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C O R P O R A T E P R O F I L E
Giga-tronics Incorporated (NASDAQ/NMS: GIGA) was founded in 1980.
It became a publicly traded company in 1983, and is listed on the NASDAQ
market under the symbol GIGA. Giga-tronics Incorporated consists of four,
separate operating units:
Instrument Division supplies RF and microwave frequency synthesizers
and power measurement instruments in bench top, rack mount and VXIbus
configurations for use in cellular, PCS, radar, electronic warfare, satellite
and telecommunications systems test applications.
Microsource is a vertically integrated designer and manufacturer of leading-edge
microwave circuits, components, and sub-systems. The company's product line
includes a broad range of YIG based signal sources and peripheral devices such as
oscillators, filters, multipliers, band reject and band pass filters, and broad band
signal synthesizers.
ASCOR designs and manufactures switching equipment in the VXI and PXI
formats for terrestrial and satellite related communications, commercial aircraft,
military flight systems and automatic test systems.
DYMATIX designs and manufactures automation and test equipment for the
semiconductor and memory media industries. Key products include, automatic
die sorting systems, automatic tape and reel equipment, robotic wafer/disk
handling and inspection equipment, and wafer test probers.
F I N A N C I A L H I G H L I G H T S
(In thousands except per share data and ratio)
March 25, 2000
March 27, 1999
March 28, 1998
New orders $ 64,013
$ 36,786 $ 33,092
Net sales
47,577 37,636
36,813
Operating income 1,495
(3,759)
617
Pre-tax earnings (loss)
Net earnings (loss)
1,633
1,139
(3,006)
1,096
(1,858)
767
Backlog 34,128 17,692 6,492
Earnings (loss) per share - basic
0.26
(0.43)
Earnings (loss) per share - diluted 0.24
(0.43)
Current ratio
Working capital
Shareholders’ equity
Total assets
Equity per share
3.23
21,645
26, 149
3.32
18,021
24,710
37,526 33,259
5.90
5.66
0.18
0.18
5.06
23,484
26,461
32,672
6.12
1
T O O U R S H A R E H O L D E R S
O p e r a t i o n s
The fiscal year ended March 25, 2000 was a good year
for Giga-tronics. It produced a record level of new orders, a record
backlog, and full recovery from the poor operating performance
of the prior period.
New orders booked this year totaled $64,013,000, up 74%
from $36,786,000 a year earlier.
Backlog at year-end was $34,128,000, up 93% from
$17,692,000 at March 27, 1999. Of this backlog, approximately
$10,000,000 is currently scheduled for shipment beyond FY2001
year-end and thus contributes to longer term planning stability.
Sales for the year were $47,577,000, up 26% from
$37,636,000 the preceding year. Manufacturing margin was
$15,810,000, up 36% from $11,534,000 a year ago. Net earnings
of $1,139,000 or $.24 a share compared with a loss of $1,858,000
or $.43 a share in the prior year.
The fourth quarter of FY2000 produced a record quarterly booking
of new orders of $24,541,000 up 109% from the $11,727,000 for
the same period a year earlier.
Sales for the quarter were $12,924,000 up more than 50% from
$8,586,000 a year earlier. Earnings were $478,000 or $.10 a fully
diluted share compared with a loss of $875,000 or $.20 a share
in the prior year.
2
All divisions were profitable for the quarter and for the year.
Most gratifying, however, was the consistent improvement in
operating performance throughout the year.
Q1
Q2 Q3
Q4
Total
Sales
$11,505 $11,834 $11,314 $12,924 $47,577
Pretax
EPS
162
.03
324
.05
460
687 1,633
.07 .10
.24
Giga-tronics continues to evidence a strong balance sheet
with a ratio of current assets to current liabilities of 3.23 to 1.0.
Working capital at year-end was $21,645,000 up from
$18,021,000 a year earlier.
Shareholder’s equity was $26,149,000 or $5.90 per
share compared with $24,710,000 or $5.66 a share at the end
of the prior year.
O r g a n i z a t i o n
Instrument Division’s focus this year has been on
strengthening both its engineering and marketing organizations.
A new Vice President of Product Development brings more than 30
years of wireless technology, discipline and managerial experience to
the organization. The addition of an International Sales Manager
reflects the Instrument Division’s commitment to that extremely
important market.
3
Microsource, acquired in May 1998, has done well in
overcoming many of its pre-acquisition problems. New orders, sales
and backlog all set new records in the year just closed. However, we
believe Microsource still has before it an opportunity to substantially
improve its manufacturing margins and therefore its level of profita-
bility through improvement of its manufacturing process. To this
end, the Division has, this past year, restructured and added to the
management strength of its manufacturing organization.
DYMATIX is a new entity reflecting the complete consol-
idation of the former Viking and Ultracision subsidiaries into a
single operating unit in one location under one management team.
In addition to the obvious benefits of reduced management structure
and more efficient utilization of resources, this consolidation has
resulted in a sharper focus on fewer objectives and therefore a
much improved ratio of successful attainment.
ASCOR had a good year in terms of booking new
business but a difficult time in making its sales and earnings goals
through most of the year because of delivery schedule constraints on
its larger orders. By year-end, however, it did achieve levels of ship-
ment that enabled it to return to profitability not only for the fourth
quarter but for the full year as well. ASCOR enters FY2001 with a
good backlog and a broadening product line. We believe it should,
therefore, return to its historical consistency in operating performance.
4
O u t l o o k
Giga-tronic’s principal market is in the broad span of wireless
communication as reflected in part by the specific applications shown
on the following pages of this report. Forecasts published by analysts
of this market are extremely optimistic.
The accuracy of these forecasts is of less consequence than
their thrust, as they point to continuing, even accelerating, growth in
broad band wireless applications.
Some segments of the market have been growing very
rapidly and are expected to continue to do so. Other segments of the
market are seen as potentially explosive but are based on relatively
new technology. Others still are extremely futuristic and beyond the
range of any meaningful measure. And cutting across all of this is
the ever-present question of customer acceptance and utilization.
Nevertheless, we believe we are participating in an exceptional
market opportunity. How this sorts out in terms of the application of
our products and technology to these many segments of wireless
communication is indeed the challenge before us. We approach it
with optimism and enthusiasm.
George H. Bruns, Jr.
Chairman and Chief Executive Officer
5
CB
Citizens Band
EMC
Electro-magnetic compatibility
TETRA
Trans Euro. Trunked Radio
GSM
Global Sytem/Mobile Comm.
