e10qsb
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
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|
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| þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 for the quarterly period ended September 24, 2005 or |
| |
|
|
| o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT for the transition period from |
to
Commission File No. 0-12719
GIGA-TRONICS INCORPORATED
(Exact name of Registrant as specified in its charter)
| |
|
|
| California
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|
94-2656341 |
|
|
|
|
| (State or other jurisdiction of
|
|
(IRS Employer Identification No.) |
| incorporation or organization) |
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|
| |
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|
| 4650 Norris Canyon Road, San Ramon, CA
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|
94583 |
|
|
|
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| (Address of principal executive offices)
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|
(Zip Code) |
Registrant’s telephone number: (925) 328-4650
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15
(d) of the Exchange Act during the past 12 months (or for 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 þ No o
State the number of shares outstanding of each of
the issuer’s classes of common equity, as of the latest practicable date:
Common stock outstanding as of November 1, 2005: 4,809,021 shares
Transitional Small Business Disclosure Format (Check one) Yes o No þ
GIGA-TRONICS INCORPORATED
INDEX
2
Item 1
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| (In thousands except share data) |
|
September 24, 2005 |
|
|
March 26, 2005 |
|
| (Unaudited) |
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,718 |
|
|
$ |
2,540 |
|
Notes receivable |
|
|
— |
|
|
|
7 |
|
Trade accounts receivable, net |
|
|
1,645 |
|
|
|
3,145 |
|
Inventories |
|
|
6,520 |
|
|
|
6,257 |
|
Prepaid expenses |
|
|
247 |
|
|
|
227 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
12,130 |
|
|
|
12,176 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
474 |
|
|
|
674 |
|
Other assets |
|
|
85 |
|
|
|
111 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
12,689 |
|
|
$ |
12,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,128 |
|
|
$ |
1,075 |
|
Accrued commissions |
|
|
253 |
|
|
|
200 |
|
Accrued payroll and benefits |
|
|
737 |
|
|
|
720 |
|
Accrued warranty |
|
|
303 |
|
|
|
378 |
|
Customer advances |
|
|
461 |
|
|
|
2 |
|
Other current liabilities |
|
|
385 |
|
|
|
464 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,267 |
|
|
|
2,839 |
|
Deferred rent |
|
|
268 |
|
|
|
310 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,535 |
|
|
|
3,149 |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Preferred stock of no par value; |
|
|
|
|
|
|
|
|
Authorized 1,000,000 shares; no shares outstanding
at September 24, 2005 and March 26, 2005 |
|
|
— |
|
|
|
— |
|
Common stock of no par value; |
|
|
|
|
|
|
|
|
Authorized 40,000,000 shares; 4,809,021 shares at
September 24, 2005 and 4,728,646 shares at
March 26, 2005 issued and outstanding |
|
|
13,002 |
|
|
|
12,756 |
|
Accumulated deficit |
|
|
(3,848 |
) |
|
|
(2,944 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
9,154 |
|
|
|
9,812 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
12,689 |
|
|
$ |
12,961 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (In thousands except per share data) |
|
September 24, 2005 |
|
|
September 25, 2004 |
|
|
September 24, 2005 |
|
|
September 25, 2004 |
|
| (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,614 |
|
|
$ |
5,379 |
|
|
$ |
9,397 |
|
|
$ |
11,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
2,391 |
|
|
|
3,050 |
|
|
|
5,529 |
|
|
|
6,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,223 |
|
|
|
2,329 |
|
|
|
3,868 |
|
|
|
4,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development |
|
|
1,043 |
|
|
|
809 |
|
|
|
2,009 |
|
|
|
1,653 |
|
Selling, general and administrative |
|
|
1,331 |
|
|
|
1,371 |
|
|
|
2,784 |
|
|
|
2,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
2,374 |
|
|
|
2,180 |
|
|
|
4,793 |
|
|
|
4,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(1,151 |
) |
|
|
149 |
|
|
|
(925 |
) |
|
|
463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net |
|
|
9 |
|
|
|
(1 |
) |
|
|
14 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing
operations before income taxes |
|
|
(1,142 |
) |
|
|
148 |
|
|
|
(911 |
) |
|
|
466 |
|
Provision for income taxes |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(1,142 |
) |
|
|
148 |
|
|
|
(915 |
) |
|
|
462 |
|
Income (loss) on discontinued
operations, net of income taxes |
|
|
5 |
|
|
|
(124 |
) |
|
|
11 |
|
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(1,137 |
) |
|
$ |
24 |
|
|
$ |
(904 |
) |
