UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the period ended December 29, 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 (IRS 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 [ ]
Common stock outstanding as of January 18, 2002: 4,628,038
PAGE 2
GIGA-TRONICS INCORPORATED
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
ITEM 1 Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of December 29, 2001 and
March 31, 2001 (unaudited) ..................................................3
Condensed Consolidated Statements of Operations, three and nine months
ended December 29, 2001 and December 30, 2000 (unaudited)....................4
Condensed Consolidated Statements of Cash Flows, nine months ended
December 29, 2001 and December 30, 2000 (unaudited)..........................5
Notes to Unaudited Condensed Consolidated Financial Statements...............6
ITEM 2 Management's Discussion and Analysis of Operations and Financial
Condition...................................................................10
PART II - OTHER INFORMATION
ITEM 1 Legal Proceedings
As of January 18, 2002, Giga-tronics 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 2 TO 5 Not applicable
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
Not applicable
SIGNATURES..........................................................................13
PAGE 3
GIGA-TRONICS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(In thousands, except share data)
December 29, March 31,
2001 2001
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 6,727 $ 3,469
Trade accounts receivable, net of allowance 5,221 7,767
of $282 and $262, respectively
Inventories, net 12,317 15,185
Prepaid expenses 835 549
Deferred income taxes 3,620 3,560
----------- -----------
TOTAL CURRENT ASSETS 28,720 30,530
Property and Equipment:
Building and leasehold improvements 408 398
Machinery and equipment 16,373 16,123
Office furniture and fixtures 1,169 1,142
----------- -----------
Property and equipment, gross cost 17,950 17,663
Less accumulated depreciation and amortization 13,604 12,357
----------- -----------
PROPERTY AND EQUIPMENT, NET 4,346 5,306
PATENTS AND LICENSES 24 36
GOODWILL, NET 215 339
OTHER ASSETS 1,349 1,232
----------- -----------
TOTAL ASSETS $ 34,654 $ 37,443
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,121 $ 3,347
Accrued commissions 368 435
Accrued payroll and benefits 1,012 1,687
Accrued warranty 782 732
Customer advances 1,601 690
Obligation under capital lease 114 167
Other current liabilities 684 548
----------- -----------
TOTAL CURRENT LIABILITIES 5,682 7,606
OBLIGATIONS UNDER CAPITAL LEASE, NET OF CURRENT PORTION 113 115
DEFERRED INCOME TAXES 796 796
DEFERRED RENT 430 451
----------- -----------
TOTAL LIABILITIES 7,021 8,968
----------- -----------
Shareholders' Equity
Common stock of no par value; 12,536 12,346
Authorized 40,000,000 shares; 4,628,038 shares outstanding at
December 29, 2001 and 4,542,694 shares at March 31, 2001
Retained earnings 15,097 16,129
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 27,633 28,475
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 34,654 $ 37,443
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
PAGE 4
GIGA-TRONICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
Dec. 29, 2001 Dec. 30, 2000 Dec. 29, 2001 Dec. 30, 2000
------------- ------------- ------------- -------------
NET SALES $ 9,720 $ 11,368 $ 31,409 $ 38,647
Cost of sales 6,315 7,300 21,066 24,802
------------- ------------- ------------- -------------
GROSS PROFIT 3,405 4,068 10,343 13,845
Product development 1,612 1,128 5,156 3,683
Selling, general and administrative 2,166 2,696 6,924 8,083
Amortization of intangibles 46 59 136 190
------------- ------------- ------------- -------------
Operating expenses 3,824 3,883 12,216 11,956
OPERATING (LOSS) INCOME (419) 185 (1,873) 1,889
Other income, net 4 41 46 187
Interest income, net 13 96 47 165
------------- ------------- ------------- -------------
(LOSS) EARNINGS BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (402) 322 (1,780) 2,241
(Benefit) provision for income taxes (211) 97 (748) 674
------------- ------------- ------------- -------------
(LOSS) EARNINGS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $ (191) $ 225 $ (1,032) $ 1,567
Cumulative effect of accounting
change -- -- -- 520
------------- ------------- ------------- -------------
NET (LOSS) EARNINGS $ (191) $ 225 $ (1,032) $ 1,047
============= ============= ============= =============
Basic net (loss) earnings per share:
Before cumulative effect of
accounting change $ (0.04) $ 0.05 $ (0.22) $ 0.35
Cumulative effect of accounting change -- -- -- (0.12)
------------- ------------- ------------- -------------
Basic net (loss) earnings per share $ (0.04) $ 0.05 $ (0.22) $ 0.23