UHF
Ultra High Frequency
IMTS
Improved mobile telephone service
ISM
Industrial Scientific & Medical Band
PCN
Public Communications Network
GPS
Global Positioning System
DECT
Digital European Cordless Telephone
PCS
Personal Comm. System
WLL
Wireless Local Loop
TVRO
TV Recieve Only
LEO
Low Earth Orbit
LMDS
Local Multi-point Distr. Service
CDMA
Code Division Multiple Access
TDMA
Time Division Multiple Access
LAN
Local Area Network
WAN
Wide Area Network
DBS
Direct Broadcast Service
F R E Q U E N C Y S P E C T R U M
FIXED & MOBILE SERVICES
MARITIME COMM & NAV
BROADCAST, AM TO TVRO
AERO COMM & NAV
CB
PAGING
LOW BAND LAND MOBILE
CT1
Wireless Local Loop
SCA PAGING
HIGH BAND LAND MOBILE
PAGING
TETRA, Wireless Local Loop
UHF LAND MOBILE
IMTS PAGING
UHF TV
CELLULAR
CELLULAR TRUNKING SMR
Wireless Local Loop
ISM
PCN spread spectrum
CT2
Narrowband GPS
GPS
Wireless Local Loop
GPS
Globalstar mobile link
DECT, Wireless Local Loop
PCS
Wireless Local Loop
PCS
ISM
Wireless Local Loop
PCS, Big LEO sat/mobile downlink
Bluetooth
Wireless Local Loop
10 KHz - 500
10 KHz - 3000
500 KHz - 4000
40 KHz - 3700
27
30 - 50
30 - 50
40 - 50
66 - 88, 132 - 520
90 - 108
150 - 170
150 - 175
380 - 512
450 - 500
450 - 500
500 - 800
800 - 900
800 - 950
800
800 - 1000
900
1000 1 GHz
930 - 931
970 - 1210, 1220 - 1400, 1420 - 1540
1500
1550 - 1580, 1590 - 1640, 1650 - 1680
1600
1800
1850 - 1990
1900
2130 - 2150, 2180 - 2200
2200 - 2700
2300 - 2310
2400 - 2500
2400
2400 2.5 GHz
TV RELAY AND MMDS-IFTS
Multichannel Multipoint Distribution Service (MMDS)
Wireless Local Loop
MILITARY
RADAR, AERO. COMM & NAV
MARITIME COMM & NAV
Wireless Local Loop
AERO. COMM & NAV
TVRO
Fixed Satellite, Mobile, space to earth
1700 - 2700
2500 - 2700
2700
2700 - 2900
2700 - 3000
2900 - 3000
3500
3600 - 3700
3950 - 4000
4660 - 4685 5 GHz
Big LEO, forward link
Private Land Mobile
WLL, unlicensed high speed data, ISM, Govt
Big LEO
Big LEO, return link
Govt, space research, satellite
RADAR
Mobile Satellite
DBS
RADAR
Fixed - Satellite, earth to space
RADAR
Fixed - Mobile, Video
Local Multipoint Distribution Service (LMDS)
LMDS
Big LEO
Microwave point to point
European LMDS
ISM
Vehicle Radar
Air to Air secure communications
5000 - 5150
5150 - 5650
5150 - 5350, 5725 - 5825
5925 - 6425
6425 - 7125 8 GHz
7075 - 8500
9000 - 10500
11.7 - 12.2 GHz
12.2 - 12.7
13.4 - 14 GHz
14 - 15.7 GHz
15 - 17.7 GHz 20 GHz
21.4 - 22.5 GHz
27.5 - 28.35 GHz
29.1 - 29.25 GHz
29 .75 - 30 GHz
38 GHz 40 GHz
41 - 42 GHz
61 GHz
77 GHz
94 GHz 110 GHz
6
M A R K E T S
The distribution of frequency spectrum on the proceeding page, ranging
from 10 kilohertz to 110 gigahertz, indicates the real breadth of the wireless communi-
cations market and the wide range of specific applications of this technology.
Giga-tronic’s target market at this time is in the range of frequencies up to 42
gigahertz.
We tend to think of wireless communication principally in terms of voice and
data transmission. Certainly this does represents the largest and most rapidly growing
segment of this market and includes such sub-segments as cellular, internet, point to
point, point to multipoint, LMDS, back-haul, fixed and mobile services, satellite up
and down links, GPS, LAN, WAN and others. This rapid growth is expected to con-
tinue across the entire range of voice and data communication as methods of delivery
are refined and declining costs permit access to an increasingly broader user base.
At the same time, however, the aviation segment of this market uses wireless
communication not only in voice and data transmission but in its application of radar
to the very vital function of air traffic control. Commercial aircraft in flight use storm
warning radar to detect and avoid storm cells for reasons of both safety and passenger
comfort. Forward looking radar provides terrain warning in mountainous country.
Ground control radar is used to direct and control aircraft traffic on runways and taxi-
ways. There are potential applications for in flight close proximity warning.
The military uses radar in a wide range of navigation, identification and
weapons control applications. Ground forces are now equipped with very sophisticated
wireless communications and wireless weapons control. With the current strong focus
on COTS (commercial off-the shelf ) procurement by the armed services there is little
difference between commercial and military procurement.
Although they may vary substantially in size, all of the foregoing segments of
this very large market utilize the same fundamental technologies and have very similar
needs for operating systems and the products to support them. Therefore they are all
extremely important markets to Giga-tronics.
7
P R O D U C T S
Microwave Signal Generators
Yig based microwave and milli-meter
RF Signal Generators
Peak Power Meters
Universal Power Meters
Hand Held Power Meters
wave products.
Free running and phase locked
oscillators in narrow and wide
band configurations.
Band pass and band reject filters.
Narrow and wide band frequency
Micro chip inspection & handing systems
synthesizers.
VXI Microwave Signal Generator
VXI Universal Power Meters
VXI ATE Switches
Scaler Network
U S E R S
Lucent Technologies
SpectraPoint Wireless
Motorola
Nokia
Ericsson
Qualcomm
Alcatel
Nortel
Agilent
Management Technologies
RCAF (Canadian Airforce)
Boeing
8
Highly integrated front-end modules
for digital radio applications.
Hughes
Raytheon
Midoriya
Northrop Grumman
Harris Aerospace
Harris Radio (Farinon)
Teradyne
Rohde & Schwarz
BAE Systems
MIT (Microwave
InstrumentationTechnologies)
U.S. Navy
A P P L I C A T I O N S
In 1999, Nokia, Motorola and Ericcson together are reported to have
produced more than one hundred and fifty million wireless telephone handsets.
Accurate output signal control of these handsets is essential to insure
proper communication under a variety of field use conditions. Additionally, with
production quantities of this magnitude, rapid testing is essential to meet
production cost constraints.
Giga-tronics Instrument Division supplies the Model 8650 Power Meter
to these and other companies for the purpose of production line testing of wireless
telephone handsets.
9
Global expansion of terrestrial and satellite
communications is driving the need for higher performance
antennas and other wireless communications products.
Antenna pattern measurement is an essential step in this
process.
Far field measurements are conducted over distance at a large outdoor
range. It is often more practical, however, to conduct these extensive tests indoors
within an anechoic chamber and then convert these near field measurements to far
field equivalents. These near field measurements generally require two microwave
sources, one for the signal and a second as a local oscillator.
Microwave Instrument Technologies, a former Scientific Atlanta
Company, is a leading designer and producer of antenna and related instrument
systems. Giga-tronics Instrument Division supplies it’s Model 12000A Microwave
Synthesizer to MI Technologies for antenna pattern measurement where stability,
accuracy, spectral purity and fast switching speed are required.
Satellites in orbit require constant monitoring
of the many elements of this very complex system of rocket
engines, radio receivers, radio transmitters, battery monitors,
thermal monitors, etc. ASCOR provided the digital interface
products to permit different elements of the satellite to com-
municate with each other in the course of ground testing.
ASCOR is similarly involved in a number of wireless communications test
applications such as wired and wireless scanning (Symbol Technology), DSL testing
(Alcatel, Agilent Technologies, Wandel & Goltermann), power supply testing,
(Lucent Technologies) and wireless testing (Motorola).
ASCOR products include microwave switches and very low noise switch
matrix devices incorporating design techniques that provide little or no cross talk
thus insuring excellent signal fidelity.
10
Oscillators are a basic source of frequency for wireless transmission
systems as well as many types of frequency based instruments. Because of their
particular design, YIG (yttrium - iron- garnet) oscillators provide stability, low
noise and wide bandwidth that make them particularly suitable for wireless
communication application.
Microsource Division of Giga-tronics is a leader in YIG oscillator
technology and in the design and manufacture of such associated products as
band pass and band reject filters, multipliers and broad band signal synthesizers.
These devices are used in wireless base station transmitting and receiving
radios, for point-to-point and point-to-multipoint communications. Tunable reject
filters are used in combat aircraft and naval shipboard to filter out clutter from their
own radar signal which otherwise would interfere with analysis of incoming signals.
YIG oscillators and filters are also used in a variety of signal generating
test and measurement instruments produced by other equipment manufactures.
11
Radar in its early days was a basic communications
system. It communicated with other physical bodies - i.e.:
aircraft, surface vessels, shorelines, etc. - to determine rela-
tive speed and direction.
Modern radar systems are much more sophisticated and much more versatile.
They can detect heavy weather cells from commercial aircraft in flight, detect other air-
craft in close proximity, distinguish between friendly and enemy aircraft and detect and
"signature identify" incoming missiles. This ability to identify in accurate and timely
fashion is critical in determining specific response.
Clearly, the calibration and maintenance of such complex systems is essential
to their purpose. An early application of Giga-tronics microwave synthesizers was as
shipboard installations for the purpose of maintaining at full readiness the wide range
of radar systems aboard Navy combat vessels. Giga-tronics’ instruments today are used
across the broad spectrum of radar systems for effective calibration and maintenance.