|
$ |
381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
(0.24 |
) |
|
$ |
0.03 |
|
|
$ |
(0.19 |
) |
|
$ |
0.10 |
|
On discontinued operations |
|
|
(0.00 |
) |
|
|
(0.02 |
) |
|
|
(0.00 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share |
|
$ |
(0.24 |
) |
|
$ |
0.01 |
|
|
$ |
(0.19 |
) |
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
(0.24 |
) |
|
$ |
0.03 |
|
|
$ |
(0.19 |
) |
|
$ |
0.10 |
|
On discontinued operations |
|
|
(0.00 |
) |
|
|
(0.02 |
) |
|
|
(0.00 |
) |
|
|
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share |
|
$ |
(0.24 |
) |
|
$ |
0.01 |
|
|
$ |
(0.19 |
) |
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
4,778 |
|
|
|
4,725 |
|
|
|
4,755 |
|
|
|
4,725 |
|
Dilutive |
|
|
4,778 |
|
|
|
4,732 |
|
|
|
4,755 |
|
|
|
4,734 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| (In thousands) |
|
September 24, 2005 |
|
|
September 25, 2004 |
|
| (Unaudited) |
|
|
|
|
|
|
|
|
Cash flows provided from operations: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(904 |
) |
|
$ |
381 |
|
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
266 |
|
|
|
363 |
|
Changes in operating assets and liabilities |
|
|
1,636 |
|
|
|
(1,242 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operations |
|
|
998 |
|
|
|
(498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(66 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(66 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
246 |
|
|
|
— |
|
Payments on capital lease and other long-term
obligations |
|
|
— |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
246 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
1,178 |
|
|
|
(538 |
) |
Cash and cash equivalents at beginning of period |
|
|
2,540 |
|
|
|
2,752 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,718 |
|
|
$ |
2,214 |
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information:
|
|
|
| (1) |
|
Cash paid for income taxes was $4 for the six month periods ended September 24, 2005 and September 25, 2004. |
See accompanying notes to unaudited condensed consolidated financial statements.
5
GIGA-TRONICS INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1)
Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by
Giga-tronics (the “Company”), pursuant to the rules and regulations of the Securities and
Exchange Commission. The consolidated 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 (consisting of only normal recurring accruals) necessary to make the
consolidated results of operations for the interim periods a fair statement of such
operations. For further information, refer to the consolidated financial statements and
footnotes thereto, included in the Annual Report on Form 10-KSB, filed with the Securities
and Exchange Commission for the year ended March 26, 2005.
Certain prior period amounts have been reclassified to conform with the current period’s
presentation.
(2)
Discontinued Operations
In the first quarter of fiscal 2004, Giga-tronics discontinued the operations at its Dymatix
Division due to the substantial losses incurred over the previous two years. In the fourth
quarter of fiscal 2004, Giga-tronics consummated the sale of its Dymatix Division and
recognized a gain of $53,000 in connection with the sale. The sales price was $300,000.
The Company received a $50,000 cash payment from the buyer and a $250,000 note receivable
with $50,000 due in May 2004 and quarterly installments of $25,000 due beginning in July
2004. The Company agreed to reschedule the payment due in May 2004 to August 2004 and, to
date, has not received payments due. The note is secured by collateral and in management’s
opinion the value of this collateral deteriorated during fiscal 2005. Accordingly, the
Company considers the note receivable to be impaired and has recorded a provision for loss
of $250,000 through discontinued operations in the 2005 fiscal year. At September 24, 2005,
the note receivable continues to be considered impaired.
(3)
Revenue Recognition
The Company records revenue in accordance with SAB 101 and 104, Revenue Recognition in
Financial Statements. As such, revenue is recorded when there is evidence of an
arrangement, delivery has occurred, the price is fixed and determinable, and collectability
is assured. This occurs when products are shipped, unless the arrangement involves
acceptance terms. If the arrangement involves acceptance terms, the Company defers revenue
until product acceptance is received.
The Company provides for estimated costs that may be incurred for product warranties at the
time of shipment. The Company’s warranty policy generally provides four years for the 2400
family of Microwave Synthesizers and one year for all other products. The estimated cost of
warranty coverage is based on the Company’s actual historical experience with its current
products or similar products.
