- --
Goodwill, for initial recognition of acquired tax
benefits that previously were included in the valuation
reserve 394 -- --
-------------- -------------- --------------
Provision (benefit) for income taxes $ 494 $ (1,148) $ 329
============== ============== ==============
</TABLE>
<PAGE> 12
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 25, 2000 March 27, 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Current tax assets, net $ 3,570 $ 2,309
Noncurrent tax asset (liabilities), net (1,011) 169
-------------- --------------
Net deferred taxes $ 2,559 $ 2,478
============== ==============
Future state tax effect (188) (238)
Allowance for doubtful accounts 196 187
Fixed asset depreciation (1,116) 188
Inventory reserves and additional costs capitalized 2,747 2,797
Deferred revenue 19 52
Accrued vacation 268 251
Accrued warranty 237 162
Other accrued liabilities 330 269
Net operating loss carryforward 6,452 6,576
Unrealized loss (gain) on equity securities -- (18)
Income tax credits 501 --
Valuation allowances (6,887) (7,748)
-------------- --------------
$ 2,559 $ 2,478
============== ==============
</TABLE>
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 25, 2000 March 27, 1999 March 28, 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax (benefit) $ 555 34.0% $(1,022) 34.0% $ 372 34.0%
Beginning of year change in deferred
Tax asset valuation allowance (55) (3.4) -- -- (85) (7.8)
State income tax, net of federal benefit 57 3.5 (146) 4.9 (87) (8.0)
Nontax deductible expenses 6 0.4 14 (0.4) 210 19.2
Interest income exempt from federal tax (51) (3.1) (19) 0.6 (83) (7.5)
Tax credits (98) (6.0) (58) 1.9 (24) (2.2)
Goodwill and patent amortization 88 5.4 84 (2.8) -- --
Other (8) (0.5) (1) -- 26 2.3
------- ------- ------- ------- ------- -------
Effective income tax (benefit) $ 494 30.3% $(1,148) 38.2% $ 329 30.0%
======= ======= ======= ======= ======= =======
</TABLE>
The change in valuation allowance from March 27, 1999 to March 25,
2000 was $860,000. 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 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 period in which those
temporary differences become 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 more
likely than not
<PAGE> 13
that the Company will realize benefits of these deductible
differences, net of valuation allowances as of March 25, 2000.
During the year ended March 27, 1999, the Company acquired
approximately $7,600,000 of deferred tax assets in the acquisition of
Microsource, which was 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 to income tax benefit. At March 25, 2000,
goodwill was reduced by the $394,000 for the tax benefits realized
from the Microsource deferred tax assets.
During the year ended March 25, 2000, disqualifying employee stock
option dispositions resulted in an income tax deduction to the
Company of approximately $269,000 and a tax benefit of approximately
$127,000. The tax benefit has been reflected as an increase to the
Company's paid-in-capital in the accompanying financial statements.
