-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DweB4mmf8+VPqhnB1gLF+vNFaKiShESSMRTTvaGja3z74/0vBjwKZlQH3OnLSYR+ sbKZSSBB6EXdJZGkCNJPgw== 0000950149-01-500776.txt : 20010522 0000950149-01-500776.hdr.sgml : 20010522 ACCESSION NUMBER: 0000950149-01-500776 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIGA TRONICS INC CENTRAL INDEX KEY: 0000719274 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 942656341 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12719 FILM NUMBER: 1643935 BUSINESS ADDRESS: STREET 1: 4650 NORRIS CANYON ROAD CITY: SAN RAMONN STATE: CA ZIP: 94583 BUSINESS PHONE: 9253284650 MAIL ADDRESS: STREET 1: 4650 NORRIS CANYON ROAD CITY: SAN RAMON STATE: CA ZIP: 94583 10-K 1 f72885e10-k.txt GIGA-TRONICS INCORPORATED FORM 10-K 1 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 31, 2001, 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 GIGA-TRONICS INCORPORATED _______________________________ (Exact name of registrant as specified in its charter) California 94-2656341 __________________________________ ____________________________________ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4650 Norris Canyon Road, San Ramon, CA 94583 ______________________________________ __________ (Address of principal executive offices) (Zip Code) Registrant's telephone number: (925) 328-4650 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ___________________ _________________________________________ None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No par value __________________________ (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [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 15, 2001 was $20,712,400. For purposes of this determination only, directors and officers of the Registrant have been assumed to be affiliates. There were a total of 4,568,694 shares of the Registrant's Common Stock outstanding as of May 15, 2001. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents have been incorporated by reference into the parts indicated:
PART OF FORM 10-K DOCUMENT ----------------- -------- PART II Registrant's ANNUAL REPORT TO Items 5, 6, 7 and 8 SHAREHOLDERS for the fiscal year ended March 31, 2001. PART III Registrant's PROXY STATEMENT for Items 10, 11, 12 and 13 its 2001 annual meeting of shareholders to be filed no later than 120 days after the close of the fiscal year ended March 31, 2001.
2 3 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 2001 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 payments based on earnings from Microsource from 1998 to 2000, which amounts were nominal. Microsource located in Santa Rosa, California 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. 3 4 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. 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. 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. 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. 4 5 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 2002, even though the outlook for defense-related orders continues to be soft. Defense-related agencies accounted for 11% of net sales in fiscal 2001, 16% in fiscal 2000, and 24% in fiscal 1999. Commercial business accounted for 89% of net sales in fiscal 2001, 84% in fiscal 2000, and 76% in fiscal 1999. 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. In addition during 2001, a Japanese distributor of the Company, Midoriya, accounted for 10% of Giga-tronics consolidated sales. Backlog of Orders On March 31, 2001, the Company's backlog of unfilled orders was $39,964,000 compared to $34,128,000 at March 25, 2000. As of March 31, 2001, there were approximately $7,245,000 unfilled orders that were scheduled for shipment beyond a year, as compared to approximately $10,201,000 at March 25, 2000. 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 U.S. government contract termination. 5 6 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 semiconductor equipment 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., DYMATIX and Microsource Inc. market their products through various distributors and representatives to commercial and government customers, although not necessarily through the same distributors and representatives. 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 $5,087,000 in fiscal 2001, $4,180,000 in fiscal 2000, and $5,313,000 in fiscal 1999. 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 the DYMATIX products are done at its Santa Clara 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. 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 31, 2001, Giga-tronics employed 313 individuals on a full time basis. Management believes that the future success of the Company depends on its ability to attract and retain skilled 6 7 personnel. None of the Company's employees are 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 $22,072,000 in fiscal 2001, $14,468,000 in fiscal 2000, and $7,665,000 in fiscal 1999. The Company has a United Kingdom (UK) research & development facility for the Instruments division which has $161,000 in assets. Otherwise the Company has no other 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, dispute over performance and our ability to collect amounts due under these orders. If this occurs, then shipments in the current year could decrease more than current projected shipments resulting in a decline in earnings. Giga-tronics sales are substantially dependent on the wireless industry Giga-tronics sells directly or indirectly to customers and equipment manufacturers in the wireless industry. Currently, this industry is undergoing dramatic and rapid change. As such, the business that Giga-tronics records could decrease or existing recorded backlog could be stretched or deferred resulting in less than projected shipments. These reduced shipments may have a material adverse effect on operations. 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 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. Giga-tonics is subject to various risks in connection with 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 7 8 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. 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 31, 2001, Giga-tronics principal executive office and the Instrument divisions' 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. 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. 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 Company believes that its facilities are adequate for its business activities. ITEM 3. LEGAL PROCEEDINGS As of March 31, 2001, 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. 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 31, 2001. Executive Officers of the Company are listed on page 10 of this Form 10-K. 8 9 PART II The Registrant's Annual Report to Shareholders for the year ended March 31, 2001, is filed as Exhibit 13.0 with the Form 10-K (the "2001 Annual Report"). The information responsive to Items 5, 6, 7 and 8, which is contained in the 2001 Annual Report, is specifically incorporated by reference in this Form 10-K. With the exception of such information, the 2001 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 2001 Annual Report, see "Common Stock Market Prices" which appears on page 30. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from the 2001 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 2001 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 due to the short-term maturities of the instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following items which appear in the 2001 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. 9 10 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 2001 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 31, 2001. GIGA-TRONICS INCORPORATED EXECUTIVE OFFICERS
Name Age Position ---- --- -------- George H. Bruns, Jr. 82 Chief Executive Officer since January, 1995, Chairman of the Board and a Director of the Company. He provided seed financing for 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 49 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. Claudio S. Mariotta 57 President, Giga-tronics Instrument Division since April 2001. From December 2000 to April 2001, Mr. Mariotta served as Vice President of Operations for the Giga-tronics Instrument Division. Mr. Mariotta came to Giga-tronics in August 1999 as Vice President of Product Development of the Giga-tronics Instrument Division. Prior to joining Giga-tronics Mr. Mariotta was the Chief Operating Officer and Chief Technical Officer of SSE Telecom a provider of Satellite transceivers worldwide. Jeffrey T. Lum 55 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 50 President, Dymatix, a joint venture between Ultracision, Inc. and Viking Semiconductor Equipment, Inc. since January 2000. Also, President of Ultracision, Inc. and Viking Semiconductor Equipment, Inc. since April 1999. Assistant to the Chairman of Giga-tronics, Inc. from September 1998 to March 1999. Vice President, Automation Products, Ultracision, Inc. from February 1996 to August 1998. Mr. Markowitz was the General Manager of Mar Engineering from September 1993 to January 1996. Mar Engineering is a manufacturer of precision machined components for the aerospace industry. William E. Wilson 61 President of Microsource, Inc. since April 2001. Mr. Wilson has been a director of the Company since December 1998. Before joining the Company as the President of Microsource, Inc., Mr. Wilson was the Chairman and CEO of Microwave Technology Incorporated of Fremont, CA, a producer of Microwave Devices and Amplifiers with broad application to the telecommunications and the test and measurement industries.
