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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 27, 1997, or
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period from
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to
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Commission File No. 0-12719
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GIGA-TRONICS INCORPORATED
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(Exact name of Registrant as specified in its charter)
California 94-2656341
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4650 Norris Canyon Road, San Ramon, CA 94583
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (510) 328-4650
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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
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Common stock outstanding as of December 27, 1997: 4,320,338
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GIGA-TRONICS INCORPORATED
INDEX
PART I - FINANCIAL INFORMATION Page No.
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ITEM 1 Consolidated Financial Statements:
Consolidated Balance Sheets as of December 27, 1997
(unaudited) and March 29, 1997 ...............................................3
Consolidated Statements of Operations, three months and nine months
ended December 27, 1997 and December 28, 1996 (unaudited).....................4
Consolidated Statements of Cash Flows, nine months
ended December 27, 1997 and December 28, 1996 (unaudited).....................5
Notes to Unaudited Consolidated Financial Statements..........................6
ITEM 2 Management's Discussion and Analysis of
Operations and Financial Condition............................................9
PART II - OTHER INFORMATION
ITEM 1
TO 5 Not applicable
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Net Earnings Per Share and
Common Share Equivalents.........................................13
(27) Financial Data Schedule..........................................14
(b) Reports on Form 8-K
A report on Form 8-K dated December 2, 1997 was filed on
December 16, 1997. It consisted of a merger agreement and
press release announcing the completion of the merger with
Ultracision, Inc.
SIGNATURES....................................................................................12
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GIGA-TRONICS INCORPORATED PAGE 3
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
ASSETS
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Dec. 27, 1997 March 29, 1997
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Current Assets:
Cash and cash equivalents $ 2,833 $ 6,999
Investments 7,980 7,210
Notes receivable 750 ---
Trade accounts receivable, net of allowance of
$291 and $324, respectively 6,700 4,556
Inventories, net 8,198 8,260
Prepaid expenses 536 422
Deferred income taxes 2,441 2,035
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Total current assets 29,438 29,482
Property and Equipment:
Machinery and equipment 8,759 8,182
Office furniture and fixtures 689 683
Land 282 279
Building and leasehold improvements 768 745
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Gross cost property and equipment 10,498 9,889
Less accumulated depreciation and amortization (7,668) (6,953)
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Net property and equipment 2,830 2,936
Patents and licenses 698 1,030
Other assets 74 116
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Total assets $ 33,040 $ 33,564
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current Liabilities:
Line of credit $ --- $ 189
Notes payable --- 76
Accounts payable 2,405 2,417
Accrued payroll and benefits 1,113 791
Customer advances 583 1,081
Other current liabilities 2,192 2,237
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Total current liabilities 6,293 6,791
Long term debt --- 909
Obligation under capital lease and other long term 66 90
Deferred income taxes 120 121
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Total liabilities 6,479 7,911
Shareholders' Equity:
Preferred stock of no par value;
Authorized 1,000,000 shares; no shares outstanding
at December 27, 1997 and March 29, 1997 --- ---
Common stock of no par value;
Authorized 40,000,000 shares; 4,320,338 shares at
December 27, 1997 and 4,316,188 shares at
March 29, 1997 issued and outstanding 11,490 11,463
Unrealized gain (loss) on investments (16) 11
Retained earnings 15,087 14,179
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Total shareholders' equity 26,561 25,653
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Total liabilities and shareholders' equity $ 33,040 $ 33,564
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See accompanying notes to unaudited consolidated financial statements
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GIGA-TRONICS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
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Dec. 27, Dec. 28, Dec. 27, Dec. 28,
1997 1996 1997 1996
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Net sales $ 9,514 $ 10,685 $ 28,169 $ 29,949
Cost of sales 5,598 6,646 15,734 18,301
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Gross profit 3,916 4,039 12,435 11,648
Product development 1,792 1,004 4,396 3,154
Selling, general and administrative 2,019 1,976 6,757 5,865
Amortization of intangibles 102 141 332 420
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Operating expenses 3,913 3,121 11,485 9,439
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Net operating income 3 918 950 2,209
Other income (expense) 7 (21) 32 (3)
Interest income, net 97 147 319 402
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Earnings before income taxes 107 1,044 1,301 2,608
Provision for income taxes 35 271 393 697
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Net earnings $ 72 $ 773 $ 908 $ 1,911
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Earnings per common share - basic $ 0.02 $ 0.18 $ 0.21 $ 0.44
============ ============ ============ ============
Earnings per common share - diluted $ 0.02 $ 0.18 $ 0.21 $ 0.44
============ ============ ============ ============
Weighted average common
shares outstanding 4,320 4,306 4,318 4,298
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Weighted average diluted
common shares outstanding 4,413 4,386 4,377 4,376
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See accompanying notes to unaudited consolidated financial statements.