9 STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
Stock Option Plan The Company has established a stock option plan
which provides for the granting of options for up to 700,000 shares
of common stock at 100% of fair market value at the date of grant,
with each grant requiring approval by the Board of Directors of the
Company. Options granted vest in one or more installments as set
forth in the relevant 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
December 1998, 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 25, 2000, no SAR's have
been granted under the option plan. As of March 25, 2000, the total
number of shares of common stock available for issuance is 608,312
under the Giga-tronics stock option plan and 17,048 under the prior
Ultracision stock option plan. All outstanding options have a term of
five years. With the merger of one of the Company's subsidiaries, the
Company also assumed 56,370 options granted under its existing option
plan. 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 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
- -------------------------------- -------------- -------------- -------------- --------------
Exercised (28,204) 2.515
Forfeited (168,875) 2.118
Granted $ 2.613 115,500 2.613
- -------------------------------- -------------- -------------- -------------- --------------
Outstanding as of March 25, 2000 131,424 553,985 $ 2.514
- -------------------------------- -------------- -------------- -------------- --------------
</TABLE>
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 been changed to the pro-forma
(unaudited) amounts shown below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Years ended
(In thousands except per share data) March 25, 2000 March 27, 1999 March 28, 1998
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss)
<S> <C> <C> <C>
As reported $ 1,139 $ (1,858) $ 767
Pro-forma 872 (2,234) 404
Net earnings (loss) per share - basic
As reported 0.26 (0.43) 0.18
Pro-forma 0.20 (0.52) 0.09
Net earnings (loss) per share - diluted
As reported 0.24 (0.43) 0.18
Pro-forma $ 0.19 $ (0.52) $ 0.09
</TABLE>
<PAGE> 14
For purposes of computing pro-forma (unaudited) consolidated 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 25, 2000 March 27, 1999 March 28, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life of options 4 years 4 years 4 years
Expected life of purchase rights 6 mos 6 mos 6 mos
Volatility 60% 60% 60%
Risk-free interest rate 5.08 to 5.97 4.53 to 5.66 5.50 to 6.25
Dividend yield Zero Zero Zero
</TABLE>
Options Outstanding and Exercisable as of March 25, 2000, by Price Range
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
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>
$2.09 374,187 3.71 $ 2.094 84,876 $ 2.094
From $2.12 to $4.00 155,798 3.81 2.717 22,548 2.827
$7.75 24,000 0.79 7.750 24,000 7.750
-------------- -------------- -------------- -------------- --------------
From $2.09 to $7.75 553,985 3.61 $ 2.514 131,424 $ 3.252
============== ============== ============== ============== ==============
</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 25, 2000, 45,734 shares
remain available for issuance under the Purchase Plan. The weighted
average fair value of the purchase rights granted in fiscal 2000 was
$2.522.
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 2000, 1999, and 1998 were
approximately $151,000, $153,000, and $151,000, respectively.
10 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 leases a 18,756 square foot
facility located in Fremont, California, under a seven-year lease
that commenced in July 1999. 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 49,090 square foot
facility located in Santa Rosa, California, under a twenty-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:
<TABLE>
<CAPTION>
-----------------------------------------
Fiscal years
(In thousands)
-----------------------------------------
<S> <C> <C>
2001 $1,679
2002 1,692
2003 1,575
2004 1,535
2005 874
Thereafter 7,127
-------
$14,482
=======
</TABLE>
<PAGE> 15
The aggregate rental expense was $1,812,000, $1,462,000, and
$959,000, in fiscal 2000, 1999, and 1998, respectively.
As of March 25, 2000, Property and Equipment includes equipment under
capital lease of $313,000 and related accumulated depreciation of
$99,000. 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, 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>
2001 $140
2002 123
2003 12
----
Total 275
Less interest costs 30
----
Present value of minimum lease payments 245
Less current portion 118
----
Long term portion of capital lease obligations $127
====
</TABLE>
11 LINE OF CREDIT
The Company has 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, 2000.
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
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 25, 2000 and March 27,
1999, and the related consolidated statements of operations, shareholders'
equity and cash flows for years ended March 25, 2000, March 27, 1999, and March
28, 1998. 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 25, 2000, and March 27, 1999, and the
results of their operations and their cash flows for the years ended March 25,
2000, March 27, 1999, and March 28, 1998, in conformity with generally accepted
accounting principles.