6
(4) Inventories
| |
|
|
|
|
|
|
|
|
| (In thousands) |
|
September 24, 2005 |
|
|
March 26, 2005 |
|
| |
Raw materials |
|
$ |
3,672 |
|
|
$ |
3,702 |
|
Work-in-progress |
|
|
2,104 |
|
|
|
1,925 |
|
Finished goods |
|
|
559 |
|
|
|
393 |
|
Demonstration inventory |
|
|
275 |
|
|
|
237 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
6,520 |
|
|
$ |
6,257 |
|
|
|
|
|
|
|
|
(5) Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net income or loss by the
weighted average common shares outstanding during the period. Diluted earnings per share
reflects the net incremental shares that would be issued if dilutive outstanding stock
options were exercised, using the treasury stock method. In the case of a net loss, it is
assumed that no incremental shares would be issued because they would be antidilutive. In
addition, certain options are considered antidilutive because the options’ exercise price
was above the average market price during the period. The shares used in per share
computations are as follows (in thousands except per share data):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (In thousands except per share data) |
|
September 24, 2005 |
|
|
September 25, 2004 |
|
|
September 24, 2005 |
|
|
September 25, 2004 |
|
| |
Net (loss) income |
|
$ |
(1,137 |
) |
|
$ |
24 |
|
|
$ |
(904 |
) |
|
$ |
381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding |
|
|
4,778 |
|
|
|
4,725 |
|
|
|
4,755 |
|
|
|
4,725 |
|
Potential common shares |
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares assuming dilution |
|
|
4,778 |
|
|
|
4,732 |
|
|
|
4,755 |
|
|
|
4,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share of
common stock |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
(0.19 |
) |
|
|
0.08 |
|
Net (loss) income per share of
common stock assuming dilution |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
(0.19 |
) |
|
|
0.08 |
|
Stock options not included in
computation |
|
|
537 |
|
|
|
486 |
|
|
|
537 |
|
|
|
486 |
|
The number of stock options not included in the computation of diluted earnings per
share (EPS) for the three month and six month periods ended September 24, 2005 are 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 three month and six month periods ended September 25, 2004 reflects stock options
where the exercise prices were greater than the average market price of the common shares
and are, therefore, antidilutive. The weighted average exercise price of excluded options
was $3.03 and $3.30 as of September 24, 2005 and September 25, 2004, respectively.
7
(6)
Stock Based Compensation
The Company accounts for stock-based employee compensation using the intrinsic value method
under Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to
Employees, and related interpretations and complies with the disclosure provisions of
Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based
Compensation. The following table illustrates the effect on net income (loss) and earnings
(loss) per share as if the Company had applied the fair value recognition provisions of SFAS
123 to stock-based employee compensation:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (In thousands except per share data) |
|
September 24, 2005 |
|
|
September 25, 2004 |
|
|
September 24, 2005 |
|
|
September 25, 2004 |
|
| |
Net (loss) income, as reported |
|
$ |
(1,137 |
) |
|
$ |
24 |
|
|
$ |
(904 |
) |
|
$ |
381 |
|
Deduct |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
included in reported net income
(loss) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Add |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee
compensation determined under fair
value based method for all awards,
net of related tax effect |
|
|
(29 |
) |
|
|
(63 |
) |
|
|
(71 |
) |
|
|
(129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income |
|
$ |
(1,166 |
) |
|
$ |
(39 |
) |
|
$ |
(975 |
) |
|
$ |
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share — basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.24 |
) |
|
$ |
0.01 |
|
|
$ |
(0.19 |
) |
|
$ |
0.08 |
|
Pro forma |
|
|
(0.24 |
) |
|
|
(0.01 |
) |
|
|
(0.21 |
) |
|
|
0.05 |
|
Net (loss) income per share — diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
(0.19 |
) |
|
|
0.08 |
|
Pro forma |
|
|
(0.24 |
) |
|
|
(0.01 |
) |
|
|
(0.21 |
) |
|
|
0.05 |
|
(7)
Significant Customers and Industry Segment Information
The Company has four reportable segments: Giga-tronics Instrument Division, ASCOR,
Microsource and Corporate. Giga-tronics Instrument Division produces a broad line of test
and measurement equipment used in the development, test and maintenance of wireless
communications products and systems, flight navigational equipment, electronic defense
systems and automatic testing systems. ASCOR designs, manufactures, and markets a line of
switching devices that link together many specific purpose instruments that comprise
automatic test systems. Microsource develops and manufactures a broad line of YIG (Yttrium,
Iron, Garnet) tuned oscillators, filters and microwave synthesizers, which are used in a
wide variety of microwave instruments and devices. Corporate handles the financing needs of
each segment and lends funds to each segment as required and are eliminated in
consolidation.
