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 September 27, 1997, or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to __________ Commission File No. 0-12719 --------------- GIGA-TRONICS INCORPORATED ------------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) California 94-2656341 - ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 4650 Norris Canyon Road, San Ramon, CA 94583 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number: (510) 328-4650 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Common stock outstanding as of September 27, 1997: 3,802,896 ------------ PAGE 2 GIGA-TRONICS INCORPORATED INDEX
PART I - FINANCIAL INFORMATION Page No. - ------------------------------ -------- ITEM 1 Consolidated Financial Statements: Consolidated Balance Sheets as of September 27, 1997 (unaudited) and March 29, 1997 ..........................................3 Consolidated Statements of Operations, three months and six months ended September 27, 1997 and September 28, 1996 (unaudited)...............4 Consolidated Statements of Cash Flows, six months ended September 27, 1997 and September 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 3 Not applicable ITEM 4 Submission of Matters to a Vote of Security Holders......................12 ITEM 5 Not Applicable ITEM 6 Exhibits and Reports on Form 8-K (a) Exhibits (11) Computation of Net Earnings and Common Share Equivalents....................................15 (27) Financial Data Schedule.....................................16 (b) Reports on Form 8-K Not applicable SIGNATURES.................................................................................14
GIGA-TRONICS INCORPORATED PAGE 3 CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data)
ASSETS ------ September 27, 1997 March 29, 1997 ------------------ -------------- Current Assets: Cash and cash equivalents $ 3,360 $ 6,796 Investments 8,386 7,010 Trade accounts receivable, net 5,016 3,794 Inventories, net 7,254 6,461 Prepaid expenses 497 422 Deferred income taxes 1,966 1,729 -------- -------- Total current assets 26,479 26,212 Property and Equipment: Machinery and equipment 8,142 7,756 Office furniture and fixtures 676 672 Land 279 279 Building and leasehold improvements 744 744 -------- -------- Gross cost property and equipment 9,841 9,451 Less accumulated depreciation and amortization (7,150) (6,701) -------- -------- Net property and equipment 2,691 2,750 Patents and licenses 800 1,030 Other assets 59 107 -------- -------- Total assets $ 30,029 $ 30,099 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities: Line of credit $ -- $ 189 Notes payable -- 76 Accounts payable 2,303 2,136 Accrued commissions 326 305 Other current liabilities 779 813 Accrued payroll and benefits 895 791 Accrued warranty 695 670 Customer advances 379 540 -------- -------- Total current liabilities 5,377 5,520 Long term debt -- 909 Obligation under capital lease 36 57 Deferred income taxes 120 121 -------- -------- Total liabilities 5,533 6,607 Shareholders' Equity: Preferred stock of no par value; Authorized 1,000,000 shares; no shares outstanding at September 27, 1997 and March 29, 1997 -- -- Common stock of no par value; Authorized 40,000,000 shares; 3,802,896 shares at September 27, 1997 and 3,799,196 shares at March 29, 1997 issued and outstanding 11,090 11,064 Unrealized gain (loss) on investments (10) 11 Retained earnings 13,416 12,417 -------- -------- Total shareholders' equity 24,496 23,492 -------- -------- Total liabilities and shareholders' equity $ 30,029 $ 30,099 ======== ========
See accompanying notes to unaudited consolidated financial statements PAGE 4 GIGA-TRONICS INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)
Three Months Ended Six Months Ended ------------------------- ------------------------- Sept. 27, Sept. 28, Sept. 27, Sept. 28, 1997 1996 1997 1996 Net sales $ 8,212 $ 7,558 $ 16,122 $ 16,138 Cost of sales 4,633 4,807 8,897 10,173 -------- -------- -------- -------- Gross profit 3,579 2,751 7,225 5,965 Product development 964 806 1,910 1,774 Selling, general and administrative 1,884 1,496 3,894 3,314 -------- -------- -------- -------- Operating expenses 2,848 2,302 5,804 5,088 -------- -------- -------- -------- Net operating income 731 449 1,421 877 Other income (expense) 3 (3) 16 18 Amortization of intangibles (103) (139) (230) (279) Interest income, net 98 146 220 251 -------- -------- -------- -------- Earnings before income taxes 729 453 1,427 867 Provision for income taxes 219 114 428 216 -------- -------- -------- -------- Net earnings $ 510 $ 339 $ 999 $ 651 ======== ======== ======== ======== Earnings per share of common stock $ 0.13 $ 0.09 $ 0.26 $ 0.17 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding 3,825 3,840 3,817 3,838 ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements. PAGE 5 GIGA-TRONICS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended ------------------------- Sept. 27, Sept. 28, 1997 1996 -------- -------- Cash flows provided from operations: Net earnings as reported $ 999 $ 651 Adjustments to reconcile net earnings to net cash provided from operations: Depreciation and amortization 687 799 Gain on sale of fixed assets (3) (9) Deferred income taxes, net (238) 39 Changes in operating assets and liabilities (1,968) 1,041 -------- -------- Net cash provided by (used in) operations (523) 2,521 Cash flows provided by investing activities: Investment maturities (purchases), net (1,397) (4,189) Additions to property and equipment, net (395) (615) Other assets 48 48 -------- -------- Net cash used in investing activities (1,744) (4,756) Cash flows from financing activities: Issuance of common stock 26 329 Payment on line of credit (189) (55) Payment on notes payable and long term debt (985) (415) Payment on capital lease (21) -- -------- -------- Net cash provided by financing activities (1,169) (141) -------- -------- Increase in cash and cash equivalents (3,436) (2,376) Beginning cash and cash equivalents 6,796 5,923 -------- -------- Ending cash and cash equivalents $ 3,360 $ 3,547 ======== ========