/s/
KPMG LLP
Mountain View, California
May 2, 2000
29
<PAGE> 17
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS:
--------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) March 25, March 27, March 28, March 29, March 30,
2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Net sales $ 47,577 $ 37,636 $ 36,813 $ 38,031 $ 40,804
Gross profit 15,810 11,534 15,789 14,627 15,916
Operating expenses 14,315 15,293 15,172 13,096 13,714
Interest income, net 59 121 457 533 221
Earnings (loss) before income taxes 1,633 (3,006) 1,096 2,048 2,623
Net earnings (loss) 1,139 (1,858) 767 1,509 2,193
Net earnings (loss) per share - basic $ 0.26 $ (0.43) $ 0.18 $ 0.35 $ 0.52
Net earnings (loss) per share - diluted $ 0.24 $ (0.43) $ 0.18 $ 0.34 $ 0.51
FINANCIAL POSITION:
--------------------------------------------------------------------------------------------------------------------
(In thousands except ratio) March 25, March 27, March 28, March 29, March 30,
2000 1999 1998 1997 1996
Current ratio 3.23 3.32 5.06 4.32 3.15
Working capital $ 21,645 $ 18,021 $ 23,484 $ 22,692 $ 19,638
Total assets 37,526 33,259 32,672 33,618 33,448
Shareholders' equity $ 26,149 $ 24,710 $ 26,461 $ 25,654 $ 23,475
Shares of common stock - basic 4,379 4,338 4,319 4,300 4,232
Shares of common stock - diluted 4,693 4,338 4,377 4,376 4,297
PERCENTAGE DATA:
--------------------------------------------------------------------------------------------------------------------
March 25, March 27, March 28, March 29, March 30,
2000 1999 1998 1997 1996
Percent of net sales
Gross profit 33.2 30.6 42.9 38.5 39.0
Operating expenses 30.1 40.6 41.2 34.4 33.6
Interest income, net 0.1 0.3 1.2 1.4 0.5
Earnings (loss) before income taxes 3.4 (8.0) 3.0 5.4 6.4
Net earnings (loss) 2.4 (4.9) 2.1 4.0 5.4
</TABLE>
30
<PAGE> 18
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 2000
-----------------------------------------------------------------------
First Second Third Fourth Year
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 11,505 $ 11,834 $ 11,314 $ 12,924 $ 47,577
Gross profit 3,451 3,948 3,990 4,421 15,810
Operating expenses 3,315 3,638 3,568 3,794 14,315
Interest income, net (1) 3 22 35 59
Earnings (loss) before income taxes 162 324 460 687 1,633
Net earnings (loss) 112 227 322 478 1,139
Net earnings (loss) per share - basic $ 0.03 $ 0.05 $ 0.07 $ 0.11 $ 0.26
Net earnings (loss) per share - diluted $ 0.03 $ 0.05 $ 0.07 $ 0.10 $ 0.24
Equivalent shares of common stock - basic 4,362 4,368 4,383 4,402 4,379
Equivalent shares of common stock - diluted 4,372 4,483 4,611 4,846 4,693
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
--------------------------------------------------------------------------------------------------------------------
(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>
COMMON STOCK MARKET PRICES
Giga-tronics' 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 25, 2000 was close to 1,400. The table
below shows the high and low closing bid quotations for the common stock
during the indicated fiscal periods.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
2000 High Low 1999 High Low
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter (3/28-6/26) 3 1 3/4 (3/29-6/27) 7 4 3/4
Second quarter (6/27-9/25) 3 5/16 1 13/16 (6/28-9/26) 5 2 13/32
Third quarter (9/26-12/25) 7 1/2 2 1/2 (9/27-12/28) 3 1/4 2
Fourth quarter (12/26-3/25) 22 6 1/2 (12/29-3/27) 3 7/16 2 1/8
-----------------------------------------------------------------------------------------------
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000719274
<NAME> GIGA-TRONICS INCORPORATED
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-25-2000
<PERIOD-START> MAR-28-1999
<PERIOD-END> MAR-25-2000
<CASH> 3,455
<SECURITIES> 0
<RECEIVABLES> 9,447
<ALLOWANCES> 253
<INVENTORY> 14,692
<CURRENT-ASSETS> 31,355
<PP&E> 16,078
<DEPRECIATION> 10,678
<TOTAL-ASSETS> 37,526
<CURRENT-LIABILITIES> 9,710
<BONDS> 0
0
0
<COMMON> 11,921
<OTHER-SE> 14,228
<TOTAL-LIABILITY-AND-EQUITY> 37,526
<SALES> 47,577
<TOTAL-REVENUES> 47,577
<CGS> 31,767
<TOTAL-COSTS> 46,082
<OTHER-EXPENSES> (79)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (59)
<INCOME-PRETAX> 1,633
<INCOME-TAX> 494
<INCOME-CONTINUING> 1,139
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,139
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.24
</TABLE>