============= ============= ============= =============
Diluted net (loss) earnings per share:
Before cumulative effect of
accounting change $ (0.04) $ 0.05 $ (0.22) $ 0.33
Cumulative effect of accounting change -- -- -- (0.11)
------------- ------------- ------------- -------------
Diluted net (loss) earnings per share $ (0.04) $ 0.05 $ (0.22) $ 0.22
============= ============= ============= =============
Shares used in per share calculation -
Basic 4,626 4,488 4,594 4,462
============= ============= ============= =============
Dilutive 4,626 4,777 4,594 4,799
============= ============= ============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
PAGE 5
GIGA-TRONICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
--------------------------------
Dec. 29, 2001 Dec. 30, 2000
------------- -------------
Cash flows provided from operations:
Net (loss) earnings $ (1,032) $ 1,047
Adjustments to reconcile net (loss) earnings to net cash provided by
operations:
Depreciation and amortization 1,616 1,585
Gain on sale of fixed assets (1) (20)
Deferred income taxes, net (60) (183)
Changes in operating assets and liabilities 3,266 (1,905)
------------- -------------
Net cash provided by operations 3,789 524
Cash flows from investing activities:
Additions to property and equipment (540) (1,118)
Proceeds from sale of equipment 12 26
Other assets (117) 583
------------- -------------
Net cash used in investing activities (645) (509)
Cash flows from financing activities:
Issuance of common stock 190 197
Payments on capital lease and other long term obligations (76) (120)
------------- -------------
Net cash provided by financing activities 114 77
Increase in cash and cash equivalents 3,258 92
------------- -------------
Beginning cash and cash equivalents 3,469 3,455
Ending cash and cash equivalents $ 6,727 $ 3,547
============= =============
Supplementary disclosure of cash flow information:
(1) No cash was paid for interest in the nine month periods ended December
29, 2001 and December 30, 2000.
(2) Cash paid for income taxes in the nine month period ended December 29,
2001 was $47. Cash paid for income taxes in the nine month period ended
December 30, 2000 was $443.
See accompanying notes to unaudited condensed consolidated financial statements.
PAGE 6
GIGA-TRONICS INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed financial statements included herein have been prepared by
Giga-tronics (the "Company"), pursuant to the rules and regulations of
the Securities and Exchange Commission. The results of operations for
the interim periods shown in this report are not necessarily indicative
of results to be expected for the fiscal year. In the opinion of
management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a
fair statement of such operations. For further information, refer to the
financial statements and footnotes thereto, included in the Annual
Report on Form 10-K, filed with the Securities and Exchange Commission
for the year ended March 31, 2001.
Certain amounts in the accompanying March 2001 consolidated financial
statements have been reclassified in order to conform to the December
2001 consolidated financial statement presentation.
(2) Significant Accounting Policies
Revenue
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.
Inventory
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out basis. The Company has estimated a
reserve for excess and obsolete inventory based on consideration of
changes to product specifications, inventory trends, and market
conditions.
Accounts Receivable
Accounts receivable are stated at the net realizable value. The Company
has estimated an allowance for uncollectible accounts based on analysis
of outstanding receivables, consideration of the age of those
receivables, and the Company's historical collection experience.
Deferred Tax Assets
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 December 29, 2001.
Product Development 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 other assets and
amortized over their useful life when reimbursable by the customer.
Otherwise, they are expensed as incurred. Included in other assets as of
December 29, 2001 and March 31, 2001 are capitalized pre-production
costs of $1,257,000, and $1,133,000, respectively.
PAGE 7
(3) Inventories
Inventories consist of the following (in thousands):
Dec. 29, 2001 March 31, 2001
------------- -------------
Raw materials $ 7,149 $ 8,432
Work-in-process 3,802 4,833
Finished goods 862 1,020
Loaned Inventory 504 900
------------- -------------
Total inventory $ 12,317 $ 15,185
============= =============
(4) Earnings Per Share
Basic earnings per share is calculated by dividing net income or loss by
the weighted average common shares outstanding during the period.