Automatic Test Equipment (ATE) Systems ordinarily
consist of racks of specific purpose test instruments mount-
ed in a fixed location to which the device to be tested is
delivered. However, new electronic defense systems place
increased emphasis on rapid deployment and flexibility
in systems integration. They must be able to address a wide variety of applications
monitoring battlefield conditions and maintaining front line as well as rear echelon
communications equipment.
The U.S. Marine Corp required a highly mobile and reliable battlefield ATE system
to maintain and repair a variety of communications and other electronic systems in
the field.
The resulting system consisted of the usual array of specific purpose test instruments
designed, however, as VXI "instrument on a card" devices. Thus it was possible to
mount in the back of a Humvee an entire ATE system, which in conventional design
would have resulted in the larger, much heavier rack mounted configuration.
Giga-tronics Instrument Division is supplying both the VXI Microwave Signal
Generator and VXI Downconverter for this system.
12
Internet access is typically obtained through a
modem to either copper or fiber optic cable. Both are limited
by bandwidths of 3 mb/s and 10 mb/s of data respectively.
Current systems are becoming increasingly limited as business
and personal use accelerates. The trend toward increased data
file transfers and downloading of software for leasing purposes
will continue to increase demand for wider bandwidths.
Fixed wireless communication systems currently pro-
vide bandwidths of up to 155 mb and therefore much greater
carrying capacity.
SpectraPoint Wireless LLC - now owned jointly by Motorola and Cisco
Systems - manufacturers and markets high speed, broadband wireless systems for
Local Multipoint Distribution Services (LMDS). This LMDS cutting-edge
technology provides high-speed internet access, wireless data, voice and video
to subscribers. Giga-tronics’ Microsource Division provides Node Local Oscillator
Assemblies to SpectraPoint as an integral part of both transmitters and receivers in
SpectraPoint’s LMDS system.
Microchips are critical components in
most wireless communication devices. The
testing of these circuits is essential to insure
proper performance. Equally critical, however,
is the equipment that handles the micro circuits
without inducing defects during the manufacture
and test process.
DYMATIX Division of Giga-tronics produces a range of automation
systems that test, handle, inspect, sort and package micro circuits.
The Model 1046 tape and reel system shown here picks chips from
a sliced wafer and transfers them to a continuous tape for transport, storage
or to other automatic equipment for attaching chips to their final location.
The advantage of the Model 1046 is that it is readily adaptable to handling
many different types and sizes of chips.
13
F I N A N C I A L R E P O R T
15
MANAGEMENT’S DISCUSSION AND ANALYSIS
17
CONSOLIDATED BALANCE SHEETS
18
CONSOLIDATED STATEMENTS OF OPERATIONS
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29
INDEPENDENT AUDITOR’S REPORT
30
SELECTED FINANCIAL DATA
32
CORPORATE INFORMATION
14
M A N A G E M E N T ’ S D I S C U S S I O N
A N D A N A L Y S I S
R e s u l t s o f O p e r a t i o n s f o r F i s c a l 2 0 0 0 a s C o m p a r e d t o 1 9 9 9
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.
Other income decreased in fiscal 2000 primarily due to the fiscal 1999 gain from the sale of a surplus building following
facilities consolidation at DYMATIX for which there was no corresponding sale in fiscal 2000. Net interest income in 2000 decreased
51% from 1999 due to lower average cash available for investment. The average cash decline resulted principally from low cash level
at the beginning of the year. The provision for income taxes in 2000 was $494,000, or 30%, of the pre-tax earnings.
Giga-tronics recorded net earnings of $1,139,000, or $0.24 per share, in 2000 versus a loss of $1,858,000, or $0.43 per
share, in 1999. The improvement in 2000 earnings was due to the Company's higher sales levels in 2000 as compared to 1999.
R e s u l t s o f O p e r a t i o n s f o r F i s c a l 1 9 9 9 a s c o m p a r e d t o 1 9 9 8
Giga-tronics acquired Microsource, Inc., a manufacturer of YIG oscillators and communications related synthesizers, on May
18, 1998 in a purchase transaction. Performance from that date through March 27, 1999 is included in the Company's operating
results. Management believes this acquisition positioned Giga-tronics to expand its market for microwave instruments and devices.
New orders received in 1999 were $36,786,000, an increase of 11% from $33,092,000 in 1998. These orders included
$7,900,000 for Microsource for which there were no comparable orders in 1998. At year end 1999, the Company's backlog of unfilled
orders was $17,692,000, compared to $6,492,000 at the end of 1998. The increase in backlog is primarily attributable to addition of
the Microsource backlog which was $11,066,000 at year end.
Net sales for 1999 were $37,636,000, a 2% increase from 1998. The increase is due to the addition of Microsource sales of
$9,000,000 offset by reduced sales volume for DYMATIX (formerly the Semiconductor Equipment Group) as well as Giga-tronics
Instrument products. In 1999, DYMATIX sales declined $6.2 million. Revenues for Giga-tronics' semiconductor product lines were
impacted by the substantial downturn of the semiconductor industry together with the severe economic problems in Asia. The
Giga-tronics Instrument sales reductions of $3.4 million were due to the aging of the product lines, delay in new product releases,
and weakness in the wireless industry. ASCOR sales improved $1.4 million in 1999 over 1998.
Cost of sales increased 24% in 1999 to $26,102,000 from $21,024,000 in 1998. The increase in 1999 is attributable to the
addition of Microsource as well as inventory write offs associated with the Company's decision to discontinue a particular
semiconductor equipment line. The cost of sales for Microsource during fiscal 1999 was $6,978,000.
Operating expenses increased 1% in 1999 over 1998, which includes Microsource operating expenses of $2,152,000.
Product development costs declined $.9 million in 1999 to $5.3 million as the development of new products began to return to
previous levels. Selling, general and administrative expenses increased in 1999 due to the addition of Microsource which had expenses
of $1,602,000. Amortization of intangibles increased as a result of the addition of the amortization of goodwill for Microsource offset
by reduced amortization of patents and licenses.
Other income increased primarily due to the gain from the sale of a surplus building following facilities consolidation of the
Company's semiconductor equipment operations. Net interest income in 1999 declined 75% from 1998 due to lower cash available for
investment. The cash decline resulted principally from the extinguishment of debt, reduction of accounts payable and acquisition costs
associated with the acquisition of the Microsource subsidiary. The benefit for income taxes in 1999 was $1,148,000 or 38% of the
pre-tax loss.
The Company recorded a net loss of $1,858,000, or $0.43 per share, in 1999 versus earnings of $767,000, or $0.18 per
share in 1998. The decline in 1999 earnings was due to the Company's lower gross profits in 1999 of $11,534,000 as compared to
$15,789,000 in 1998.
15
M A N A G E M E N T ’ S D I S C U S S I O N
A N D A N A L Y S I S
F i n a n c i a l C o n d i t i o n a n d L i q u i d i t y
As of March 25, 2000, Giga-tronics had $3,455,000 in cash, cash equivalents, and investments, compared to $2,686,000
as of March 27, 1999 and $10,335,000 as of March 28, 1998. Cash provided by operations amounted to $2,065,000 in 2000,
compared to cash used by operations of $2,365,000 in 1999, and $1,099,000 in 1998. Cash provided by operations in 2000 is
attributed to operating income in the year. In 1999, losses by operations were the significant reason for the increase in use of cash by
operations. In 1998, the increase in product development costs of $1,619,000 and the merger transaction costs of $643,000 were
the significant reasons for the use of cash by operations.
Giga-tronics continues to maintain a strong financial position, with working capital at year end of $21,645,000 compared to
$18,021,000 in 1999 and $23,484,000 in 1998. The Company's current ratio of 3.2 decreased from the 1999 and 1998 current ratio
of 3.3 and 5.1, respectively. The increase in working capital is primarily a result of the increased operations of the Company.
Additions to property and equipment were $1,361,000 in 2000, compared to $953,000 in 1999 and $779,000 in 1998.
Fiscal 2000 spending reflects continuing investments to support new product development, increased productivity, and improved
product quality. Other cash inflows in 2000 consists of $174,000 of common stock in connection with the exercise of stock options.
Other cash inflows in 1999 were $89,000 of common stock in connection with the exercise of stock options, $1,291,000 from the
sale of the Company's building and $5,742,000 from maturities of investments, net of purchases, which were principally marketable
securities classified as available for sale.