8
Information on reportable segments is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| (In thousands) |
|
September 24, 2005 |
|
|
September 25, 2004 |
|
| |
|
|
|
|
|
Pre-tax |
|
|
|
|
|
|
Pre-tax |
|
| |
|
Net Sales |
|
|
Income (loss) |
|
|
Net Sales |
|
|
Income (loss) |
|
Giga-tronics Instrument |
|
$ |
1,428 |
|
|
$ |
(724 |
) |
|
$ |
3,137 |
|
|
$ |
176 |
|
ASCOR |
|
|
914 |
|
|
|
(221 |
) |
|
|
1,068 |
|
|
|
8 |
|
Microsource |
|
|
1,272 |
|
|
|
(417 |
) |
|
|
1,174 |
|
|
|
(426 |
) |
Corporate |
|
|
— |
|
|
|
220 |
|
|
|
— |
|
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,614 |
|
|
$ |
(1,142 |
) |
|
$ |
5,379 |
|
|
$ |
148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| (In thousands) |
|
September 24, 2005 |
|
|
September 25, 2004 |
|
| |
|
|
|
|
|
Pre-tax |
|
|
|
|
|
|
Pre-tax |
|
| |
|
Net Sales |
|
|
Income (loss) |
|
|
Net Sales |
|
|
Income (loss) |
|
Giga-tronics Instrument |
|
$ |
4,306 |
|
|
$ |
(675 |
) |
|
$ |
6,658 |
|
|
$ |
380 |
|
ASCOR |
|
|
2,191 |
|
|
|
(189 |
) |
|
|
1,852 |
|
|
|
(105 |
) |
Microsource |
|
|
2,900 |
|
|
|
(521 |
) |
|
|
2,569 |
|
|
|
(403 |
) |
Corporate |
|
|
— |
|
|
|
474 |
|
|
|
— |
|
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,397 |
|
|
$ |
(911 |
) |
|
$ |
11,079 |
|
|
$ |
466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
Warranty Obligations
The Company’s warranty policy generally provides four years for the 2400 family of Microwave
Synthesizers and one year for all other products. The Company records a liability for
estimated warranty obligations at the date products are sold. The estimated cost of
warranty coverage is based on the Company’s actual historical experience with its current
products or similar products. For new products, the required reserve is based on historical
experience of similar products until such time as sufficient historical data has been
collected on the new product. Adjustments are made as new information becomes available.
The following provides a reconciliation of changes in the Company’s warranty reserve. The
Company provides no other guarantees.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (In thousands) |
|
September 24, 2005 |
|
|
September 25, 2004 |
|
|
September 24, 2005 |
|
|
September 25, 2004 |
|
| |
Balance at beginning of period |
|
$ |
345 |
|
|
$ |
512 |
|
|
$ |
378 |
|
|
$ |
548 |
|
Provision for current period sales |
|
|
59 |
|
|
|
56 |
|
|
|
134 |
|
|
|
84 |
|
Warranty costs incurred |
|
|
(101 |
) |
|
|
(80 |
) |
|
|
(209 |
) |
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
303 |
|
|
$ |
488 |
|
|
$ |
303 |
|
|
$ |
488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
The forward-looking statements included in this report including, without limitation, statements
containing the words “believes”, “anticipates”, “estimates”, “expects”, “intends” and words of
similar import, which reflect management’s best judgment based on factors currently known, involve
risks and uncertainties. Actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including but not limited to those
listed in Giga-tronics’ Annual Report on Form 10-KSB for the fiscal year ended March 26, 2005 Part
I, under the heading “Certain Factors Which May Adversely Affect Future Operations or an Investment
in Giga-tronics”, and Part II, under the heading “Management’s Discussion and Analysis of Financial
Conditions and Results of Operations”.
Overview
The business environment remains challenging; this quarter Giga-tronics is showing a significant
decline in new orders. However, inquiries for Giga-tronics’ products remain high as the Company
recently introduced the 2400M Modulation Series microwave synthesizer. New orders in the military
sector are showing indications of weakness and it is still too early to determine if the commercial
wireless telecommunications market has rebounded. Giga-tronics intends to continue research and
development in key growth areas in order to expand product lines and update existing lines with
features our customers are demanding.
The Company’s cost reduction programs, including reductions in personnel and new lease terms, are
on track and have positioned Giga-tronics to take advantage of opportunities in our market.
However, the Company’s employees have been on salary reductions over the last three years and the
Company anticipates reinstating prior salary levels in fiscal 2006 once the financial condition of
the Company stabilizes.
The Company has released the 2400M synthesizer during the 2005 fiscal year. These products are
being accepted by the marketplace and management believes there is significant room for growth.
This release demonstrates the Company’s commitment to new product development. Giga-tronics
intends to continue research and development in key growth areas in order to expand product lines
and update existing lines with additional features.
While Microsource received a large long-term order from Boeing during fiscal 2005, the management
at Microsource anticipates that prospects for new orders will be moderate for the new fiscal year.
In the first quarter of fiscal 2004, Giga-tronics decided to discontinue the operations at its
Dymatix division due to the substantial losses incurred over the last two years. In the second
quarter of fiscal 2006, the net profit from discontinued operations was $5,000, compared to a net
loss of $124,000 for the same period in fiscal 2005.