10 11 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 2001 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 31, 2001. 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 2001 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 31, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. 11 12 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
2001 Annual Report to Shareholders Financial Statements (Page No.) - -------------------- ------------------ Consolidated Balance Sheets - 17 As of March 31, 2001 and March 25, 2000 Consolidated Statements of Operations - 18 Years Ended March 31, 2001, March 25, 2000 and March 27, 1999 Consolidated Statements of Shareholders' Equity - 19 Years Ended March 31, 2001, March 25, 2000 and March 27, 1999 Consolidated Statements of Cash Flows - 20 Years Ended March 31, 2001, March 25, 2000 and March 27, 1999 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 15 Consent of Independent Auditors Schedule II - Valuation and Qualifying 16 Accounts
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 2001 Annual Report and the Proxy Statement are not to be deemed filed as part of this report. 12 13 (a)(3) Exhibits Reference is made to the Exhibit Index which is found on page 17 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 31, 2001. 13 14 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. /s/ GEORGE H. BRUNS, JR. Chairman of the Board 5/18/01 - ----------------------------- and Chief Executive Officer ------------- George H. Bruns, Jr. (Principal Executive Officer) (Date) /s/ MARK H. COSMEZ II Vice President, Finance, Chief 5/18/01 - ----------------------------- Financial Officer and Secretary ------------- Mark H. Cosmez II (Principal Accounting Officer) (Date) /s/ JAMES A. COLE Director 5/18/01 - ----------------------------- ------------- James A. Cole (Date) /s/ ROBERT C. WILSON Director 5/18/01 - ----------------------------- ------------- Robert C. Wilson (Date) /s/ WILLIAM E. WILSON Director 5/18/01 - ----------------------------- ------------- William E. Wilson (Date)
14 15 Exhibit 23.0 REPORT ON FINANCIAL STATEMENT SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Giga-tronics Incorporated The audits referred to in our report dated May 4, 2001, included the related financial statement schedule for the years ended March 31, 2001, March 25, 2000, and March 27, 1999, 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. 333-45476, 333-34719, 333-39403, and 333-48889) on Form S-8 and (No. 333-50091) on Form S-3 of Giga-tronics Incorporated of our reports included herein and incorporated herein by reference. /s/ KPMG LLP ------------------------------------ KPMG LLP Mountain View, California May 17, 2001 15 16 SCHEDULE II 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 - ----------------------------------------------------------------------------------------------- $ $ $ $ Year ended March 31, 2001 Allowances deducted from assets: Accounts receivable: For allowance for doubtful accounts(1) 253,890 13,589 5,703 261,776 Total 253,890 13,589 5,703 261,776 ================================================= Year ended March 25, 2000 Accounts receivable: For allowance 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 allowance for doubtful accounts(1) 292,644 152,581 10,612 434,613 Total 292,644 152,581 10,612 434,613 =================================================
(1) Allowance for accounts receivable collection exposure. 16 17 GIGA-TRONICS INCORPORATED INDEX TO EXHIBITS 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 (33-48889), 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 (33-48889), incorporated herein by reference.** 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 (33-48889) and incorporated herein by reference.** 10.8 2000 Stock Option Plan and form of Incentive Stock Option Agreement, previously filed on September 8, 2000 as Exhibit 99.1 to Form S-8 (33-45476) and incorporated herein by reference.** 13.0* 2001 Annual Report to Shareholders. 23.0* Report on Financial Statement Schedule and Consent of Independent Auditors. (See page 15 of this Annual Report on Form 10-K.)