Supplementary disclosure of cash flow information: (1) Cash paid for interest in the six month period ending September 27, 1997 was $43,000. (2) Cash paid for income taxes in the six month period ending September 27, 1997 was $673,000. (3) Non-cash investing and financing activities: The Company incurred an unrealized loss of $21,000 (after tax effect) on investments held available for sale during the six month period ending September 27, 1997. The Company incurred an unrealized gain of $58,000 (after tax effect) during the six-month period ended September 28, 1996. The Company purchased $62,000 of equipment under capital lease obligation in the six months ended September 28, 1996. See accompanying notes to unaudited consolidated financial statements. PAGE 6 GIGA-TRONICS INCORPORATED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (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. 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) Business Combinations 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 enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below: Three months ended Three months ended (In thousands) June 28, 1997 June 29, 1996 ------------- ------------- Net Sales Viking $ 1,313 $ 787 Giga-tronics 6,597 7,793 ------- ------- Combined $ 7,910 $ 8,580 ======= ======= Net Income Viking $ 141 $ (193) Giga-tronics 348 505 --------- ---------- Combined $ 489 $ 312 ======== ========= PAGE 7 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-tronic's financial statements for the same period, and Viking's financial statements for the year ended May 31, 1996 were combined with Giga-tronic's financial statements for the year ended March 30, 1996. An adjustment has been made to shareholders' equity 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. On October 29, the Company reached an agreement in principle to acquire Ultracision, Inc., a private company located in Santa Clara, California. 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. Ultracision will be the second acquisition of a company that conducts operations in the semiconductor industry. The Company intends to exchange 517,000 shares of Giga-tronics common stock for all of the presently outstanding shares of Ultracision. The transaction is intended to be accounted for using the "pooling of interests" method of accounting. The merger is expected to be effective in the third quarter and is subject to completion of due diligence and the approval of the transaction by the Ultracision shareholders. (3) Recent Accounting Pronouncements 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 is currently required under the provisions of Accounting Principles Board Opinion No. 15. Under SFAS No. 128, the Company will be required to present both basic net income per share and diluted net income per share. Basic net income per share is expected to be higher than the currently presented income per share as the effect of dilutive stock options will not be considered in computing basic net income per share. Diluted net income per share is expected to be comparable to earnings per share as presented in the accompanying consolidated financial statements. The Company plans to adopt SFAS No. 128 in its fiscal quarter ending December 27, 1997, and at that time all historical net income per share data presented will be restated to conform to the provisions of SFAS No. 128. PAGE 8 (4) Inventories Inventories consist of the following (in thousands): Sept. 27, 1997 March 29, 1997 -------------- -------------- Raw materials $ 2,905 $ 2,531 Work-in-process 3,171 2,522 Finished goods 1,178 1,408 --------- ---------- $ 7,254 $ 6,461 ========= ========= PAGE 9 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, switching devices, and semiconductor inspection equipment. These products are used in the development, test and maintenance of wireless communications products and systems, electronic defense systems, automatic testing systems (ATE) and semiconductor devices. The Company intends to broaden its product lines and expand its markets, both by internal development of new products and through the acquisition of other business entities. In that regard, on October 29, the Company reached an agreement in principle to acquire Ultracision, Inc., a private company located in Santa Clara, California. Ultracision is a manufacturer of automation equipment used in the test and inspection of silicon wafers. Ultracision additionally produces a line of probers for the testing and inspection of silicon devices. Ultracision will be the second acquisition related to the semiconductor industry. Ultracision reported sales of approximately $5,653,000 (unaudited) for its last fiscal year ended March 1997. The Company intends to exchange 517,000 shares of Giga-tronics common stock for all of the presently outstanding shares of Ultracision. The transaction is intended to be accounted for using the "pooling of interests" method of accounting. The merger is expected to be effective in the third quarter and is subject to completion of due diligence and the approval of the transaction by the Ultracision shareholders. THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996 Net sales for the three month and six month periods ended September 27, 1997 increased 8.7% ($654,000) and decreased .1% ($16,000), respectively, compared with the same periods last year. The sales increase in the quarter was principally due to an increase of $1.0 million in semiconductor products and $1.4 million in power measurement products (PM), which were partially offset by declining signal generator (SG) and switching module sales. The decline for the six month period resulted from a decrease of approximate $3.3 million in the SG product line and $.7 million in the switching modules product line, which were partially offset by an increase of approximately $2.6 million in PM and $1.6 million in the semiconductor equipment related products. The decline in SG sales is attributable to maturing of the product line, delays in new product releases and constraints on military budgets. The change in the switching modules reflects normal PAGE 10 fluctuations in periods due to timing of large orders. 