Diluted earnings per share reflects the net incremental shares that
would be issued if dilutive outstanding stock options were exercised,
using the treasury stock method. In the case of a net loss, it is
assumed that no incremental shares would be issued because they would be
antidilutive. In addition, certain options are considered antidilutive
because the options' exercise price was above the average market price
during the period. The shares used in per share computations for the
three and nine month periods ended December 29, 2001 and December 30,
2000 are as follows (in thousands):
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
Dec. 29, 2001 Dec. 30, 2000 Dec. 29, 2001 Dec. 30, 2000
------------- ------------- ------------- -------------
Net (loss) earnings $ (191) $ 225 $ (1,032) $ 1,047
Weighted average:
Common shares outstanding 4,626 4,488 4,594 4,462
Dilutive potential common shares -- 289 -- 337
Common shares assuming dilution 4,626 4,777 4,594 4,799
Number of stock options not
included in the computation 590 68 590 37
All stock options outstanding were excluded from the computation of
diluted EPS for the three and nine month periods ended December 29, 2001
because the company experienced a loss from continuing operations and
the options are, therefore, antidilutive.
The number of stock options not included in the computation of diluted
EPS for the three and nine month periods ended December 30, 2000
reflects stock options where the exercise prices were greater than the
average market price of the common shares and were, therefore,
antidilutive.
PAGE 8
(5) Significant Customers and Industry Segment Information
The Company has five reportable segments: Giga-tronics Instrument
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 and devices.
DYMATIX manufactures and markets optical inspection equipment used to
test semiconductor devices and automation equipment for the test and
inspection of silicon wafers. The Corporate segment handles the
financing needs of each segment and lends funds to each segment as
required.
Information on reportable segments is as follows (in thousands):
Three Months Ended
--------------------------------------------------------------------
December 29, 2001 December 30, 2000
------------------------------- -------------------------------
Pre-tax Pre-tax
Net Sales Income (loss) Net Sales Income (loss)
------------- ------------- ------------- -------------
Giga-tronics Instrument $ 5,810 $ 380 $ 6,249 $ 151
ASCOR 884 (311) 2,145 482
Microsource 2,478 (344) 1,801 (556)
DYMATIX 548 (339) 1,173 (219)
Corporate -- 212 -- 464
------------- ------------- ------------- -------------
Total $ 9,720 $ (402) $ 11,368 $ 322
============= ============= ============= =============
Nine Months Ended
--------------------------------------------------------------------
December 29, 2001 December 30, 2000
------------------------------- -------------------------------
Pre-tax Pre-tax
Net Sales Income (loss) Net Sales Income (loss)
------------- ------------- ------------- -------------
Giga-tronics Instrument $ 17,893 $ 289 $ 17,542 $ 598
ASCOR 2,946 (373) 5,973 1,345
Microsource 7,461 (1,727) 9,905 (714)
DYMATIX 3,109 (730) 5,227 (43)
Corporate -- 761 -- 1,055
------------- ------------- ------------- -------------
Total $ 31,409 $ (1,780) $ 38,647 $ 2,241
============= ============= ============= =============
(6) Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141, Business Combinations, and Statement No. 142,
Goodwill and Other Intangible Assets. Statement 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill.
Statement 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested
for impairment at least annually in accordance with the provisions of
Statement 142. Statement 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated
useful lives, and reviewed for impairment in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
PAGE 9
The Company adopted the provisions of Statement 141 as of July 1, 2001.
The adoption of Statement 141 did not have a material impact on the
Company's financial position or results of operations. The Company is
required to adopt the provisions of Statement 142 effective March 31,
2002. The Company has not yet determined the impact the adoption of
Statement 142 will have on its financial position or results of
operations.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement No. 144
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. Statement No. 144 retains the fundamental
provisions in Statement No. 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation
issues associated with Statement No. 121. Statement No. 144 also retains
the basic provisions of APB Opinion No. 30 on how to present
discontinued operations in the statement of operations, but broadens
that presentation to include a component of an entity (rather than a
segment of a business). The Company is required to adopt the provisions
of Statement No. 144 effective March 31, 2002. The impact of such
adoption is not anticipated to have a material effect on the Company's
financial position or results of operations
PAGE 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
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 listed in the Giga-tronics' annual report on Form 10-K
for the fiscal year ended March 31, 2001 Part I, under the heading "Certain
Factors Which May Adversely Affect Future Operations or an Investment in
Giga-tronics", and "Management's Discussion and Analysis of Financial Conditions
and Results of Operations".
GENERAL
Giga-tronics designs, manufactures, and markets microwave and radio frequency
signal generation and power measurement instruments, switching devices, and YIG
tuned oscillators. These products have broad applications in the development,
test and maintenance of commercial and military wireless communications systems,
electronic defense systems and automatic testing systems (ATE). Giga-tronics
also manufactures a line of inspection and handling equipment used in the
production of semiconductor devices.