Management believes that the Company has adequate resources to meet its operating and capital expenditure needs for the
foreseeable future. The Company has a seven million dollar unsecured line of credit, none of which has been used. The Company
may continue to increase product development expenditures in the near term for the purpose of broadening its product base. It is the
Company's intention to broaden its product lines and expand its market, both by internal development of new products and through
the acquisition of other business entities.
F a c t o r s T h a t M a y A f f e c t F u t u r e R e s u l t s O f O p e r a t i o n s
BUSINESS CLIMATE MAY BECOME VOLATILE
Giga-tronics' has a significant number of defense-related orders. If the defense market should decline, shipments in the
current year could be less than anticipated and cause a decrease in earnings. The Company's commercial product backlog has a
number of risks and uncertainties such as the cancellation or deferral of orders. If this occurs, then shipments in the current year
could fall short of plan resulting in a decline in earnings.
GIGA-TRONICS ACQUISITIONS MAY NOT BE EFFECTIVELY INTEGRATED AND THEIR INTEGRATION MAY BE COSTLY
As part of its business strategy, Giga-tronics intends to broaden its product lines and expand its markets, in part through the
acquisition of other business entities. In fiscal 1999 the Company acquired Microsource, Inc. in a transaction accounted for as a
purchase. Giga-tronics is subject to various risks in connection with this and any future acquisitions. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the acquired companies, the potential disruption of the
Company's business, the inability of management to maximize the financial and strategic position of the Company by the successful
incorporation of acquired technology and rights into its product offerings, the maintenance of uniform standards, controls,
procedures and policies, and the potential loss of key employees of acquired companies. No assurance can be given that any
acquisition by Giga-tronics will or will not occur, that if an acquisition does occur, that it will not materially harm the Company or
that any such acquisition will be successful in enhancing the Company's business. The Company currently contemplates that future
acquisitions may involve the issuance of additional shares of common stock. Any such issuance may result in dilution to all
Giga-tronics shareholders, and sales of such shares in significant volume by the shareholders of acquired companies may depress
the price of its common stock.
Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report to
Stockholders contain forward-looking statements that involve risks and uncertainties. The actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to,
those discussed herein and in the Company's 2000 Report 10-K under "Item 1. Business" and "Certain Factors Which May Affect
Future Operation Or An Investment In Giga-tronics" as filed with the Securities and Exchange Commission.
16
C O N S O L I D A T E D B A L A N C E S H E E T S
(In thousands except share data)
Assets
Current assets
Cash and cash equivalents
Trade accounts receivable, net of allowance
of $253 and $435 respectively
Inventories, net
Income tax receivable
Prepaid expenses
Deferred income taxes
Total current assets
Property and equipment
Leasehold improvements
Machinery and equipment
Office furniture and fixtures
Property and equipment, gross cost
Less accumulated depreciation and amortization
Property and equipment, net
Patents and licenses
Goodwill, net
Deferred income taxes
Other assets
Total assets
Liabilities and shareholders' equity
Current liabilities
Accounts payable
Accrued commissions
Accrued payroll and benefits
Accrued warranty
Customer advances
Obligation under capital lease
Other current liabilities
Total current liabilities
Obligations under capital lease, net of current portion
Deferred income taxes
Deferred rent
Total liabilities
Shareholders' equity
Preferred stock of no par value;
Authorized 1,000,000 shares; no shares outstanding
at March 25, 2000 and March 27, 1999
Common stock of no par value;
Authorized 40,000,000 shares; 4,431,008 shares at
March 25, 2000 and 4,361,902 shares at
March 27, 1999 issued and outstanding
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
See Accompanying Notes to Consolidated Financial Statements
March 25, 2000
March 27, 1999
$
3,455
$
2,686
9,194
14,692
—
444
3,570
31,355
382
14,673
1,023
16,078
10,678
5,400
112
564
—
95
$ 37,526
$
4,065
625
1,638
553
1,536
118
1,175
9,710
127
1,011
529
11,377
6,434
13,249
725
383
2,309
25,786
311
13,460
1,060
14,831
9,179
5,652
349
1,194
169
109
$ 33,259
$
3,022
369
1,346
467
1,648
112
801
7,765
210
—
574
8,549
—
—
11,921
14,228
26,149
$ 37,526
11,621
13,089
24,710
$ 33,259
17
C O N S O L I D AT E D S TAT E M E N TS O F O PE R AT I O N S
Years ended
(In thousands except per share data)
March 25, 2000
March 27, 1999
March 28, 1998
Net sales
Cost of sales
Gross profit
Product development
Selling, general and administrative
Amortization of intangibles
Operating expenses
Operating income (loss)
Other income (expense)
Interest income, net
Earnings (loss) before income taxes
Provision (benefit) for income taxes
$ 47,577
31,767
15,810
4,180
9,655
480
14,315
1,495
79
59
1,633
494
$ 37,636
26,102
11,534
5,313
9,418
562
15,293
(3,759 )
632
121
(3,006 )
(1,148 )
Net earnings (loss)
$ 1,139
$ (1,858 )
Earnings (loss) per common share - basic
Earnings (loss) per common share - diluted
Weighted average basic
common shares outstanding
Weighted average diluted
common shares outstanding
See Accompanying Notes to Consolidated Financial Statements
$
$
0.26
0.24
4,379
4,693
$ (0.43 )
$ (0.43 )
4,338
4,338
$ 36,813
21,024
15,789
6,200
8,537
435
15,172
617
22
457
1,096
329
767
0.18
0.18
4,319
4,377
$
$
$
18
C O N S O L I D AT E D S TAT E M E N TS
O F S H A R E H O L D E R S ’ E QU I T Y
(In thousands except share data)
Balance at March 29, 1997
Comprehensive Income
Net earnings
Unrealized loss on investments,
net of income tax benefit of $16
Comprehensive Income
Stock issuance under stock
option plans
Balance at March 28, 1998
Comprehensive Income
Net loss
Unrealized gain on investments,
net of income tax benefit of $10
Comprehensive loss
Stock issuance under stock
option plans
Balance at March 27, 1999
Comprehensive Income
Net earnings
Stock issuance under stock
Option plans
Tax benefit associated with exercise
of stock options
Common Stock
Shares
Amount
Comprehensive
Income (Loss)
Other
Comprehensive
Income (Loss)
Retained
Earnings
Total
4,316,188
$ 11,463
$ —
$ 11
$ 14,180
$ 25,654
—
—
—
10,111
—
—
—
69
767
(29)
738
—
(29)
—
—
—
767
—
—
—
767
(29)
—
69
4,326,299
$ 11,532
$ — $ (18) $ 14,947
$ 26,461
— (1,858)
— (1,858)
(1,858)
18
—
— (1,840)
18
—
—
—
—
—
18
—
89
35,603
89
—
4,361,902
$ 11,621
$ — $ — $ 13,089
$ 24,710
—
—
1,139
69,106
—
174
126
—
—
—
—
—
1,139
1,139
—
—
174
126
—
—
—
Balance at March 25, 2000
4,431,008
$ 11,921
$ — $ — $ 14,228
$ 26,149
See Accompanying Notes to Consolidated Financial Statements
19
C O N S O L I D A T E D S T A T E M E N T S
O F C A S H F L O W S
Years ended
(In thousands)
March 25, 2000
March 27, 1999
March 28, 1998
Cash flows provided from operations:
Net earnings (loss)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operations:
Provision for bad debt
Depreciation and amortization
Tax benefit from employee stock options
Tax benefit of pre acquisition NOL utilization
Gain on sales of fixed assets
Deferred income taxes
Changes in operating assets and liabilities:
Trade accounts receivable
Inventories
Prepaid expenses
Accounts payable
Accrued commissions
Accrued payroll and benefits
Accrued warranty
Accrued other expenses
Customer advances
Income taxes receivable/payable
Net cash provided by (used in) operations
Cash flows from investing activities:
Purchases of investments
Maturities of investments
Proceeds from sale of property and equipment
Additions to property and equipment
Payment for purchase of Microsource, including transaction costs
Advances to Microsource
Issuance of notes receivable
Other assets
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Issuance of common stock
Dividends paid
Payment on line of credit
Payment on notes payable and other long term liabilities
Payments on capital lease and other long term obligations
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Supplementary disclosure of cash flow information:
Cash paid for income taxes
Cash paid for interest
Non-cash investing and financing activities:
Purchases under capital lease obligations
See Accompanying Notes to Consolidated Financial Statements
20
$ 1,139
$(1,858)
$ 767
(182)
2,111
126
394
(20)
(81)
(2,578)
(1,443)
(61)
1,043
256
292
86
535
(112)
560
2,065
—
—
7
(1,361)
(8)
—
—
14
(1,348)
174
—
—
(45)
(77)
52
769
2,686
3,455
$
86
—
50
142
2,208
—
—
(521)
(443)
1,738
(1,710)
74
(622)
(180)
67
(269)
(209)
(968)
186
(2,365)
(2,268)
8,010
1,291
(953)
(605)
(940)
—
(17)
4,518
89
—
(1,500)
(2,497)
(170)
(4,078)
(1,925)
4,611
2,686
$
7
—
—
(31)
1,407
—
—
(3)
(120)
(2,337)
196
(522)
204
206
(118)
(67)
(212)
(469)
—
(1,099)
(36,294)
37,751
—
(779)
—
—
(860)
57
(125)
69
(27)
(189)
(985)
(32)
(1,164)
(2,388)
6,999
4,611
$ 951
58
—
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
1 Business Combinations
On May 18, 1998, Giga-tronics Incorporated acquired Microsource, Inc. (Microsource) of Santa Rosa, California. Microsource develops and
manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters, and microwave synthesizers. The acquisition was accounted
for using the purchase method of accounting, and accordingly, the results of operations of Microsource have been included in the Company’s
consolidated financial statements from May 18, 1998. The purchase price consisted of $1,500,000 plus contingent payments based upon future
net income of Microsource during the two fiscal years after the effective time of the merger. The excess of the purchase price over the fair
value of the net identifiable assets of $1,509,000 was recorded as goodwill and other intangibles (primarily patents).