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 and six month periods increased by 30.1% ($828,000) and 21.1% ($1,260,000), respectively. Gross margin as a percent of sales for the six months increased to 44.8% compared to 37.0% 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 six month periods increased 23.7% ($546,000) and 14.1% ($716,000), respectively, compared with the prior year. Operating expenses as a percent of sales for the six months increased to 8.8% compared to 5.4% for the prior year. The increase is principally due to higher advertising expenses, sales and administrative salaries, and commission expenses related to the semiconductor and switching module product lines. The Company also increased research and development costs in an effort to develop new products. Interest income for the three month and six 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 inventory and accounts receivable balances. Earnings before income taxes for the three month and six month periods increased 60.9% ($276,000) and 64.6% ($560,000), respectively, compared to the same period last year. The change was primarily due to improved gross margins, partially offset by higher operating expenses. Orders for the current quarter were slightly lower (1.4%) than the comparable period last year. Orders for the six month period were 4.4% ($712,000) lower than the prior year. Orders were lower for switching modules and semiconductor products, caused by normal fluctuations between periods for large orders. Backlog at September 1997 was $6,797,000 compared to $7,593,000 at the March year end. The Company anticipates the level of sales in the third quarter to approximate the level of sales in each of the first two quarters. When compared to the prior year, the Company expects third quarter sales to be lower due to the high volume of shipments in the third quarter of the prior year. The Company anticipates earnings for the third quarter to also be lower as compared to the prior year. However, earnings for the nine months are expected to compare favorably to the corresponding nine month period of the prior year. PAGE 11 FINANCIAL CONDITION The company maintains a strong financial position, with working capital of $21,102,000 and a ratio of current assets to current liabilities of 4.9 at September 27, 1997. In the most recent quarter, cash was used to liquidate the debt of the acquired Viking Semiconductor Equipment subsidiary. The Company continues to fund all of its working capital needs from cash provided by operations. Cash used from operations for the six months ended September 27, 1997 was $523,000 due to the increase in inventory and accounts receivable related to the growth of the semiconductor product line. During the six month period, the Company spent $395,000 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 and entered into an agreement in principle to acquire Ultracision, 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 be made on a pooling basis and may therefore 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. PAGE 12 PART II, Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (A) Annual Meeting of Stockholders was held on August 5, 1997. (1) The vote for the nominated Directors was as follows: Nominee In Favor Withheld ------- -------- -------- George H. Bruns, Jr. 2,961,728 189,768 James A. Cole 2,960,828 190,668 Edward D. Sherman 2,957,828 193,668 Robert C. Wilson 2,951,028 200,468 (2) (a) Other matters voted upon at the meeting were as follows: Ratification of the selection of KPMG Peat Marwick LLP as independent public accountants for fiscal year 1998 was approved as follows: No. of Votes % of Votes on Proposal Cast ------------ ---------- For 3,148,096 99.89% Against 2,700 0.09% Abstain 700 0.02% ------------------------------------------------- Quorum 3,151,496 100.0% Non-voted Shares = 227,953 Outstanding shares on Record Date = 3,379,449 PAGE 13 (b) Ratification of the Employee Stock Purchase Plan was approved as follows: No. of Votes % of Votes on Proposal Cast ------------ ---------- For 2,316,938 90.61% Against 110,230 4.31% Abstain 129,982 5.08% ------------------------------------------------- Quorum 2,557,150 100.0% Non-voted Shares = 822,299 Outstanding shares on Record Date = 3,379,449 (c) Ratification of the amendment to the Stock Option Plan to increase the number of authorized shares from 400,000 to 700,000 and make the other changes described in the Proxy Statement was approved as follows: No. of Votes % of Votes on Proposal Cast ------------ ---------- For 1,935,328 78.15% Against 409,912 16.55% Abstain 131,167 5.30% ------------------------------------------------- Quorum 2,476,407 100.0% Non-voted Shares = 903,042 Outstanding shares on Record Date = 3,379,449 PAGE 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GIGA-TRONICS INCORPORATED (Registrant) Date: 11/10/97 /s/ George H. Bruns, Jr. --------------------------------------- George H. Bruns, Jr. Chairman and Chief Executive Officer (Principal Executive Officer) Date: 11/10/97 /s/ Mark H. Cosmez II --------------------------------------- Mark H. Cosmez II Vice President, Finance and Chief Financial Officer (Principal Accounting Officer)