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
31