Results of Operations
New orders received from continuing operations in the second quarter of fiscal 2006 increased 47%
to $1,847,000 from the $1,253,000 received in the second quarter of fiscal 2005. The $1,253,000
included a significant order reversal of $4,854,000 during the second quarter of fiscal 2005.
Orders received for the first half of fiscal 2006 increased 56% to $7,340,000 from $4,720,000 for
the first half of fiscal 2005. This increase in orders is due to the reversal in the second
quarter of fiscal 2005 of $4,854,000.
10
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| New Orders |
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (Dollars in thousands) |
|
September 24, 2005 |
|
|
% change |
|
|
September 25, 2004 |
|
|
September 24, 2005 |
|
|
% change |
|
|
September 25, 2004 |
|
| |
Instrument Division |
|
$ |
1,376 |
|
|
|
(64 |
%) |
|
$ |
3,791 |
|
|
$ |
4,131 |
|
|
|
(34 |
%) |
|
$ |
6,278 |
|
ASCOR |
|
|
320 |
|
|
|
(65 |
%) |
|
|
924 |
|
|
|
2,235 |
|
|
|
29 |
% |
|
|
1,732 |
|
Microsource |
|
|
151 |
|
|
|
— |
|
|
|
(3,462 |
) |
|
|
974 |
|
|
|
— |
|
|
|
(3,290 |
) |
| |
|
|
Total |
|
$ |
1,847 |
|
|
|
47 |
% |
|
$ |
1,253 |
|
|
$ |
7,340 |
|
|
|
56 |
% |
|
$ |
4,720 |
|
| |
|
|
Orders at the Instrument Division decreased in the second quarter primarily due to a decrease
in military demand for their products. Orders at ASCOR decreased in the second quarter primarily
due to a decrease in commercial demand for their products. Orders at Microsource increased
primarily due to the renegotiation of a long term contract with an existing customer, whereby
Microsource reversed its recorded backlog for deliveries beyond 12 months by $4,854,000 during the
second quarter of fiscal 2005.
The following table shows order backlog and related information at the end of the respective
periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| (Dollars in thousands) |
|
September 24, 2005 |
|
|
% Change |
|
|
September 25, 2004 |
|
| |
Backlog of unfilled orders |
|
$ |
13,735 |
|
|
|
37 |
% |
|
$ |
9,996 |
|
Backlog of unfilled orders shippable within one year |
|
|
7,014 |
|
|
|
(6 |
%) |
|
|
7,435 |
|
Previous fiscal year (FY) quarter end backlog
reclassified during year as shippable later than
one year |
|
|
186 |
|
|
|
(44 |
%) |
|
|
333 |
|
Net cancellations during year of previous FY
quarter end one-year backlog |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Backlog at the end of the second quarter 2006 increased 37% as compared to the end of the same
period last year.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allocation of Net Sales by Segment |
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (Dollars in thousands) |
|
September 24, 2005 |
|
|
% change |
|
|
September 25, 2004 |
|
|
September 24, 2005 |
|
|
% change |
|
|
September 25, 2004 |
|
| |
Instrument Division |
|
$ |
1,428 |
|
|
|
(55 |
%) |
|
$ |
3,137 |
|
|
$ |
4,306 |
|
|
|
(35 |
%) |
|
$ |
6,658 |
|
ASCOR |
|
|
914 |
|
|
|
(14 |
%) |
|
|
1,068 |
|
|
|
2,191 |
|
|
|
18 |
% |
|
|
1,852 |
|
Microsource |
|
|
1,272 |
|
|
|
8 |
% |
|
|
1,174 |
|
|
|
2,900 |
|
|
|
13 |
% |
|
|
2,569 |
|
| |
|
|
Total |
|
$ |
3,614 |
|
|
|
(33 |
%) |
|
$ |
5,379 |
|
|
$ |
9,397 |
|
|
|
(15 |
%) |
|
$ |
11,079 |
|
| |
|
|
Fiscal 2006 second quarter net sales from continuing operations were $3,614,000, a 33%
decrease from the $5,379,000 in the second quarter of 2005. The decrease in sales was primarily due
to lower order levels at the Instrument Division due to the weakness in military related orders and
delayed delivery requirements coupled with the weakness in the commercial market at ASCOR offset
with the limited improvement in customer delivery requirements at Microsource. For the six months
ended September 24, 2005 sales declined 15% to $9,397,000 from $11,079,000 for the same period in
the prior year. The decrease in sales was primarily due to lower order levels at the Instrument
Division due to the weakness in the commercial market as well as the military and government market
coupled with decreased orders in the commercial market at ASCOR partially offset by the improvement
in customer delivery requirements at Microsource.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of Sales |
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (Dollars in thousands) |
|
September 24, 2005 |
|
|
% change |
|
|
September 25, 2004 |
|
|
September 24, 2005 |
|
|
% change |
|
|
September 25, 2004 |
|
| |
Cost of sales |
|
$ |
2,391 |
|
|
|
(22 |
%) |
|
$ |
3,050 |
|
|
$ |
5,529 |
|
|
|
(11 |
%) |
|
$ |
6,179 |
|
In the second quarter of fiscal 2006, cost of sales from continuing operations decreased 22%
to $2,391,000 from $3,050,000 for the same period last year. For the six months ended September 24,
2005, the cost of sales from continuing operations declined 11% to $5,529,000 from $6,179,000 for
the similar period ending September 25, 2004. Both of these declines are primarily attributable to
the lower material and labor costs associated with reduced shipment levels.