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GIGA-TRONICS INCORPORATED PAGE 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
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Dec. 27, Dec. 28,
1997 1996
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Cash flows provided from operations:
Net earnings as reported $ 908 $ 1,911
Adjustments to reconcile net earnings to net cash from operations:
Depreciation and amortization 1,062 1,173
Gain on sale of fixed assets (3) 23
Adjustment to conform year end of subsidiary (note 3) --- 254
Deferred income taxes, net (407) (58)
Changes in operating assets and liabilities (3,173) (95)
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Net cash provided by (used in) operations (1,613) 3,208
Cash flows from investing activities:
Investment maturities (purchases), net (797) (4,883)
Additions to property and equipment, net (621) (924)
Other assets 42 69
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Net cash used in investing activities (1,376) (5,738)
Cash flows from financing activities:
Issuance of common stock 27 357
Payment on line of credit (189) (255)
Payment on notes payable and long term debt (985) (436)
Payment on capital lease and other long term (30) (41)
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Net cash used in financing activities (1,177) (375)
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Increase in cash and cash equivalents (4,166) (2,905)
Beginning cash and cash equivalents 6,999 6,441
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Ending cash and cash equivalents $ 2,833 $ 3,536
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Supplementary disclosure of cash flow information:
(1) Cash paid for interest in the nine month period ended December 27,
1997 was $46,000.
(2) Cash paid for income taxes in the nine month period ended December 27,
1997 was $741,000.
(3) Non-cash investing and financing activities: The Company incurred an
unrealized loss of $27,000 (after tax effect) on investments held
available for sale during the nine month period ending December 27,
1997. The Company incurred an unrealized gain of $77,000 (after tax
effect) during the nine month period ended December 28, 1996.
The Company made no purchases of equipment under capital lease
obligations in the nine months ended December 27, 1997. The Company
purchased $62,000 of equipment under capital lease obligation in the
nine months ended December 28, 1996.
See accompanying notes to unaudited consolidated financial statements.
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GIGA-TRONICS INCORPORATED
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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(1) Basis of Presentation
The financial statements included herein have been prepared by 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 29, 1997.
Basic earnings (loss) per share is based on the weighted average number
of shares of common stock outstanding during the period.
Diluted earnings (loss) per share is based on the weighted average
number of shares of common stock and dilutive common stock equivalent
shares outstanding during the year.
(2) Change in Accounting Principle
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
share" (SFAS No. 128). SFAS No. 128 establishes a different method of
computing net income per share than required under the provisions of
Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the
Company is required to present both basic net income per share and
diluted net income per share. The Company adopted SFAS No. 128 in its
fiscal quarter ended December 27, 1997, and all historical net income
per share data presented is restated to conform to the provisions of
SFAS No. 128.
(3) Business Combinations
(a) Effective June 27, 1997, Giga-tronics completed a merger with
Viking Semiconductor Equipment, Inc. (Viking) by issuing
approximately 420,000 shares of the Company's common stock in
exchange for all of the common stock of Viking. The merger has
been accounted for using the pooling-of-interest method of
accounting and accordingly, the consolidated financial
statements for periods prior to the combination have been
restated to include the accounts and results of operations of
Viking. The results of operations previously reported by the
separate entities and the combined amounts presented in the
accompanying consolidated financial statements are summarized in
the table below.
Prior to the combination, Viking's fiscal year ended May 31. In
recording the pooling-of-interest combination, Viking's
financial statements for the twelve months ended March 31, 1997
were combined with Giga-tronics' financial statements for the
same period, and Viking's financial statements for the year
ended May 31, 1996
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were combined with Giga-tronics' financial statements for the
year ended March 30, 1996. An adjustment has been made to
retained earnings for fiscal 1997 to eliminate the effect of
including Viking's results of operations for the two month
period ended May 31, 1996, in both the years ended March 31,
1997 and 1996.
Viking manufactures and markets a line of optical inspection
equipment used to manufacture and test semiconductor devices.
Products include die attachments, automatic die sorters, tape
and reel equipment, and wafer inspection equipment.