THREE AND NINE MONTHS ENDED DECEMBER 29, 2001 AND DECEMBER 30, 2000
Total orders for the three month period were $6,394,000 versus $13,418,000 for
the comparable period last year. The new orders declined primarily due to the
weakness in the overall wireless market partially offset by increases in
military orders. Orders for the Instrument division were 51% ($4,381,000) lower
in the third quarter of FY 2002 versus the prior year. Orders for ASCOR were 36%
($495,000) lower for the third quarter versus last year. Orders for Microsource
were 37% ($594,000) lower than the comparable quarter last year. DYMATIX orders
were 86% ($1,554,000) lower in the three months ended December 29, 2001 versus
the same period a year ago. For the nine months, orders were $20,698,000, which
includes the partial order cancellation in the second quarter at the Instrument
division of $3,703,000, compared to $45,712,000 for the same period last year.
Backlog at December 29, 2001 was $29,251,000 (of which approximately $11.0
million is expected to be shipped within one year) compared to $43,359,000 at
December 30, 2000.
Net sales for the three and nine month periods ended December 29, 2001 decreased
15% ($1,648,000) and 19% ($7,238,000), respectively, compared with the same
periods last year. The reduction in sales was primarily due to fewer orders
booked because of the general slowdown in the commercial wireless market and
stretch outs on existing orders in backlog. Giga-tronics Instrument sales
decreased 7% ($439,000) for the quarter on weak orders and increased 2%
($351,000) for the nine months ended December 29, 2001 primarily due to strong
backlog as compared to the same periods a year ago. ASCOR sales decreased in the
third quarter 59% ($1,261,000) and for the nine months decreased 51%
($3,027,000) primarily due to less backlog from the respective periods of a year
ago coupled with weaker new orders. Sales for Microsource increased 38%
($677,000) in the quarter primarily due to shipments on the $7 million order
received in the first quarter of FY 2002 and decreased 25% ($2,444,000) for the
nine months ended December 29, 2001 primarily due to our customers delaying
shipments of new product. Sales for DYMATIX decreased 53% ($625,000) in the
quarter and declined 41% ($2,118,000) for the nine months primarily due to
customers delaying orders until the new product is released, as well as less
backlog than the comparable periods a year ago.
Cost of Sales decreased 14% ($985,000) in the quarter ended December 29, 2001
from the similar period a year ago primarily due to the 15% overall decline in
sales offset by the increase in cost of sales at Microsource on their 38%
increase in revenue. For the nine months ended December 29, 2001, cost of sales
decreased 15% ($3,736,000) versus the prior year. This decrease is attributable
to 19% lower sales coupled with higher manufacturing material costs and
manufacturing labor for the products shipped.
PAGE 11
Operating expenses for the three month period decreased 2% ($59,000) from the
same period a year ago due to decreases of $530,000 in SG&A and $13,000 in total
amortization offset by an increase of $484,000 in product development. For the
nine month period, operating expenses increased 2% ($260,000) from the
comparable period a year ago due to decreases of $1,159,000 in SG&A and $54,000
in total amortization offset by an increase of $1,473,000 in product
development. Product development expenses for the three and nine month periods
increased 43% ($484,000) and 40% ($1,473,000), respectively, compared with the
prior year primarily due to increased product development at DYMATIX and
increased YIG product development costs at Microsource. Selling, general and
administrative expenses decreased 20% ($530,000) for the three months ended
December 29, 2001 compared to the prior year. The decrease is a result of lower
commission expense of $125,000 on lower sales for the quarter, $219,000 less in
administrative expenses and $186,000 less in marketing expenses during the
quarter. For the nine months ended December 29, 2001, selling, general and
administrative expenses decreased 14% ($1,159,000) versus the same period a year
ago. The decrease is primarily due to lower commission expense of $599,000
related to lower sales levels coupled with lower administrative and marketing
expenses of $462,000 and $98,000, respectively, primarily due to expense
reduction measures. For the three and nine month periods ended December 29,
2001, these expense reductions were primarily personnel related. Amortization of
intangibles decreased 22% ($13,000) for the three months and 28% ($54,000) for
the nine months as compared to the prior year. The decrease in the amortization
of intangibles is a result of lower amortization of patents and licenses.
Interest income for the three and nine month periods decreased from the prior
year due to lower interest rates on cash available for investment.
Earnings before income taxes for the three month and nine month periods
decreased compared to the same periods last year. The change was primarily due
to lower revenue and higher research and development expenses.
FINANCIAL CONDITION
Giga-tronics maintains a strong financial position, with working capital of
$23,038,000 and a ratio of current assets to current liabilities of 5.1 to 1.0
at December 29, 2001. Giga-tronics continues to fund all of its working capital
needs from cash provided by operations. Cash provided from operations, for the
nine months ended December 29, 2001, was $3,789,000.