*Attached as exhibits to this Form 10-K. ** Management contract or compensatory plan or arrangement. 17 EX-13 2 f72885ex13.txt 2001 ANNUAL REPORT TO SHAREHOLDERS 1 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS FOR FISCAL 2001 AS COMPARED TO 2000 During the fourth quarter of fiscal 2001, the Company adopted SAB 101, Revenue Recognition in Financial Statements. The Company recorded a net cumulative effect adjustment related to this change in accounting of $520,000, effective March 26, 2000. The adoption of SAB 101 resulted in the deferral of $2,165,000 in sales as of the beginning of the 2001 fiscal year, and subsequent recognition of the deferred sales during the year. New orders received in 2001 were $57,830,000, a decrease of 10% from $64,013,000 in 2000. This decrease was attributable primarily to the non recurrence of a three year contract for about $14,100,000 recorded at the end of fiscal 2000. At year end 2001, the Company's backlog of unfilled orders was $39,964,000, compared to $34,128,000 at the end of 2000. As of year end 2001, there were approximately $7,245,000 unfilled orders that were scheduled for shipment beyond a year and as of year end 2000 there were $10,201,000 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 2001 were $54,159,000, a 14% increase from $47,577,000 in 2000. Sales for the fiscal year 2001, without the SAB 101 adjustment, would have been $51,994,000, or over a 9% increase in revenue as compared to the $47,577,000 of the prior year. In fiscal 2001, Microsource decreased revenues 12% or $1,861,000, while Giga-tronics Instruments increased 35% or $6,485,000, in sales and ASCOR improved 12% or $798,000, in sales. DYMATIX (formerly the Semiconductor Equipment Group) improved 16% or $1,160,000. DYMATIX sales for the fiscal year 2001, without the SAB 101 adjustment, would have declined over 14% or $1,005,000. Cost of sales increased 11% in 2001 to $35,103,000 from $31,767,000 in 2000. Cost of sales for the fiscal year 2001, without the SAB 101 adjustment, would have been $33,681,000, or over a 6% increase in cost of sales as compared to the prior year. The increase in fiscal 2001 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 increased 12% in 2001 over 2000. Product development costs increased $907,000 in fiscal 2001 to $5,087,000. This was principally due to increased development of new products at the Instruments division and at Microsource. Selling, general and administrative expenses increased $1,058,000 to $10,713,000 in 2001 due to higher commissions on higher revenues coupled with higher personnel and promotional expenses at the Instruments division. Amortization of intangibles decreased $248,000 to $232,000 principally, as a result of reduced amortization of patents and licenses. Other income increased in fiscal 2001 primarily due to increased sublease rent from the facilities leased in Santa Rosa. Net interest income in 2001 increased from 2000 due to higher average cash available for investment. The average cash improvement resulted principally from higher cash levels in the middle of the year. The provision for income taxes in 2001 was $1,040,000, or 30%, of the pre-tax earnings. Giga-tronics recorded net earnings before cumulative effect of accounting change of $2,421,000, or $0.51 per diluted share, in 2001 versus $1,139,000, or $0.24 per diluted share, in 2000. The improvement in 2001 earnings was due to the Company's higher sales levels in 2001 as compared to 2000. The Company recorded $520,000 for the cumulative effect of accounting change as a result of the implementation of SAB 101. As a result, Giga-tronics recorded net earnings of $1,901,000, or $0.40 per diluted share, in 2001 versus $1,139,000, or $0.24 per diluted share, in 2000. 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 $17,692,000 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. 2 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 diluted share, in 2000 versus a loss of $1,858,000, or $0.43 per diluted share, in 1999. The improvement in 2000 earnings was due to the Company's higher sales levels in 2000 as compared to 1999. FINANCIAL CONDITION AND LIQUIDITY As of March 31, 2001, Giga-tronics had $3,469,000 in cash and cash equivalents, compared to $3,455,000 as of March 25, 2000 and $2,286,000 as of March 27, 1999. Cash provided by operations amounted to $1,951,000 in 2001 and $2,644,000 in 2000, compared to cash used by operations of $2,365,000 in 1999. Cash provided by operations in 2001 is attributed to operating income in the year primarily offset by cash paid for income taxes of $988,000 and the net change in operating assets and liabilities. 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. Giga-tronics continues to maintain a strong financial position, with working capital at year end of $22,924,000 compared to $21,066,000 in 2000 and $18,021,000 in 1999. The Company's current ratio of 4.1 increased from the 2000 and 1999 current ratio of 3.2 and 3.3, respectively. The increase in working capital is primarily a result of the increased operations of the Company. Additions to property and equipment were $1,800,000 in 2001, compared to $1,361,000 in 2000 and $953,000 in 1999. Fiscal 2001 spending reflects continuing investments to support new product development, increased productivity, and improved product quality. Other cash inflows in 2001 consists of $367,000 of common stock in connection with the exercise of stock options. Other cash inflows in 2000 were $174,000 of common stock in connection with the exercise of stock options. 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 dispute over performance and our ability to collect amounts due under the contract. 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. Giga-tonics is subject to various risks in connection with 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. 3 FORWARD LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report to Shareholders 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 2001 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. 