The total purchase price of $1,500,000 has been allocated to the net assets acquired based on the estimated fair value as follows (in thousands):
Current assets
Property and equipment
Goodwill and other intangibles
Current liabilities
Capital lease and other long term obligations, net
Less advances to Microsource, net, and transaction costs
$
$
5,119
4,370
1,509
(7,018)
(517)
3,463
(1,963)
1,500
The purchase price was subsequently adjusted to give effect to the contingent payment of $8,000, net paid to Microsource shareholders based on
the subsidiary's fiscal year 2000 operating results. In addition, the purchase price allocation was adjusted to give effect in fiscal year 2000 to the
recognition of deferred tax assets of $394,000 for which no value was assigned at the date of the acquisition.
Results of operations previously reported by the separate entities prior to the mergers and the pro-forma combined amounts are summarized below.
Year ended March 28, 1998 (unaudited)
Net sales
Net earnings (loss)
Net earnings (loss) per share
Giga-tronics
$ 36,813
767
0.18
$
Microsource
$ 6,262
(4,531)
$ —
Pro-forma
Adjustments
$ —
(390)
$ —
Pro-forma
Combined
43,075
(4,154)
(0.96)
$
$
Pro-forma adjustment represents increased depreciation on the step-up basis (to fair market value) on property, plant and equipment, the
amortization of goodwill created as a result of the acquisition of Microsource, and interest accrued by Microsource on the notes due to
Giga-tronics for which no income had previously been recorded by Giga-tronics.
2 Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of Giga-tronics and its wholly owned subsidiaries.
The Company
Giga-tronics and its subsidiary companies design, manufacture and market a broad line of test and measurement equipment used in the
development, test, and maintenance of wireless communications products and systems, flight navigational equipment, electronic defense systems,
and automatic testing systems. The Company also manufactures and markets a line of test, measurement, and handling equipment used in the
manufacturing of semiconductor devices. The Company’s products are sold worldwide to customers in the test and measurement and
semiconductor industries. The Company has no foreign operations, and all non-U.S. sales are made in U.S. dollars.
Principles of Consolidation
All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated financial statements include the accounts of Giga-tronics and its wholly-owned subsidiaries.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that effect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fiscal Year
March. Fiscal years 2000, 1999 and 1998 each contained 52 weeks.
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
Revenue Recognition Revenues are recognized when the earnings process has been completed and products are shipped or when services are
performed. Upon shipment, the Company also provides for the estimated cost that may be incurred for product warranties.
Cash Equivalents
purchase to be cash equivalents.
The Company considers all highly liquid debt instruments with remaining maturity dates of 90 days or less from date of
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.
21
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated
Property and Equipment
useful lives of the respective assets, which range from three to ten years for machinery and equipment and office fixtures. Leasehold improvements and
assets acquired under capital leases are amortized using the straight-line method over the shorter of the estimated useful lives of the respective assets or
the lease term. Recoverability of property and equipment is measured by comparison of its carrying amount, including the unamortized portion of
goodwill allocated to property and equipment, to future cash flows the property and equipment are expected to generate. The Company assesses the
recoverability of enterprise level goodwill by determining whether the unamortized goodwill balance can be recovered through undiscounted future
cash flows of the acquired operation. To date, the Company has made no adjustments to the carrying value of its property and equipment or goodwill
due to asset impairment.
Deferred Rent Rent expense is recognized in an amount equal to the minimum guaranteed base rent plus future rental increases amortized on the
straight-line basis over the terms of the leases, including free rent periods. Included in other long-term liabilities is the excess of rent expense over
required rental payments.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Patents and Licenses
2000 and March 27, 1999 accumulated amortization on patents and licenses was $2,084,000 and $1,848,000, respectively.
Patents and licenses are being amortized using the straight-line method over periods of five to seven years. As of March 25,
Goodwill
accumulated amortization on goodwill was $1,725,000 and $1,481,000 respectively.
Goodwill is being amortized using the straight-line method over a period of five years. As of March 25, 2000 and March 27, 1999
Product Development Costs
Product development costs are charged to operations in the year incurred.
Software Development Costs
are expensed as incurred until technological feasibility in the form of a working model has been established. To date, software development has been
concurrent with the establishment of technological feasibility, and accordingly, no costs have been capitalized.
Development costs included in the research and development of new products and enhancements to existing products
Stock-based Compensation
The Company uses the intrinsic value method to account for stock-based compensation.
Earnings (Loss) Per Share
the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed exercise of stock options. Antidilutive options
are not included in the computation of diluted earnings per share.
Basic earnings (loss) per share are computed using the weighted average number of common shares outstanding during
Financial Instruments and Concentration of Credit Risk
25, 2000, consist principally of cash, cash equivalents and trade accounts receivable. The Company’s cash equivalents consist principally of money
market funds and certificates of deposits which are held in recognized depository institutions. Concentration of credit risk in trade accounts receivable
results primarily from sales to major customers. The Company individually evaluates the creditworthiness of its customers and generally does not
require collateral or other security. Historically, the Company has not incurred any significant credit related losses.
Financial instruments, which potentially subject the Company to credit risk as of March
Fair Market Value of Financial Instruments
payable approximates fair market value because of the short maturity of these financial instruments.
The carrying amount for the Company’s cash equivalents, trade accounts receivable and accounts
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No.133, "Accounting for Derivative Instruments
and Hedging Activites." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in earnings in the period of change. The Company must adopt SFAS No. 133 in the
first quarter of fiscal 2002. Management does not believe the adoption of SFAS No. 133 will have a material effect on the financial position or operations
of the Company.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101. SAB 101 presents certain of the SEC’s staff views on applying generally
accepted accounting principles for revenue recognition in financial statements. The Company has not determined the impact implementation of SAB No.
101 will have on its consolidated results of operations.
The FASB issued Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation – an Interpretation of APB No. 25" (FIN No.
44) in March 2000. The interpretation clarifies the application of Opinion 25 for only certain issues such as the following: (a) the definition of
employee for the purposes of applying Opinion 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of
stock compensation awards in a business combination. The Company must adopt FIN No. 44 by July 1, 2000. The Company does not believe that the
interpretation will have a material effect on its consolidated results of operations, financial position, or liquidity.