Cash and cash equivalents increased $3,258,000 for the nine months ended
December 29, 2001. Giga-tronics spent $540,000 on new manufacturing and test
equipment and other capital items. Giga-tronics intends to continue investing in
capital items that support growth and new product development, raise
productivity and improve the quality of its products. Historically, the Company
has satisfied its cash needs internally for both operating and capital
expenditures, and management expects to continue to do so for the foreseeable
future.
Management believes that cash reserves and investments remain adequate to meet
anticipated operating needs. In addition, Giga-tronics has an unsecured
revolving line of credit for $7 million, none of which has been utilized. This
line of credit expires September 30, 2002. It is also the Company's intention to
increase research and development expenditures for the purpose of broadening its
product base. From time to time, Giga-tronics considers a variety of acquisition
opportunities to also broaden its product lines and expand its market. Such
acquisition activity could also increase the Company's operating expenses and
require the additional use of capital resources.
OUTLOOK
With the broad softening in the wireless industry, Giga-tronics' outlook for
2002 is cautious. Giga-tronics is uncertain of the duration and severity of the
current economic downturn in the markets we serve and the ultimate impact this
will have on the Company. While there are some indications of increased strength
in defense, the economic downturn has impacted capital spending in many of our
commercial markets and has resulted in declining new product orders. In response
to the current market conditions, Giga-tronics has implemented cost reduction
programs in order to reduce expenses. However, Giga-tronics remains committed to
the investment in new product development in order to expand our product lines
and update our existing lines with additional
PAGE 12
features. While the Microsource segment is expected to improve in the current
year, its short-term growth will be less than previously anticipated as there
are timing delays associated with currently booked orders.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this section of the report, including statements
regarding sales under "OUTLOOK" and statements under "FINANCIAL CONDITION", are
forward-looking. While Giga-tronics believes that these statements are accurate,
Giga-tronics' business is dependent upon general economic conditions and various
conditions specific to the test and measurement, wireless and semiconductor
industries. Future trends and these factors could cause actual results to differ
materially from the forward-looking statements that we have made. In particular:
Giga-tronics' core business is test and measurement, as well as components for
the wireless communications market, which continues to remain soft. 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. If the commercial market should decline further,
then shipments in the current year could fall short of plan resulting in a
decline in earnings. Also, Giga-tronics has a significant number of
defense-related orders. While Giga-tronics has seen some improvement in the
defense sector, it is not significant enough to offset the decline in the
commercial sector. If the defense market should decline, shipments in the
current year could be less than anticipated and cause a decrease in earnings.
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, develop new products and applications and
in part to develop, manufacture and successfully introduce new products and
product lines with improved capabilities and continue enhancing 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 may also experience difficulty obtaining
critical parts or components required in the manufacturing of our products,
resulting in our inability to fulfill orders in a timely manner, which may have
a negative impact on our earnings. Also, the Company may not timely ramp
manufacturing capacity to meet order demand and quickly adapt cost structures to
changing market conditions.
As part of our business strategy, Giga-tronics intends to broaden its product
lines and expand its markets, in part through the acquisition of other business
entities. The Company acquired Microsource, Inc. in fiscal 1999 in a transaction
accounted for as a purchase. The Company is subject to various risks in
connection with past and any future acquisitions. Such risks include, among
other things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's business, the
inability of the Company's management to maximize the financial and strategic
position of the Company by the successful incorporation of acquired technology
and rights into the Company's product offerings, the maintenance of uniform
standards, controls, procedures and policies, and the potential loss of key
employees of acquired companies. No assurance can be given that any acquisition
by Giga-tronics will or will not occur, that if an acquisition does occur, that
it will not materially and adversely affect the Company or that any such
acquisition will be successful in enhancing the Company's business. Giga-tronics
currently contemplates that future acquisitions may involve the issuance of
additional shares of the Company's common stock. Any such issuance may result in
dilution to all shareholders of the Company, and sales of such shares in
significant volume by the shareholders of acquired companies may depress the
price of the Company's common stock.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q 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 Operations Or An Investment In
Giga-tronics" as filed with the Securities and Exchange Commission.
PAGE 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GIGA-TRONICS INCORPORATED
(Registrant)
Date: January 28, 2002 /s/ GEORGE H. BRUNS, JR
------------------------------------
George H. Bruns, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: January 28, 2002 /s/ MARK H. COSMEZ II
------------------------------------
Mark H. Cosmez II
Vice President, Finance and
Chief Financial Officer
(Principal Accounting Officer)