11
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Expenses |
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (Dollars in thousands) |
|
September 24, 2005 |
|
|
% change |
|
|
September 25, 2004 |
|
|
September 24, 2005 |
|
|
% change |
|
|
September 25, 2004 |
|
| |
Product development |
|
$ |
1,043 |
|
|
|
29 |
% |
|
$ |
809 |
|
|
$ |
2,009 |
|
|
|
22 |
% |
|
$ |
1,653 |
|
Selling, general and
administrative |
|
|
1,331 |
|
|
|
(3 |
%) |
|
|
1,371 |
|
|
|
2,784 |
|
|
|
0 |
% |
|
|
2,784 |
|
| |
|
|
Total |
|
$ |
2,374 |
|
|
|
9 |
% |
|
$ |
2,180 |
|
|
$ |
4,793 |
|
|
|
8 |
% |
|
$ |
4,437 |
|
| |
|
|
Operating expenses from continuing operations increased 9% or $194,000 in the second quarter
of fiscal 2006 over 2005 due to an increase of $234,000 in product development costs and a decrease
of $40,000 in selling, general and administrative expenses. Product development costs from
continuing operations increased 29% or $234,000 in the second quarter of fiscal 2006 primarily due
to increased product development expenses company-wide as Giga-tronics continues research and
development in order to expand product lines and update its existing lines. Selling, general and
administrative expenses from continuing operations decreased 3% or $40,000 for the second quarter
of fiscal year 2006 compared to the same period in the prior year. The decrease is a result of
lower commission expenses of $99,000 on lower commissionable sales for the quarter, offset by
higher administrative expenses of $55,000 and higher marketing expenses of $4,000.
Operating expenses from continuing operations increased 8% or $356,000 for the six months ended
September 24, 2005 over the same period for the prior year due to an increase of $356,000 in
product development costs. Product development costs from continuing operations increased 22% or
$356,000 for the six months ended September 25, 2004 primarily due to increased product development
expenses company-wide as Giga-tronics continued research and development in order to expand product
lines and update its existing lines. Selling, general and administrative expenses from continuing
operations remained flat for the first half of fiscal 2006 compared to the same period in the prior
year. This is a result of higher commission expenses of $34,000 and higher administrative expenses
of $32,000 offset by lower marketing expense of $66,000.
The pre-tax loss from continuing operations for the three and six months periods ended September
24, 2005 were $1,142,000 and $911,000, respectively. The pre-tax profit from continuing operations
for the three and six months periods ended September 25, 2004 were $148,000 and $466,000,
respectively. Giga-tronics recorded a net loss of $1,137,000 or $0.24 per fully diluted share for
the second quarter of fiscal 2006 versus a net profit of $24,000 or $0.01 per fully diluted share
in the same period last year. Giga-tronics recorded a net loss of $904,000 or $0.19 per fully
diluted share for the first half of fiscal 2006 versus a net profit of $381,000 or $0.08 per fully
diluted share in the same period last year.
Profit from discontinued operations for the six-month period ended September 24, 2005 totaled
$11,000. Loss from discontinued operations for the six-month period ended September 25, 2004
totaled $81,000. The Company discontinued and subsequently sold its Dymatix division in the fourth
quarter of fiscal 2004. The loss recorded for the six-month period ended September 25, 2004
reflects changes in estimated expense related to the discontinuation of the Dymatix division and a
reserve for impairment established by management as discussed in Footnote 2 the Interim
Consolidated Financial Statement — Discontinued Operations.
Financial Condition and Liquidity
As of September 24, 2005, Giga-tronics had $3,718,000 in cash and cash equivalents, compared to
$2,540,000 as of March 26, 2005.