22
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
3 Cash, Cash Equivalents and Short-term Investments
Cash, cash equivalents, and short-term investments consisted of the following at March 25, 2000 and March 27, 1999:
Cash and Cash Equivalents
Amortized
Cost
$ 1,067
1,933
455
$ 3,455
Fair
Value
$ 1,067
1,933
455
$ 3,455
Cash and Cash Equivalents
Amortized
Cost
$ 1,093
1,593
$ 2,686
Fair
Value
$ 1,093
1,593
$ 2,686
March 25, 2000
(In thousands)
Cash
Money market funds
Other marketable securities
Total debt securities
March 27, 1999
(In thousands)
Cash
Money market funds
Total debt securities
4 Inventories
Years ended
(In thousands)
Raw materials
Work-in-progress
Finished goods
Loaned inventory
5 Selling Expenses
March 25, 2000
March 27, 1999
$ 8,095
5,746
294
557
$ 6,386
6,124
305
434
$ 14,692
$ 13,249
Selling expenses consist primarily of commissions paid to various marketing agencies. Commission expense totaled $2,360,000, $2,051,000,
and $2,155,000 in fiscal 2000, 1999, and 1998, respectively. Advertising costs which are expensed as incurred totaled $511,000, $558,000, and
$431,000 for fiscal 2000, 1999, and 1998, respectively.
6 Significant Customers and Industry Segment Information
The Company has five reportable segments: Giga-tronics Instruments Division, ASCOR, Microsource, DYMATIX, and Corporate. Giga-tronics
Instrument division produces a broad line of test and measurement equipment used in the development, test and maintenance of wireless
communications products and systems, flight navigational equipment, electronic defense systems and automatic testing systems. ASCOR designs,
manufactures, and markets a line of switching devices that link together many specific purpose instruments that comprise automatic test systems.
Microsource develops and manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers, which
are used in a wide variety of microwave instruments or devices. DYMATIX, which includes Viking Semiconductor Equipment, Inc. and Ultracision,
Inc., manufactures and markets optical inspection equipment used to test semiconductor devices and automation equipment for the test and
inspection of silicon wafers. Corporate handles the financing needs of each segment and lends funds to each segment as required.
The accounting policies for the segments are the same as those described in the "Summary of Significant Accounting Policies." The Company
evaluates the performance of its segments and allocates resources to them based on earnings before income taxes (pre-tax income (loss)).
Segment net sales includes sales to external customers. Segment pre-tax loss includes an allocation for corporate expenses, amortization of
goodwill, and interest expense from borrowings from Corporate. Corporate expenses are allocated to the reportable segments based principally
on full time equivalent headcount. The interest expense is charged at prime which is currently 9% for cash required by each segment. Goodwill
associated with acquisitions are recorded as assets of the individual segments. Assets include accounts receivable, inventories, equipment, cash,
deferred income taxes, prepaid expenses, goodwill and other long-term assets. The Company accounts for inter-segment sales and transfers at
terms that allow a reasonable profit to the seller. During the periods reported there were no significant inter-segment sales or transfers.
The Company's reportable operating segments are strategic business units that offer different products and services. They are managed separately
because each business utilizes different technology and requires different marketing strategies. All of the businesses except for Giga-tronics Instruments
were acquired. The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer ("CEO"). The CEO reviews
financial information presented on a consolidated basis accompanied by disaggregated information about revenues and pre-tax income by operating
segment. The tables below present information for the fiscal years ended in 2000, 1999 and 1998:
23
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
March 25, 2000 (In thousands):
Revenue
Interest income
Interest expense
Amortization & depreciation
Pre-tax income
Assets
March 27, 1999 (In thousands):
Revenue
Interest income
Interest expense
Amortization & depreciation
Pre-tax income (loss)
Assets
March 28, 1998 (In thousands):
Revenue
Interest income
Interest expense
Amortization & depreciation
Pre-tax income (loss)
Assets
Giga-tronics
Instruments
$ 18,516
—
25
699
361
13,546
Giga-tronics
Instruments
$ 17,061
35
—
924
(805)
10,130
Giga-tronics
Instruments
$ 20,441
—
5
1,110
1,626
12,778
ASCOR
Microsource
DYMATIX
Corporate
Total
$ 6,705
34
15
153
53
5,299
ASCOR
$ 6,484
10
31
152
546
4,426
ASCOR
$ 5,070
40
—
163
62
3,425
$ 15,069
1
634
1,164
132
11,874
Microsource
$ 8,984
—
455
1,004
(777)
11,495
Microsource
$ —
—
—
—
—
—
$ 7,287
—
329
95
168
5,396
DYMATIX
$ 5,107
2
287
128
(2,791)
5,763
DYMATIX
$ 11,302
5
183
134
(1,192)
7,326
$ — $ 47,577
105
46
2,111
1,633
37,526
70
(957)
—
919
1,411
Corporate
Total
$ — $ 37,636
167
46
2,208
(3,006)
33,259
120
(727)
—
821
1,445
Corporate
Total
$ — $ 36,813
515
58
1,407
1,096
32,672
470
(130)
—
600
9,143
The Company’s Giga-tronics Instruments, ASCOR, and Microsource segments sell to agencies of the U.S. Government and U.S. defense-
related customers. In fiscal 2000, 1999, and 1998 U.S. Government and U.S. defense-related customers accounted for 16%, 24%, and
12% of sales, respectively.
Export sales accounted for 30%, 20%, and 28% of the Company’s sales in fiscal 2000, 1999, and 1998, respectively. Export sales by
geographical area are shown below:
Years ended (In thousands)
Americas
Europe
Asia
Rest of world
7 Earnings (loss) per Share
$
March 25, 2000
1,989
6,448
4,981
1,050
14,468
$
March 27, 1999
445
$
3,446
3,371
403
7,665
$
March 28, 1998
345
$
3,990
5,747
328
10,410
$
Shares used in per share computations for the years ended March 25, 2000, March 27, 1999, and March 28, 1998 are as follows:
Years ended (In thousands except per share data)
March 25, 2000
March 27, 1999
March 28, 1998
Net earnings (loss)
Weighted average:
Common shares outstanding
Common share equivalents
Common shares assuming dilution
Net earnings per share of common stock
Net earnings per share of common stock
assuming dilution
$ 1,139
$ (1,858 )
$
767
4,379
314
4,693
4,338
—
4,338
$ 0.26
$ (0.43 )
$ 0.24
$ (0.43 )
4,319
58
4,377
0.18
0.18
177
$
$
Stock options not included in computation
24
537
The number of stock options not included in the computation of diluted EPS for the period ended March 27, 1999 is a result of the Company’s loss from
continuing operations and therefore the options are antidilutive. The number of stock options not included in the computation of diluted EPS for the periods
ending March 25, 2000 and March 28, 1998 reflects stock options where the exercise prices were greater than the average market price of the common
shares and are therefore antidilutive.
24
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
8 Income Taxes
Following are the components of the provision (benefit) for income taxes:
Years ended
(In thousands)
Current:
Federal
State
Deferred:
Federal
State
Charge in lieu of taxes attributable to employer
stock option plans
Goodwill, for initial recognition of acquired tax
benefits that previously were included in the
valuation reserve
Provision (benefit) for income taxes
March 25, 2000
March 27, 1999
March 28, 1998
$
$
46
7
53
(180)
100
(80)
127
394
494
$
(720)
4
(716)
(205)
(227)
(432)
—
—
$
413
20
433
50
(154)
(104)
—
—
$ (1,148)
$
329
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)
Current tax assets, net
Noncurrent tax asset (liabilities), net
Net deferred taxes
Future state tax effect
Allowance for doubtful accounts
Fixed asset depreciation
Inventory reserves and additional costs capitalized
Deferred revenue
Accrued vacation
Accrued warranty
Other accrued liabilities
Net operating loss carryforward
Unrealized loss (gain) on equity securities
Income tax credits
Valuation allowances
March 25, 2000
March 27, 1999
$ 3,570
(1,011)
$ 2,559
(188)
196
(1,116)
2,747
19
268
237
330
6,452
—
501
(6,887)
$ 2,559
$ 2,309
169
$ 2,478
(238)
187
188
2,797
52
251
162
269
6,576
(18)
—
(7,748)
$ 2,478
Income tax expense (benefit) differs from the amounts computed by applying the U.S. federal income tax rate to pre-tax income
as a result of the following:
Years ended
(In thousands except percentages)
Statutory federal income tax (benefit)
Beginning of year change in deferred
tax asset valuation allowance
State income tax, net of federal benefit
Nontax deductible expenses
Interest income exempt from federal tax
Tax credits
Goodwill and patent amortization
Other
Effective income tax (benefit)
March 25, 2000
March 27, 1999
March 28, 1998
$ 555
34.0% $ (1,022)
34.0%
$ 372
34.0%
(55)
57
6
(51)
(98)
88
(8)
$ 494
(3.4 )
3.5
0.4
(3.1 )
(6.0 )
5.4
(0.5 )
—
(146)
14
(19)
(58)
84
(1)
30.3% $ (1,148)
—
4.9
(0.4 )
0.6
1.9
(2.8 )
—
38.2%
(85)
(87)
210
(83)
(24)
—
26
$ 329
(7.8)
(8.0)
19.2
(7.5)
(2.2)
—
2.3
30.0%
25
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
The change in valuation allowance from March 27, 1999 to March 25, 2000 was $860,000. The change in valuation allowance from March 28,
1998 to March 27, 1999 was $7,648,000. The change in valuation allowance from March 29, 1997 to March 28, 1998 was $272,000.