(b) Effective December 2, 1997, Giga-tronics completed a merger with
Ultracision, Inc. (Ultracision) by issuing approximately 517,000
shares of the Company's common stock in exchange for all of the
common stock of Ultracision. The merger has been accounted for
using the pooling-of-interest method of accounting and
accordingly, the consolidated financial statements for periods
prior to the combination have been restated to include the
accounts and results of operations of Ultracision. The results
of operations previously reported by the separate entities and
the combined amounts presented in the accompanying consolidated
financial statements are summarized in the table below. Prior to
the combination, Ultracision's fiscal year ended March 31.
Ultracision is a manufacturer of automation equipment for the
test and inspection of silicon wafers. Ultracision additionally
produces a line of probers for the testing and inspection of
silicon devices.
Results of operations previously reported by the separate
entities and the combined amounts presented in the accompanying
consolidated financial statements are summarized below:
Nine months ended Nine months ended
(In thousands) Dec. 27, 1997 Dec. 28, 1996
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Net Sales
Viking $ 1,313 $ 2,714
Ultracision 3,422 4,607
Giga-tronics 23,434 22,628
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Combined $ 28,169 $ 29,949
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Net Income
Viking $ 141 $ (176)
Ultracision (296) 641
Giga-tronics 1,063 1,446
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Combined $ 908 $ 1,911
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(c) On December 24, 1997, the Company announced that it had reached
an agreement in principle to acquire Microsource, Inc. of Santa
Rosa. The Company will exchange shares and options totaling
750,000 shares for all of the outstanding shares and options of
Microsource. The acquisition will be accounted for under the
"purchase" method of accounting and is subject to approval by
the shareholders of both companies. Microsource develops and
manufactures a broad line of YIG tuned oscillators, filters, and
microwave synthesizers.
(4) Inventories
Inventories consist of the following (in thousands):
Dec. 27, 1997 March 29, 1997
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Raw materials $ 3,436 $ 3,506
Work-in-process 3,516 3,346
Finished goods 1,246 1,408
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$ 8,198 $ 8,260
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
The forward-looking statements included in Management's Discussion and Analysis
of Financial Condition and Results of Operations, which reflect management's
best judgment based on factors currently known, involve risks and uncertainties.
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including but not
limited to those discussed below. Forward-looking information provided by
Giga-tronics pursuant to the safe harbor established by recent securities
legislation should be evaluated in the context of these factors.
GENERAL
The Company designs, manufactures, and markets microwave and radio frequency
signal generation and power measurement instruments, and switching devices.
These products are used in the development, test, and maintenance of wireless
communications products and systems, electronic defense systems, and automatic
testing systems (ATE). The Company also manufactures a line of inspection and
handling devices used in the production of semiconductor devices.
The Company intends to broaden its products and expand its markets, both by
internal development of new products and through the acquisition of other
business entities. In that regard, the Company completed the acquisition of
Viking Semiconductor Equipment, Inc. and Ultracision, Inc. during this fiscal
year, thus broadening its product offerings into the semiconductor industry
marketplace. In addition, the Company reached an agreement in principle to
acquire Microsource, Inc., a private company located in Santa Rosa, California.
Microsource is a manufacturer of a broad line of YIG tuned oscillators, filters,
and microwave synthesizers.
Several new products were introduced in the nine months ended December 27, 1997.
Viking Semiconductor Equipment, Inc. introduced the 2300 Series Ball Grid Array
furnace loader and unloader, the 1046 Series Tape and Reel, and the 1063 Die
Bonder, all of which are used in the semiconductor manufacturing process.
Ultracision changed its basic software for all of its products to the Windows NT
platform and Secs2/Gem protocol, thereby updating to the semiconductor industry
standard for equipment interfaces. Ultracision also introduced the AutoBoxer,
used in handling in the wafer manufacturing process.
THREE MONTHS AND NINE MONTHS ENDED DECEMBER 27, 1997 AND DECEMBER 28, 1996
Net sales for the three month and nine month periods ended December 27, 1997
decreased 11% ($1,171,000) and decreased 6% ($1,780,000), respectively, compared
with the same periods last year. The sales decrease in the quarter was
principally due to declining signal generator (SG), radio frequency (RF), and
switching module sales. Sales for semiconductor products remained essentially
the same as the prior year for the quarter. The decline for the nine month
period resulted from a decrease of approximately $3.6 million in the SG product
line, $.9 million in the RF product line, and $.9 million in the switching
modules product line. These were partially offset by an increase of
approximately $2.6 million in power meter (PM) and $1.0 million in the
semiconductor equipment related products. The decline in SG and RF sales is
attributable to maturing of the product line, delays in new products releases,
and constraints on military budgets.
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The change in the switching modules reflects the slowdown in orders over the
recent months due to the timing of large procurements. The increase in PM
products is due to new product releases and growth in the commercial wireless
telecommunications market. The growth in the semiconductor products reflects
increased manufacturing throughput and the introduction of new products.