Working capital at the end of the second quarter of fiscal 2006 was $8,863,000 compared to
$8,867,000 in the same period last year.
The Company’s current ratio (current assets divided by current liabilities) at September
24, 2005 was 3.7 compared to 3.5 on September 25, 2004.
12
Cash provided by operations amounted to $1,040,000 in the first half of fiscal 2006. Cash used by
operations amounted to $465,000 in the same period of fiscal 2005. Cash provided by operations in
the first half of fiscal 2006 is primarily attributed to the net change in operating assets and
liabilities offset by the operating loss in the year. Cash used by operations in the first half of
fiscal 2005 is primarily attributed to the net change in operating assets and liabilities offset by
the operating profit in the quarter.
On June 20, 2005, the Company renewed its secured revolving line of credit for $2,500,000, with
interest payable at prime rate plus 1%. The borrowing under this line of credit is based on the
Company’s accounts receivable and inventory and is secured by all of the assets of the Company.
The Company had no borrowing under this line of credit during the three and six month periods ended
September 24, 2005.
From time to time, Giga-tronics considers a variety of acquisition opportunities to also broaden
its product lines and expand its market. Such acquisition activity could also increase the
Company’s operating expenses and require the additional use of capital resources. The Company also
intends to maintain research and development expenditures for the purpose of broadening its product
line.
Additions to property and equipment were $66,000 in the first half of fiscal 2006 compared to
$30,000 for the same period last year. The low level of capital equipment spending reflects the
overall decline in business activity and increased productivity.
Future tax benefits are subject to a valuation allowance when management is unable to conclude that
its deferred tax assets will more likely than not be realized from the results of operations. The
ultimate realization of deferred tax assets is dependent upon generation of future taxable income
during the periods in which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this assessment. Based on
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 not realize benefits of these deductible differences as of September 24, 2005. Management
has, therefore, established a valuation allowance against its net deferred tax assets as of
September 24, 2005.
Recent Accounting Pronouncements
In December 2004 the FASB issued Statement Number 123 (revised 2004) (“FAS 123 (R)”), Share-Based
Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal
to the fair value of share-based payments, such as stock options, granted to employees. The
Company is required to apply FAS 123 (R) on a modified prospective method. Under this method, the
Company is required to record compensation expense (as previous awards continue to vest) for the
unvested portion of previously granted awards that remain outstanding at the date of adoption. In
addition, the Company may elect to adopt FAS 123 (R) by restating previously issued financial
statements, basing the expense on that previously reported in their pro forma disclosures required
by FAS 123. FAS 123 (R) is effective in the first reporting period beginning after December 15,
2005, March 26, 2006 for the Company. Management has not completed its evaluation of the effect
that FAS 123 (R) will have, but believes that the effect will be consistent with its previous pro
forma disclosures.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (FAS 151). FAS 151 requires that
abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as
current-period charges. Further, FAS 151 requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. Unallocated overheads must be
recognized as an expense in the period in which they are incurred. FAS 151 is effective for
inventory costs incurred beginning in the first quarter of fiscal 2007. We are currently
evaluating the effect of FAS 151 on our financial statements and related disclosures.
13
FORWARD-LOOKING STATEMENTS
Certain statements contained in this section of the report, including statements regarding sales
under “OVERVIEW” and statements under “FINANCIAL CONDITION AND LIQUIDITY”, are forward-looking.
While Giga-tronics believes that these statements are accurate, Giga-tronics’ business is dependent
upon general economic conditions and various conditions specific to the test and measurement,
wireless and semiconductor industries. Future trends and these factors could cause actual results
to differ materially from the forward-looking statements that we have made. In particular:
Giga-tronics’ core business is test and measurement, as well as components for the wireless
communications market, which continues to be soft. The Company’s commercial product backlog has a
number of risks and uncertainties such as the cancellation or deferral of orders, dispute over
performance and our ability to collect amounts due. If the commercial market should decline
further, then shipments in the current year could fall short of plan resulting in a decline in
earnings. Also, Giga-tronics has a significant number of defense-related orders. While
Giga-tronics has seen some improvement in the defense sector, it is not significant enough to
offset the decline in the commercial sector. If the defense market should decline, shipments in
the current year could be less than anticipated and cause a decrease in earnings.
The market for electronics equipment is characterized by rapidly changing technology and evolving
industry standards. Giga-tronics believes that its future success will depend, in part, upon its
ability to develop and commercialize its existing products, develop new products and applications
and in part to develop, manufacture and successfully introduce new products and product lines with
improved capabilities and continue enhancing existing products. There can be no assurance that
Giga-tronics will successfully complete the development of current or future products or that such
products will achieve market acceptance. Giga-tronics may also experience difficulty obtaining
critical parts or components required in the manufacturing of our products, resulting in an
inability to fulfill orders in a timely manner, which may have a negative impact on earnings.