The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized. The
ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the period in which those temporary
differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment.
Based on the historical taxable income and projections for future taxable income over the periods in which the deferred tax assets become
deductible, management believes it more likely than not that the Company will realize benefits of these deductible differences, net of valuation
allowances as of March 25, 2000.
During the year ended March 27, 1999, the Company acquired approximately $7,600,000 of deferred tax assets in the acquisition of
Microsource, which was fully offset by a valuation allowance. Subsequent recognition of tax benefits relating to the valuation allowance for
deferred tax assets of Microsource will be allocated to goodwill and the remainder to income tax benefit. At March 25, 2000, goodwill was
reduced by the $394,000 for the tax benefits realized from the Microsource deferred tax assets.
During the year ended March 25, 2000, disqualifying employee stock option dispositions resulted in an income tax deduction to the Company
of approximately $269,000 and a tax benefit of approximately $127,000. The tax benefit has been reflected as an increase to the Company’s
paid-in-capital in the accompanying financial statements.
9 Stock Options and Employee Benefit Plans
The Company has established a stock option plan which provides for the granting of options for up to 700,000
Stock Option Plan
shares of common stock at 100% of fair market value at the date of grant, with each grant requiring approval by the Board of Directors of
the Company. Options granted vest in one or more installments as set forth in the relevant option agreement and must be exercised while
the grantee is employed by the Company or within a certain period after termination of employment. Options granted to employees shall
not have terms in excess of 10 years from the grant date. During December 1998, the Company offered options holders the opportunity to
have outstanding options repriced to current fair value, with the related vesting period starting over. The Company cancelled and reissued
(repriced) 405,250 options pursuant to the repricing. Holders of options may be granted stock appreciation rights (SAR’s), which entitle
them to surrender outstanding options for a cash distribution under certain changes in ownership of the Company, as defined in the stock
option plan. As of March 25, 2000, no SAR’s have been granted under the option plan. As of March 25, 2000, the total number of shares of
common stock available for issuance is 608,312 under the Giga-tronics stock option plan and 17,048 under the prior Ultracision stock
option plan. All outstanding options have a term of five years. With the merger of one of the Company’s subsidiaries, the Company also
assumed 56,370 options granted under its existing option plan. These options vest 100% after two years and have a term of five years.
Following is a summary of stock option activity:
Per Share Weighted
Average Fair Value
of Options Granted
$ 3.822
$ 2.914
$ 2.613
Outstanding as of March 29, 1997
Exercised
Forfeited
Granted
Outstanding as of March 28, 1998
Exercised
Forfeited
Granted
Outstanding as of March 27, 1999
Exercised
Forfeited
Granted
Outstanding as of March 25, 2000
Options
Exercisable
12,150
106,682
48,814
131,424
Shares
318,870
(950)
(16,250)
89,000
390,670
(1,400)
(561,456)
807,750
635,564
(28,204)
(168,875)
115,500
553,985
Weighted Average
Exercise Price
$ 7.058
4.000
4.115
7.410
7.268
2.660
6.399
2.818
2.391
2.515
2.118
2.613
$ 2.514
26
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
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)
Net earnings (loss)
As reported
Pro-forma
Net earnings (loss) per share – basic
As reported
Pro-forma
Net earnings (loss) per share – diluted
As reported
Pro-forma
March 25, 2000
March 27, 1999
March 28, 1998
$ 1,139
872
0.26
0.20
0.24
$ 0.19
$ (1,858)
(2,234)
(0.43)
(0.52)
(0.43)
$ (0.52)
$ 767
404
0.18
0.09
0.18
$ 0.09
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 25, 2000
March 27, 1999
March 28, 1998
Expected life of options
Expected life of purchase rights
Volatility
Risk-free interest rate
Dividend yield
4 years
6 mos
60%
5.08 to 5.97
zero
4 years
6 mos
60%
4.53 to 5.66
zero
4 years
6 mos
60%
5.50 to 6.25
zero
Options Outstanding and Exercisable as of March 25, 2000, by Price Range
Range of
Exercise Prices
$2.09
From $2.12 to $4.00
$7.75
From $2.09 to $7.75
Number
of Options
Outstanding
Weighted Average
Remaining
Contractual Life
Weighted
Average
Exercise Price
374,187
155,798
24,000
553,985
3.71
3.81
0.79
3.61
$ 2.094
2.717
7.750
$ 2.514
Number
of Options
Exercisable
84,876
22,548
24,000
131,424
Weighted
Average
Exercise Price
$ 2.094
2.827
7.750
$ 3.252
Under the Company’s Employee Stock Purchase Plan (the Purchase Plan), employees meeting specific
Employee Stock Purchase Plan
employment qualifications are eligible to participate and can purchase shares semi-annually through payroll deductions at the lower of
85% of the fair market value of the stock at the commencement or end of the offering period. The Purchase Plan permits eligible
employees to purchase common stock through payroll deductions for up to 10% of qualified compensation. As of March 25, 2000,
45,734 shares remain available for issuance under the Purchase Plan. The weighted average fair value of the purchase rights granted
in fiscal 2000 was $2.522.
The Company has established 401(k) plans which cover substantially all employees. Participants may make voluntary
401(k) Plan
contributions to the plan up to 20% of their defined compensation. The Company is required to match a percentage of the participants’
contributions in accordance with the plan. Participants vest ratably in Company contributions over a four-year period. Company
contributions to the plans for fiscal 2000, 1999, and 1998 were approximately $151,000, $153,000, and $151,000, respectively.
27
N O T E S T O C O N S O L I D A T E D
F I N A N C I A L S T A T E M E N T S
10 Commitments
The Company leases a 47,300 square foot facility located in San Ramon, California, under a twelve-year lease (as amended) that
commenced in April 1994. The Company leases a 18,756 square foot facility located in Fremont, California, under a seven-year lease that
commenced in July 1999. The Company leases a 20,400 square foot facility located in Santa Clara, California, under a seven-year lease that
commenced in July 1995. The Company leases a 49,090 square foot facility located in Santa Rosa, California, under a twenty-year lease that
commenced in July 1993. These facilities accommodate all of the Company’s present operations. The Company also has acquired
equipment under capital and operating leases. The future minimum lease payments for equipment leases and facilities are shown below:
Fiscal years
(In thousands)
2001
2002
2003
2004
2005
Thereafter
$
1,679
1,692
1,575
1,535
874
7,127
$ 14,482
The aggregate rental expense was $1,812,000, $1,462,000, and $959,000, in fiscal 2000, 1999, and 1998, respectively.
As of March 25, 2000, Property and Equipment includes equipment under capital lease of $313,000 and related accumulated depreciation
of $99,000. As of March 27, 1999, Property and Equipment includes equipment under capital lease of $502,000 and related accumulated
depreciation of $111,000. As of March 28, 1998, equipment under capital lease was not significant. The future minimum lease payments
for capital equipment leases are shown below:
Fiscal years
(In thousands)
2001
2002
2003
Total
Less interest costs
Present value of minimum lease payments
Less current portion
Long term portion of capital lease obligations
11 Line of Credit
$ 140
123
12
275
30
245
118
$ 127
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 11/2 percent. This credit line has not been utilized by the Company and expires July 31, 2000.