4 CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------- (In thousands except share data) March 31, 2001 March 25, 2000 -------------- -------------- ASSETS Current assets Cash and cash equivalents $ 3,469 $ 3,455 Trade accounts receivable, net of allowance of $262 and $254 respectively 7,767 9,194 Inventories, net 15,185 14,113 Prepaid expenses 424 444 Deferred income taxes 3,560 3,570 ------- ------- TOTAL CURRENT ASSETS 30,405 30,776 Property and equipment Leasehold improvements 398 382 Machinery and equipment 16,123 14,673 Office furniture and fixtures 1,142 1,023 ------- ------- Property and equipment, gross cost 17,663 16,078 Less accumulated depreciation and amortization 12,357 10,678 ------- ------- PROPERTY AND EQUIPMENT, NET 5,306 5,400 PATENTS AND LICENSES 36 112 GOODWILL, NET 339 564 OTHER ASSETS 1,232 674 ------- ------- TOTAL ASSETS $37,318 $37,526 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 3,347 $ 4,065 Accrued commissions 435 625 Accrued payroll and benefits 1,687 1,638 Accrued warranty 732 553 Customer advances 690 1,536 Obligation under capital lease 167 118 Other current liabilities 423 1,175 ------- ------- TOTAL CURRENT LIABILITIES 7,481 9,710 OBLIGATIONS UNDER CAPITAL LEASE, NET OF CURRENT PORTION 115 127 DEFERRED INCOME TAXES 796 1,011 DEFERRED RENT 451 529 ------- ------- TOTAL LIABILITIES 8,843 11,377 ------- ------- SHAREHOLDERS' EQUITY Preferred stock of no par value Authorized 1,000,000 shares; no shares outstanding at March 31, 2001 and March 25, 2000 -- -- Common stock of no par value; Authorized 40,000,000 shares; 4,542,694 shares at March 31, 2001 and 4,431,008 shares at March 25, 2000 issued and outstanding 12,346 11,921 Retained earnings 16,129 14,228 ------- ------- TOTAL SHAREHOLDERS' EQUITY 28,475 26,149 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $37,318 $37,526 ======= =======
See Accompanying Notes to Consolidated Financial Statements 17 5 CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------- Years ended (In thousands except share data) March 31, 2001 March 25, 2000 March 27, 1999 -------------- -------------- -------------- NET SALES $ 54,159 $47,577 $ 37,636 Cost of sales 35,103 31,767 26,102 -------- ------- -------- GROSS PROFIT 19,056 15,810 11,534 Product development 5,087 4,180 5,313 Selling, general and administrative 10,713 9,655 9,418 Amortization of intangibles 232 480 562 -------- ------- -------- Operating expenses 16,032 14,315 15,293 -------- ------- -------- OPERATING INCOME (LOSS) 3,024 1,495 (3,759) Other income (expense) 232 79 632 Interest income, net 205 59 121 -------- ------- -------- EARNINGS (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 3,461 1,633 (3,006) Provision (benefit) for income taxes 1,040 494 (1,148) -------- ------- -------- EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 2,421 1,139 (1,858) Cumulative effect of accounting change 520 -- -- -------- ------- -------- NET EARNINGS (LOSS) $ 1,901 $ 1,139 $ (1,858) ======== ======= ======== Basic earnings (loss) per share: Before cumulative effect of accounting change $ 0.54 $ 0.26 $ (0.43) -------- ------- -------- Cumulative effect of accounting change (0.12) -- -- -------- ------- -------- Basic earnings (loss) per share $ 0.42 $ 0.26 $ (0.43) ======== ======= ======== Diluted earnings (loss) per share: Before cumulative effect of accounting change $ 0.51 $ 0.24 $ (0.43) -------- ------- -------- Cumulative effect of accounting change (0.11) -- -- -------- ------- -------- Diluted earnings (loss) per share $ 0.40 $ 0.24 $ (0.43) ======== ======= ======== Weighted average basic common shares outstanding 4,474 4,379 4,338 Weighted average diluted common shares outstanding 4,803 4,693 4,338 PRO FORMA AMOUNTS ASSUMING ACCOUNTING CHANGE IS APPLIED RETROACTIVELY: (Unaudited) NET INCOME (LOSS) $ 2,421 $ 623 $ (1,404) ======== ======= ======== Net income (loss) per share - Basic $ 0.54 $ 0.14 $ (0.32) ======== ======= ======== Net income (loss) per share - Diluted $ 0.51 $ 0.13 $ (0.32) ======== ======= ========
See Accompanying Notes to Consolidated Financial Statements 18 6 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands except share data)
Common Stock Other ------------ Comprehensive Comprehensive Retained Shares Amount Income (Loss) Income (Loss) Earnings Total - -------------------------------------------------------------------------------------------------------------------------- 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 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 Comprehensive Income - net Net earnings -- -- 1,901 -- 1,901 1,901 ======= Stock issuance under stock Option plans 111,686 367 -- -- -- 367 Tax benefit associated with exercise of stock options -- 58 -- -- -- 58 - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 2001 4,542,694 $12,346 $ -- $ -- $ 16,129 $ 28,475 ==========================================================================================================================
See Accompanying Notes to Consolidated Financial Statements 19 7 CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------------- Years ended (In thousands) March 31, 2001 March 25, 2000 March 27, 1999 -------------- -------------- -------------- CASH FLOWS PROVIDED FROM OPERATIONS: Net earnings (loss) $ 1,901 $ 1,139 $(1,858) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operations: Provision for bad debt 8 (182) 142 Depreciation and amortization 2,120 2,111 2,208 Tax benefit from employee stock options 58 126 -- Tax benefit of pre acquisition NOL utilization -- 394 -- Gain on sales of fixed assets (20) (20) (521) Deferred income taxes (205) (81) (443) Changes in operating assets and liabilities: Trade accounts receivable 1,419 (2,578) 1,738 Inventories (1,072) (864) (1,710) Prepaid expenses 20 (61) 74 Accounts payable (718) 1,043 (622) Accrued commissions (190) 256 (180) Accrued payroll and benefits 49 292 67 Accrued warranty 179 86 (269) Accrued other expenses (613) 535 (209) Customer advances (846) (112) (968) Income taxes receivable/payable (139) 560 186 ------- ------- ------- NET CASH PROVIDED BY (USED IN) OPERATIONS 1,951 2,644 (2,365) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments -- -- (2,268) Maturities of investments -- -- 8,010 Proceeds from sale of property and equipment 26 7 1,291 Additions to property and equipment (1,645) (1,311) (953) Payment for purchase of Microsource, including transaction costs -- (8) (605) Advances to Microsource -- -- (940) Other assets (489) (565) (17) ------- ------- ------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (2,108) (1,877) 4,518 CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 367 174 89 Payment on line of credit -- -- (1,500) Payment on notes payable and other long term liabilities (78) (45) (2,497) Payments on capital lease and other long term obligations (118) (127) (170) ------- ------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 171 2 (4,078) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14 769 (1,925) ------- ------- ------- BEGINNING CASH AND CASH EQUIVALENTS 3,455 2,686 4,611 ENDING CASH AND CASH EQUIVALENTS 3,469 3,455 2,686 ======= ======= ======= Supplementary disclosure of cash flow information: Cash paid for income taxes $ 988 $ 86 $ 7 Cash paid for interest -- -- -- Non-cash investing and financing activities: Purchases under capital lease obligations 155 50 -- - --------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements 20 8 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 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. 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 a United Kingdom (UK) research & development facility for the Instruments division. Otherwise the Company has no other foreign-based operations or material amounts of identifiable assets in foreign countries. Its gross margins on foreign and domestic sales are similar, 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year The Company's financial reporting year consists of either a 52 week or 53 week period ending on the last Saturday of the month of March. Fiscal year 2001 contained 53 weeks while fiscal years 2000 and 1999 each contained 52 weeks. Reclassifications Certain reclassifications, none of which affected net income (loss), have been made to prior year balances in order to conform to the current year presentation. Revenue Recognition Revenues are recognized when there is evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. Revenue to customers is recorded when products are shipped and the risk of loss has passed. Upon shipment, the Company also provides for the estimated cost that may be incurred for product warranties. Revenue related to products shipped subject to customers' evaluation is recognized upon final acceptance. During the fourth quarter of fiscal 2001, the Company adopted Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, effective March 26, 2000. Prior to the adoption of SAB 101, the Company recognized revenue on sales with final customer acceptance upon delivery and provided for the estimated costs of installation obligations at the time the revenue was recognized. The Company recorded a cumulative effect adjustment related to this change in accounting of $520,000, net of income taxes. The adoption of SAB 101 resulted in the deferral of $2,165,000 in sales as of the beginning of the 2001 fiscal year, and subsequent recognition of the deferred sales during the year. 9 Pro forma effect of SAB 101 assuming accounting change is applied retroactively is as follows:
Years ended March 31, 2001 March 25, 2000 March 27, 1999 -------------- -------------- -------------- (In thousands except per share data) (Unaudited) NET SALES $54,159 $45,412 $ 39,120 Cost of Sales 35,103 30,345 26,938 ------- ------- -------- GROSS PROFIT 19,056 15,067 12,182 Operating Expense 16,032 14,315 15,293 ------- ------- -------- OPERATING INCOME (LOSS) 3,024 752 (3,111) Interest and other income 437 138 753 ------- ------- -------- EARNINGS (LOSS) BEFORE TAXES 3,461 890 (2,358) Provision (benefit) for income taxes 1,040 267 (954) ------- ------- -------- NET INCOME (LOSS) $ 2,421 $ 623 $ (1,404) ======= ======= ======== Net income (loss) per share - Basic $ 0.54 $ 0.14 $ (0.32) ------- ------- -------- Net income (loss) per share - Diluted $ 0.51 $ 0.13 $ (0.32) ------- ------- --------
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 using 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 31, 2001 and March 25, 2000 accumulated amortization on patents and licenses was $2,160,000 and $2,084,000, respectively. Goodwill Goodwill is being amortized using the straight-line method over a period of five years. As of March 31, 2001 and March 25, 2000 accumulated amortization on goodwill was $1,881,000 and $1,725,000 respectively. Pre-production costs The Company incurs pre-production costs on certain long-term supply arrangements. The costs, which represent non-recurring engineering and tooling costs owned by the Company, are capitalized as part of other assets and amortized over their useful life when reimbursable by 10 the customer. Otherwise, they are expensed as incurred. Included in other assets as of March 31, 2001 and March 25, 2000 are capitalized design and development costs of $1,133,000 and $579,000, 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, completion of 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 employee 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 using the treasury method. Antidilutive options are not included in the computation of diluted earnings per share. Financial Instruments and Concentration of Credit Risk Financial instruments, which potentially subject the Company to credit risk as of March 31, 2001, 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. Cash and cash equivalents 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. 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 Balance Sheet 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. 3 CASH AND CASH EQUIVALENTS Cash and cash equivalents consisted of the following at March 31, 2001 and March 25, 2000:
------------------------------------------------------------------------ March 31, 2001 Cash and Cash Equivalents -------------------------- (In thousands) Amortized Fair Cost Value Cash $3,469 $3,469 ------ ------ Total $3,469 $3,469 ====== ======