Also, the Company may not timely ramp manufacturing capacity to meet order demand and quickly adapt
cost structures to changing market conditions.
As part of its business strategy, Giga-tronics has in the past broadened its product lines and
expanded its markets, in part through the acquisition of other business entities, and it may do so
in the future. The Company is subject to various risks in connection with past and any future
acquisitions. Such risks include, among other things, the difficulty of assimilating the
operations and personnel of the acquired companies, the potential disruption of the Company’s
business, the inability of the Company’s management to maximize the financial and strategic
position of the Company by the successful incorporation of acquired technology and rights into the
Company’s product offerings, the maintenance of uniform standards, controls, procedures and
policies, and the potential loss of key employees of acquired companies. No assurance can be given
that any acquisition by Giga-tronics will or will not occur, that if an acquisition does occur,
that it will not materially and adversely affect the Company or that any such acquisition will be
successful in enhancing the Company’s business. Giga-tronics currently contemplates that future
acquisitions may involve the issuance of additional shares of the Company’s common stock. Any such
issuance may result in dilution to all shareholders of the Company, and sales of such shares in
significant volume by the shareholders of acquired companies may depress the price of the Company’s
common stock.
14
Item 3
Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures as of the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures provide reasonable assurances that the information the Company is required
to disclose in the reports it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time period required by the Commission’s
rules and forms. There were no significant changes in the Company’s internal control over
financial reporting during the period covered by this report that have materially affected, or are
reasonably likely to materially affect our internal controls over financial reporting.
15
Part II — OTHER INFORMATION
Item 1
Legal Proceedings
As of November 1, 2005, Giga-tronics has no material pending legal proceedings. From time to
time, Giga-tronics is involved in various disputes and litigation matters that arise in the
ordinary course of business.
Item 4
Submission of matters to a vote of security holders
Annual Meeting of stockholders was held on September 13, 2005.
(1) The vote for the nominated Directors was as follows:
| |
|
|
|
|
|
|
|
|
| Nominee |
|
In Favor |
|
|
Withheld |
|
George H. Bruns, Jr. |
|
|
4,140,426 |
|
|
|
165,930 |
|
James A. Cole |
|
|
4,137,946 |
|
|
|
168,410 |
|
Kenneth A. Harvey |
|
|
4,141,946 |
|
|
|
164,410 |
|
Robert C. Wilson |
|
|
4,110,464 |
|
|
|
195,892 |
|
William E. Wilson |
|
|
4,113,564 |
|
|
|
192,792 |
|
(2) Other matters voted upon at the meeting were as follows:
| |
(a) |
|
Adoption of The 2005 Equity Incentive Plan was approved as follows: |
| |
|
|
|
|
|
|
|
|
| |
|
No. of Votes on Proposal |
|
|
Percent of Votes Cast |
|
For |
|
|
2,388,624 |
|
|
|
88.06 |
% |
Against |
|
|
295,979 |
|
|
|
10.91 |
% |
Abstain |
|
|
27,928 |
|
|
|
1.03 |
% |
Quorum |
|
|
2,712,531 |
|
|
|
100.00 |
% |
Broker non-voted Shares = 1,593,825
| |
(b) |
|
Ratification of the selection of Perry-Smith LLP as independent public
accountants for the fiscal year 2006 was approved as follows: |
| |
|
|
|
|
|
|
|
|
| |
|
No. of Votes on Proposal |
|
|
Percent of Votes Cast |
|
For |
|
|
4,276,295 |
|
|
|
99.30 |
% |
Against |
|
|
23,855 |
|
|
|
0.55 |
% |
Abstain |
|
|
6,206 |
|
|
|
0.15 |
% |
Quorum |
|
|
4,306,356 |
|
|
|
100.00 |
% |
Broker non-voted Shares = 0
Outstanding shares on Record Date = 4,734,646
16
Item 6
Exhibits
Exhibits
| |
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act. |
| |
| |
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act. |
| |
| |
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act. |
| |
| |
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act. |
17
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) |
|
|
|
|
|
|
|
|
|
By: |
|
|
|
|
|
|
|
Date: November 1, 2005
|
|
/s/ GEORGE H. BRUNS, JR. |
|
|
|
|
George H. Bruns, Jr.
|
|
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
Date: November 1, 2005
|
|
/s/ MARK H. COSMEZ II |
|
|
|
|
Mark H. Cosmez II
|
|
|
|
|
Vice President, Finance |
|
|
|
|
Chief Financial Officer and Secretary |
|
|
|
|
(Principal Accounting Officer) |
|
|
18