28
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 25, 2000 and March 27, 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for years ended March 25, 2000, March 27, 1999,
and March 28, 1998. These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Giga-tronics Incorporated and subsidiaries as of March 25, 2000, and March 27,
1999, and the results of their operations and their cash flows for the years ended March 25, 2000,
March 27, 1999, and March 28, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Mountain View, California
May 2, 2000
29
S E L E C T E D F I N A N C I A L D A T A
Summary of Operations:
(In thousands except per share data)
Net sales
Gross profit
Operating expenses
Interest income, net
Earnings (loss) before income taxes
Net earnings (loss)
March 25,
2000
March 27,
1999
March 28,
1998
March 29,
1997
March 30,
1996
$ 47,577
$ 37,636
$ 36,813
$ 38,031
$ 40,804
15,810
14,315
59
1,633
1,139
11,534
15,293
121
(3,006)
(1,858)
15,789
15,172
457
1,096
767
14,627
13,096
533
2,048
1,509
15,916
13,714
221
2,623
2,193
Net earnings (loss) per share – basic
$ 0.26
$ (0.43)
$ 0.18
$ 0.35
$ 0.52
Net earnings (loss) per share – diluted
$ 0.24
$ (0.43)
$ 0.18
$ 0.34
$ 0.51
Financial Position:
(In thousands except current ratio)
Current ratio
Working capital
Total assets
March 25,
2000
March 27,
1999
March 28,
1998
March 29,
1997
March 30,
1996
3.23
3.32
5.06
4.32
3.15
$ 21,645
$ 18,021
$ 23,484
$ 22,692
$ 19,638
37,526
33,259
32,672
33,618
33,448
Shareholders’ equity
$ 26,149
$ 24,710
$ 26,461
$ 25,654
$ 23,475
Shares of common stock – basic
Shares of common stock – diluted
4,379
4,693
4,338
4,338
4,319
4,377
4,300
4,376
4,232
4,297
Percentage Data:
Percent of net sales
Gross profit
Operating expenses
Interest income, net
Earnings (loss) before income taxes
Net earnings (loss)
March 25,
2000
March 27,
1999
March 28,
1998
March 29,
1997
March 30,
1996
33.2
30.1
0.1
3.4
2.4
30.6
40.6
0.3
(8.0)
(4.9)
42.9
41.2
1.2
3.0
2.1
38.5
34.4
1.4
5.4
4.0
39.0
33.6
0.5
6.4
5.4
30
S E L E C T E D F I N A N C I A L D A T A
Quarterly Financial Information (Unaudited)
(In thousands except per share data)
First
Second
Net sales
Gross profit
Operating expenses
Interest income, net
Earnings (loss) before income taxes
Net earnings (loss)
Net earnings (loss) per share – basic
Net earnings (loss) per share – diluted
Equivalent shares of common stock - basic
Equivalent shares of common stock - diluted
$ 11,505
3,451
3,315
(1)
162
112
$
0.03
$ 0.03
4,362
4,372
$ 11,834
3,948
3,638
3
324
227
$ 0.05
$ 0.05
4,368
4,483
Quarterly Financial Information (Unaudited)
(In thousands except per share data)
First
Second
2000
Third
$ 11,314
3,990
3,568
22
460
322
$ 0.07
$ 0.07
4,383
4,611
1999
Third
Net sales
Gross profit
Operating expenses
Interest income, net
Earnings (loss) before income taxes
Net earnings (loss)
Net earnings (loss) per share – basic
Net earnings (loss) per share – diluted
Equivalent shares of common stock - basic
Equivalent shares of common stock - diluted
$ 8,677
3,313
3,806
112
(377)
(264)
$ (0.06)
$ (0.06)
4,326
4,326
$ 9,030
2,834
3,950
6
(1,076)
(753)
$ (0.17)
$ (0.17)
4,331
4,331
$ 11,343
3,690
3,672
2
47
34
$ 0.01
$ 0.01
4,344
4,362
Fourth
Year
$ 12,924
4,421
3,794
35
687
478
$ 0.11
$ 0.10
4,402
4,846
$ 47,577
15,810
14,315
59
1,633
1,139
$
0.26
$ 0.24
4,379
4,693
Fourth
Year
$ 8,586
1,697
3,865
1
(1,600)
(875)
$ (0.20)
$ (0.20)
4,350
4,350
$ 37,636
11,534
15,293
121
(3,006)
(1,858)
$ (0.43)
$ (0.43)
4,338
4,338
Common Stock Market Prices
Giga-tronics’ common stock is traded over the counter on NASDAQ/NMS National Market System using the symbol "GIGA". The number of
record holders of the Company’s common stock as of March 25, 2000 was close to 1,400. The table below shows the high and low closing
bid quotations for the common stock during the indicated fiscal periods.
2000
High
First quarter
(3/28-6/26)
3
Low
13/4
1999
High
(3/29-6/27)
Second quarter
(6/27-9/25)
35/16
113/16
(6/28-9/26)
Third quarter
(9/26-12/25)
Fourth quarter
(12/26-3/25)
71/2
22
21/2
61/2
(9/27-12/28)
31/4
(12/29-3/27)
37/16
7
5
Low
43/4
213/32
2
21/8
31
C O R P O R A T E I N F O R M A T I O N
D I R E C T O R S
H E A D Q U A R T E R S
Giga-tronics Incorporated
George H. Bruns, Jr.
Chairman and Chief Executive Officer
4650 Norris Canyon Road
San Ramon, CA 94583
(925) 328-4650
(925) 328-4700 (FAX)
www.gigatronics.com
S U B S I D I A R I E S
ASCOR, Inc.
4384 Enterprise Place
Fremont, CA 94539
(510) 490-2300
(510) 490-8493 (FAX)
www.ascor-inc.com
Microsource, Inc.
1269 Corporate Center Parkway
Santa Rosa, CA 95407
(707) 527-7010
(707) 527-7176 (FAX)
www.microsource-inc.com
DYMATIX
Ultracision, Inc.
Viking Semiconductor Equipment, Inc.
3380 Montgomery Drive
Santa Clara, CA 95054
(408) 980-0666
(408) 980-0670 (FAX)
www.dymatix.com
George H. Bruns, Jr.
Chairman and
Chief Executive Officer
James A. Cole 1,2
General Partner, Windward Ventures
General Partner, Spectra Enterprises
Robert C. Wilson 1,2
Chairman
Wilson & Chambers
William E. Wilson 1,2
Chairman and Chief Executive Officer
Microwave Technology, Inc.
1
2
Member, Compensation Committee
Member, Audit Committee
E X E C U T I V E O F F I C E R S
George H. Bruns, Jr.
Chairman and
Chief Executive Officer
Mark H. Cosmez II
Vice President, Finance /
Chief Financial Officer & Secretary
James R. Koehn
President, Giga-tronics Instrument Division
Jeffrey T. Lum
President, ASCOR, Inc.
Daniel S. Markowitz
President, DYMATIX
(Ultracision, Inc. and Viking Semiconductor Equipment, Inc.)
Robert A. Smith
President, Microsource, Inc.
32
C O R P O R A T E I N F O R M A T I O N
L E G A L C O U N S E L
Gibson, Dunn & Crutcher LLP
One Montgomery Street
Telesis Tower
San Francisco, CA 94104
www.gdclaw.com
T R A N S F E R A G E N T
ChaseMellon Shareholder Services
253 Montgomery Street, 23rd Floor
San Francisco, CA 94104
www.chasemellon.com
I N D E P E N D E N T A U D I T O R S
KPMG Peat Marwick LLP
500 East Middlefield Road
Mountain View, CA 94043
www.kpmg.com
A N N U A L M E E T I N G
The Company’s Annual Meeting of Shareholders
will be held at 9:30 a.m. on August 30, 2000 at
Giga-tronics’ offices located at 4650 Norris Canyon
Road, San Ramon, CA 94583.
F O R M 1 0 - K
A copy of the Company’s Annual Report on
Form 10-K for 2000, filed with the Securities and
Exchange Commission, may be obtained by share-
holders without charge by a written request to:
Company Secretary
4650 Norris Canyon Road
San Ramon, CA 94583
Giga-tronics Incorporated
4650 Norris Canyon Road
San Ramon, CA 94583
(925) 328-4650
(925) 328-4700 (FAX)
www.gigatronics.com