------------------------------------------------------------------------ March 25, 2000 Cash and Cash Equivalents ------------------------- (In thousands) Amortized Fair Cost Value Cash $1,067 $1,067 Money market funds 1,933 1,933 Other marketable securities 455 455 ------ ------ Total $3,455 $3,455 ====== ======
11 4 INVENTORIES
------------------------------------------------------------------------ Years ended (In thousands) March 31, 2001 March 25, 2000 ------------------------------------------------------------------------ Raw materials $ 8,432 $ 8,095 Work-in-progress 4,833 5,167 Finished goods 1,020 294 Loaned Inventory 900 557 ------- ------- $15,185 $14,113 ======= =======
5 SELLING EXPENSES Selling expenses consist primarily of commissions paid to various marketing agencies. Commission expense totaled $2,579,000, $2,360,000, and $2,051,000 in fiscal 2001, 2000, and 1999, respectively. Advertising costs which are expensed as incurred totaled $579,000, $511,000, and $558,000 for fiscal 2001, 2000, and 1999, 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. 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 2001, 2000 and 1999: March 31, 2001 (In thousands):
Giga-tronics Instruments ASCOR Microsource DYMATIX Corporate Total ------------ ------- ----------- ------- --------- -------- Revenue $ 25,001 $ 7,503 $ 13,208 $ 8,447 $ -- $ 54,159 Interest income 25 93 6 3 109 236 Interest expense (196) (4) (744) (354) 1,267 (31) Depreciation and amortization 604 148 1,270 98 -- 2,120 Pre-tax income 1,193 1,436 (985) 434 1,383 3,461 Assets 15,518 4,172 11,937 5,236 455 37,318
March 25, 2000 (In thousands):
Giga-tronics Instruments ASCOR Microsource DYMATIX Corporate Total ------------ ------- ----------- ------- --------- -------- 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) Depreciation and amortization 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
12 March 27, 1999 (In thousands):
Giga-tronics Instruments ASCOR Microsource DYMATIX Corporate Total ------------ ------ ----------- ------- --------- -------- 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 Depreciation and amortization 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
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 2001, 2000, and 1999 U.S. Government and U.S. defense-related customers accounted for 11%, 16%, and 24%, of sales, respectively. In addition during 2001, a Japanese distibutor of the Company, Midoriya, accounted for 10% of the Company's consolidated sales and 11% of accounts receivable as of year end. Export sales accounted for 41%, 30%, and 20% of the Company's sales in fiscal 2001, 2000, and 1999, respectively. Export sales by geographical area are shown below:
Years ended (In thousands) March 31, 2001 March 25, 2000 March 27, 1999 ------------------------------------------------------------------------ Americas $ 4,256 $ 1,989 $ 445 Europe 6,831 6,448 3,446 Asia 9,512 4,981 3,371 Rest of world 1,473 1,050 403 ------- ------- ------ $22,072 $14,468 $7,665 ======= ======= ======
7 EARNINGS (LOSS) PER SHARE Shares used in per share computations for the years ended March 31, 2001, March 25, 2000, and March 27, 1999 are as follows:
Years ended (In thousands except per share data) March 31, 2001 March 25, 2000 March 27, 1999 ------------------------------------------------------------------------------------------- Net earnings (loss) $1,901 $1,139 $(1,858) ====== ====== ======= Weighted average: Common shares outstanding 4,474 4,379 4,338 Common share equivalents 329 314 -- ------ ------ ------- Common shares assuming dilution 4,803 4,693 4,338 ====== ====== ======= Net earnings per share of common stock $ 0.42 $ 0.26 $ (0.43) ====== ====== ======= Net earnings per share of common stock assuming dilution $ 0.40 $ 0.24 $ (0.43) ====== ====== ======= Stock options not included in computation 57 24 537 ====== ====== =======
The number of stock options not included in the computation of diluted earnings per share (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 31, 2001 and March 25, 2000 reflects stock options where the exercise prices were greater than the average market price of the common shares and are therefore antidilutive. 13 8 INCOME TAXES Following are the components of the provision (benefit) for income taxes:
--------------------------------------------------------------------------------------------------- Years ended (In thousands) March 31, 2001 March 25, 2000 March 27, 1999 --------------------------------------------------------------------------------------------------- Current: Federal $ 1,063 $ 46 $ (720) State 66 7 4 ------- ----- ------- 1,129 53 (716) Deferred: Federal 58 (180) (205) State (263) 100 (227) ------- ----- ------- (205) (80) (432) Charge in lieu of taxes attributable to employer stock option plans 58 127 -- Goodwill, for initial recognition of acquired tax benefits that previously were included in the valuation reserve 58 394 -- ------- ----- ------- Provision (benefit) for income taxes $ 1,040 $ 494 $(1,148) ======= ===== =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
----------------------------------------------------------------------------------------- Years ended (In thousands) March 31, 2001 March 25, 2000 ----------------------------------------------------------------------------------------- Current tax assets, net $ 3,560 $ 3,570 Noncurrent tax asset (liabilities), net (796) (1,011) ------- ------- Net deferred taxes $ 2,764 $ 2,559 ======= ======= Future state tax effect (182) (188) Allowance for doubtful accounts 112 196 Fixed asset depreciation (855) (1,116) Inventory reserves and additional costs capitalized 2,529 2,747 Deferred revenue -- 19 Accrued vacation 284 268 Accrued warranty 314 237 Other accrued liabilities 212 330 Net operating loss carryforward 6,056 6,452 Income tax credits 786 501 Valuation allowances (6,492) (6,887) ------- ------- $ 2,764 $ 2,559 ======= =======
14