Gross profit for the three month period decreased by 3% ($123,000) due to higher
costs associated with the roll out of new products in the semiconductor lines.
Gross profit increased 7% ($787,000) for the nine month period. Gross margin as
a percent of sales for the nine months increased to 44% compared to 39% for the
prior year. The increase in profit is attributable to lower manufacturing labor
costs, lower depreciation, and lower controllable manufacturing expenses. The
prior year also included a heavily discounted sale of signal generators.
Operating expenses for the three month and nine month periods increased 25%
($792,000) and 22% ($2,046,000), respectively, compared with the prior year.
Research and development expenses for the three month and nine month periods
increased 78% ($788,000) and 39% ($1,242,000), respectively, compared with the
prior year, in an effort to develop new products in each of its product lines.
Sales and administrative expenses include acquisition related costs for the
three and nine month periods of $227,000 and $678,000, respectively. In
addition, sales and administrative expenses increased for the nine month period
due to higher advertising expenses, sales and administrative salaries, and
commission expenses related to the semiconductor and switching module product
lines.
Interest income for the three month and nine month periods declined over the
prior year due to lower cash available for investment. The cash decline resulted
from extinguishing the debt of Viking Semiconductor and increased funding
required for the new product development, acquisition costs, and higher notes
and accounts receivable balances.
Earnings before income taxes for the three month and nine month periods
decreased 90% ($937,000) and 50% ($1,307,000), respectively, compared to the
same period last year. The change was primarily due to the substantial increase
in expenditures for new product development, particularly in the recently
acquired semiconductor lines, and the $678,000 of acquisition costs.
Orders for the current quarter were slightly lower (5%) than the comparable
period last year. Orders for the nine month period were 5% ($1,483,000) lower
than the prior year. Orders were lower for switching modules caused by a
slowdown in the overall switching market and the timing of large procurements.
Lower orders for semiconductor products were caused by normal fluctuations
between periods for large orders and most recently the effect of the Asian
economy on the semiconductor industry. Backlog at December 1997 was $7,817,000
compared to $10,213,000 at the March year end. The decline in backlog is a
result of lower orders in the switching modules and semiconductor product lines.
The Company expects a continuing flatness in sales in the fourth quarter due to
the maturing of some product lines. New product releases in these lines are not
anticipated until early in fiscal year 1999. The Asian economy may also have
some adverse effects on new orders and sales.
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FINANCIAL CONDITION
The company maintains a strong financial position, with working capital of
$23,145,000 and a ratio of current assets to current liabilities of 4.7 to 1.0
at December 27, 1997. The Company continues to fund all of its working capital
needs from cash provided by operations. Cash used from operations for the nine
months ended December 27, 1997 was $1,613,000 due to the increase in research
and development spending, the acquisitions costs, the increase in accounts
receivable, and the reduction in customer advances.
During the nine month period, the Company spent $621,000 on new manufacturing
and test equipment and other capital items. The Company will continue to invest
in capital items that support growth and new product development, raise
productivity and improve quality. Historically the Company has satisfied its
cash needs internally for both operating and capital expenses, and management
expects to continue to do so.
Management believes that cash reserves and investments remain adequate to meet
anticipated operating needs. 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, the Company 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
As part of its business strategy, the Company intends to broaden its product
lines and expand its markets, in part through the acquisition of other business
entities. The Company has recently acquired Viking Semiconductor Equipment, Inc.
and Ultracision, Inc. The Company also entered into an agreement in principle to
acquire Microsource, Inc. The Company is subject to various risks in connection
with these and any future acquisitions. Such risks include, among other things,
the difficulty of assimilating the operations and personnel of the acquired
companies, the potential disruption of the Company's business, the inability of
the Company's management to maximize the financial and strategic position of the
Company by the successful incorporation of acquired technology and rights into
the Company's product offerings, the maintenance of uniform standards, controls,
procedures and policies, and the potential loss of key employees of acquired
companies. No assurance can be given that any acquisition by the Company will or
will not occur, that if an acquisition does occur, that it will not materially
and adversely affect the Company or that any such acquisition will be successful
in enhancing the Company's business. The Company currently contemplates that
future acquisitions may involve the issuance of additional shares of the
Company's Common Stock. Any such issuances 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.
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SIGNATURES
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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: 02/09/98 /s/
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George H. Bruns, Jr.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: 02/09/98 /s/
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Mark H. Cosmez II
Vice President, Finance and
Chief Financial Officer
(Principal Accounting Officer)