------------------------------------------------------------------------------------------------------------------------ Years ended (In thousands except percentages) March 31, 2001 March 25, 2000 March 27, 1999 ------------------------------------------------------------------------------------------------------------------------ Statutory federal income tax (benefit) $ 1,176 34.0% $ 555 34.0% $(1,022) 34.0% Beginning of year change in deferred Tax asset valuation allowance -- -- (55) (3.4) -- -- State income tax, net of federal benefit 200 5.8 57 3.5 (146) 4.9 Nontax deductible expenses 6 0.2 6 0.4 14 (0.4) Tax credits (297) (8.6) (98) (6.0) (58) 1.9 Goodwill and patent amortization 60 1.7 88 5.4 84 (2.8) Interest income exempt from federal tax (58) (1.7) (51) (3.1) (19) .6 Other (47) (1.4) (8) (.5) (1) -- -------------------- ------------------ -------------------- Effective income tax (benefit) $ 1,040 30.0% $ 494 30.3% $(1,148) 38.2% ==================== ================== ====================
The change in valuation allowance from March 25, 2000 to March 31, 2001 was $395,000. 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 Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences 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 that the Company will realize benefits of these deductible differences, net of valuation allowances as of March 31, 2001. 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. As of March 31, 2001, goodwill has been reduced by $452,000 for the tax benefits realized from the Microsource deferred tax assets. During the years ended March 31, 2001 and March 25, 2000, disqualifying employee stock option dispositions resulted in an income tax deduction to the Company of approximately $145,000 and $269,000, respectively, and a tax benefit of approximately $58,000 and $127,000, respectively. The tax benefit has been reflected as an increase to the Company's paid-in capital in the accompanying Statement of Shareholders' Equity. 9 STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS Stock Option Plan The Company established a 1990 Stock Option Plan which provided for the granting of options for up to 700,000 shares of common stock. The 1990 Plan expired during the 2001 fiscal year. The Company subsequently established the 2000 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 31, 2001, no SAR's have been granted under the option plan. As of March 31, 2001, the total number of shares of common stock available for issuance is 540,800 under the 2000 stock option plan. All outstanding options have a term of five years. 15 Following is a summary of stock option activity:
Per Share Weighted Average Fair Value Options Weighted Average of Options Granted Exercisable Shares Exercise Price ------------------------------------------------------------------------------------------------------------ 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 ------------------------------------------------------------------------------------------------------------ Exercised (84,212) 2.247 Forfeited (89,737) 4.786 Granted $6.407 214,700 6.407 ------------------------------------------------------------------------------------------------------------ Outstanding as of March 31, 2001 143,988 594,736 $3.610 ------------------------------------------------------------------------------------------------------------
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:
Years ended (In thousands except per share data) March 31, 2001 March 25, 2000 March 27, 1999 ---------------------------------------------------------------------------------------------------- Net earnings (loss) As reported $1,901 $1,139 $(1,858) Pro-forma 1,537 872 (2,234) Net earnings (loss) per share - basic As reported 0.42 0.26 (0.43) Pro-forma 0.34 0.20 (0.52) Net earnings (loss) per share - diluted As reported 0.40 0.24 (0.43) Pro-forma $ 0.32 $ 0.19 $ (0.52)
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:
Years ended March 31, 2001 March 25, 2000 March 27, 1999 -------------------------------------------------------------------------------------- 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 4.64 to 6.30 5.08 to 5.97 4.53 to 5.66 Dividend yield Zero Zero Zero
Options Outstanding and Exercisable as of March 25, 2001, by Price Range
-------------------------------------------------------------------------------------------------- Number Weighted Average Weighted Number Weighted Range of of Options Remaining Average of Options Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price -------------------------------------------------------------------------------------------------- $2.09 286,536 2.69 $2.094 113,238 $2.094 From $2.12 to $5.09 182,200 3.77 3.658 30,750 2.895 From $6.13 to $8.88 126,000 4.54 6.990 -- -- ------- ---- ------ ------- ----- From $2.09 to $8.88 594,736 3.41 $3.610 143,988 $2.26 ======= ==== ====== ======= =====
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 31, 2001, 18,260 shares remain available for issuance under the Purchase Plan. The weighted average fair value of the purchase rights granted in fiscal 2001 was $6.471. 16 401(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 2001, 2000, and 1999 were approximately $208,000, $151,000, and $153,000, 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 operating equipment and facility leases are shown below:
------------------------------------------------------------------------ Fiscal years (In thousands) ------------------------------------------------------------------------ 2002 $ 1,717 2003 1,581 2004 1,535 2005 875 2006 886 Thereafter 6,241 ------- $12,835 =======
The aggregate rental expense was $1,816,000, $1,812,000, and $1,462,000 in fiscal 2001, 2000, and 1999, respectively. As of March 31, 2001, Property and Equipment includes equipment under capital lease of $283,000 and related accumulated amortization of $162,000. As of March 25, 2000, Property and Equipment includes equipment under capital lease of $313,000 and related accumulated amortization of $99,000. As of March 27, 1999, Property and Equipment includes equipment under capital lease of $502,000 and related accumulated amortization of $111,000. The future minimum lease payments for capital equipment leases are shown below.
---------------------------------------------------------------------- Fiscal years (In thousands) ---------------------------------------------------------------------- 2002 $ 182 2003 70 2004 57 ----- Total 309 Less interest costs 27 ----- Present value of minimum lease payments 282 Less current portion 167 ----- Long term portion of capital lease obligations $ 115 =====
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. As of March 31, 2001, this credit line has not been utilized by the Company and expires July 31, 2001. 17 I N D E P E N D E N T A U D I T O R S' R E P O R T The Board of Directors and Shareholders Giga-tronics Incorporated: We have audited the accompanying consolidated balance sheets of Giga-tronics Incorporated and subsidiaries as of March 31, 2001 and March 25, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for years ended March 31, 2001, March 25, 2000, and March 27, 1999. 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 auditing standards generally accepted in the United States of America. 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 31, 2001 and March 25, 2000, and the results of their operations and their cash flows for the years ended March 31, 2001, March 25, 2000, and March 27, 1999, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, effective March 26, 2000, the Company changed its method of accounting for certain equipment sales. /s/ KPMG LLP Mountain View, California May 4, 2001 29 18 SELECTED FINANCIAL DATA
SUMMARY OF OPERATIONS: YEAR ENDED - ------------------------------------------------------------------------------------------------------------------ (In thousands except per share data) March 31, March 25, March 27, March 28, March 29, 2001 2000 1999 1998 1997 Net sales $54,159 $47,577 $ 37,636 $36,813 $38,031 Gross profit 19,056 15,810 11,534 15,789 14,627 Operating expenses 16,032 14,315 15,293 15,172 13,096 Interest income, net 205 59 121 457 533 Earnings (loss) before cumulative effect of accounting change and income taxes 3,461 1,633 (3,006) 1,096 2,048 Earnings (loss) before cumulative effect of accounting change 2,421 1,139 (1,858) 767 1,509 Net earnings (loss) 1,901 1,139 (1,858) 767 1,509 Net earnings (loss) per share - basic $ 0.42 $ 0.26 $ (0.43) $ 0.18 $ 0.35 Net earnings (loss) per share - diluted $ 0.40 $ 0.24 $ (0.43) $ 0.18 $ 0.34
FINANCIAL POSITION:
- -------------------------------------------------------------------------------------------------------- (In thousands except ratio) March 31, March 25, March 27, March 28, March 29, 2001 2000 1999 1998 1997 Current ratio 4.06 3.17 3.32 5.06 4.32 Working capital $22,924 $21,066 $18,021 $23,484 $22,692 Total assets 37,318 37,526 33,259 32,672 33,618 Shareholders' equity $28,475 $26,149 $24,710 $26,461 $25,654 Shares of common stock - basic 4,474 4,379 4,338 4,319 4,300 Shares of common stock - diluted 4,803 4,693 4,338 4,377 4,376
PERCENTAGE DATA:
- -------------------------------------------------------------------------------------------------------------- March 31, March 25, March 27, March 28, March 29, 2001 2000 1999 1998 1997 Percent of net sales Gross profit 35.2 33.2 30.6 42.9 38.5 Operating expenses 29.6 30.1 40.6 41.2 34.4 Interest income, net 0.4 0.1 0.3 1.2 1.4 Earnings (loss) before cumulative effect of accounting change and income taxes 6.4 3.4 (8.0) 3.0 5.4 Net earnings (loss) 3.5 2.4 (4.9) 2.1 4.0
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 31, 2001 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. These quotations reflect inter-dealer prices without retail mark-ups, mark-downs, or commission and may not reflect actual transactions.
--------------------------------------------------------------------------------- 2001 High Low 2000 High Low --------------------------------------------------------------------------------- First quarter (3/26-6/24) 12 7/8 6 3/8 (3/28-6/26) 3 1 3/4 Second quarter (6/25-9/30) 10 6 25/32 (6/27-9/25) 3 5/16 1 13/16 Third quarter (10/1-12/30) 7 5/16 4 13/16 (9/26-12/25) 7 1/2 2 1/2 Fourth quarter (12/31-3/31) 8 3/16 4 7/8 (12/26-3/25) 22 6 1/2 - --------------------------------------------------------------------------------------------------------
30 19 SELECTED FINANCIAL DATA Effective March 26, 2000, the Company changed its method of accounting for revenue recognition to conform with the guidance provided by SAB 101 (see Note 2). The Company's unaudited financial results for the quarters ended June 24, September 30 and December 30, 2000 have been restated to apply SAB 101 retroactively to the beginning of fiscal 2001. The impact in 2001 of adopting SAB 101 was to increase net income before the cumulative effect of the accounting change by $520,000, net of income taxes. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------- (In thousands except per share data) 2001 ---------------------------------------------------------- First Second Third Fourth Year ------- ------- ------- ------- ------- Net sales $13,637 $13,642 $11,368 $15,512 $54,159 Gross profit 4,963 4,814 4,068 5,211 19,056 Operating expenses 3,775 4,298 3,883 4,076 16,032 Interest income, net 33 36 96 40 205 Earnings before cumulative effect of accounting change and income taxes 1,253 666 322 1,220 3,461 Earnings before cumulative effect of accounting change 877 465 225 854 2,421 Net earnings 357 465 225 854 1,901 Net earnings per share - basic $ 0.08 $ 0.10 $ 0.05 $ 0.19 $ 0.42 Net earnings per share - diluted $ 0.07 $ 0.10 $ 0.05 $ 0.18 $ 0.40 Equivalent shares of common stock - basic 4,437 4,460 4,488 4,511 4,474 Equivalent shares of common stock - diluted 4,817 4,796 4,777 4,801 4,803
The results of operations and statements of financial position as previously reported in the Company's interim 2001 financial statements filed on Form 10-Q have been revised to retroactively reflect on a pro-forma basis the application of SAB 101 effective March 26, 2000.
For the three months ended --------------------------------------------------------------------------------- June 24, 2000 September 30, 2000 December 30, 2000 ------------- ------------------ ----------------- As Reported Revised As Reported Revised As Reported Revised ----------- ------- ----------- ------- ----------- ------- Net sales $12,161 $13,637 $14,058 $13,642 $11,810 $11,368 Gross profit 4,436 4,963 4,946 4,814 4,266 4,068 Operating expenses 3,775 3,775 4,298 4,298 3,883 3,883 Interest income, net 33 33 36 36 96 96 Earnings before cumulative effect of accounting change and income taxes 726 1,253 798 666 520 322 Earnings before cumulative effect of accounting change 508 877 557 465 363 224 Net earnings 508 357 557 465 363 224
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------- (In thousands except per share data) 2000 ----------------------------------------------------------------- First Second Third Fourth Year -------- ------- ------- ------- ------- 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 before income taxes 162 324 460 687 1,633 Net earnings 112 227 322 478 1,139 Net earnings per share - basic $ 0.03 $ 0.05 $ 0.07 $ 0.11 $ 0.26 Net earnings 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
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