Annual Report
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549

FORM 10-K

     
(Mark One)    
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

   
    for the fiscal year ended March 30, 2002, 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
(State or other jurisdiction of
incorporation or organization)
  94-2656341
(I.R.S. Employer Identification No.)

   
4650 Norris Canyon Road, San Ramon, CA
(Address of principal executive offices)
  94583
(Zip Code)

Registrant’s telephone number: (925) 328-4650

Securities registered pursuant to Section 12(b) of the Act:

     
Title of each class
  Name of each exchange on which registered
None   None

Securities registered pursuant to Section 12(g) of the Act:

 
Common Stock, No par value
(Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 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 [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]

The aggregate market value of voting stock held by non-affiliates of the Registrant calculated on the closing average bid and asked prices as of May 16, 2002 was $11,733,699. For purposes of this determination only, directors and officers of the Registrant have been assumed to be affiliates. There were a total of 4,661,132 shares of the Registrant’s Common Stock outstanding as of May 16, 2002.

 


Table of Contents

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the following documents have been incorporated by reference into the parts indicated:

     
PART OF FORM 10-K   DOCUMENT

 
PART  III
Items 10, 11, 12 and 13
  Registrant’s PROXY STATEMENT for its 2002 annual meeting of shareholders to be filed no later than 120 days after the close of the fiscal year ended March 30, 2002.

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PART I
ITEM 1.  BUSINESS
ITEM 2.  PROPERTIES
ITEM 3.  LEGAL PROCEEDINGS
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART  II
ITEM 5.  MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ITEM 6.  SELECTED FINANCIAL DATA
ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
PART  III
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11.  EXECUTIVE COMPENSATION
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART  IV
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
SIGNATURES
INDEX TO EXHIBITS


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PART  I

     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 discussed under “Certain Factors Which May Adversely Affect Future Operations Or An Investment In Giga-tronics” in Item 1 below and in Item 7, “Management’s Discussion and Analysis”.

ITEM 1.  BUSINESS

General

     Giga-tronics Incorporated (Giga-tronics) includes operations of Giga-tronics Instrument division, ASCOR, Inc. (ASCOR), DYMATIX, which is a joint venture of Viking Semiconductor Equipment, Inc. (Viking) and Ultracision, Inc. (Ultracision), and Microsource, Inc. (Microsource).

     Giga-tronics designs, manufactures and markets through its Giga-tronics Instrument division, 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. These products are used primarily in the design, production, repair and maintenance of commercial telecommunications, radar, and electronic warfare.

     Giga-tronics was incorporated on March 5, 1980, and its principal executive offices are located at 4650 Norris Canyon Road, San Ramon, California, and its telephone number at that location is (925) 328-4650.

     Effective July 23, 1996, Giga-tronics acquired ASCOR. ASCOR, located in Fremont, California, designs, manufactures, and markets a line of switching and connecting devices that link together many specific purpose instruments that comprise a portion of automatic test systems. ASCOR offers a family of switching and interface test adapters as standard VXI configured products, as well as complete system integration services to the Automatic Test Equipment market.

     Effective June 27, 1997, Giga-tronics completed a merger with Viking by issuing approximately 420,000 shares of the Company’s common stock in exchange for all of the common stock of Viking. Viking, which is now located in Santa Clara, California, 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.

     Effective December 2, 1997, Giga-tronics completed a merger with Ultracision by issuing approximately 517,000 shares of the Company’s common stock in exchange for all of the common stock of Ultracision. Ultracision is a manufacturer of automation equipment for the test and inspection of silicon wafers. Ultracision also produces a line of probers for the testing and inspection of silicon devices.

     Effective May 18, 1998, Giga-tronics acquired Microsource. All the outstanding shares of Microsource were exchanged for $1,500,000 plus contingent payments based on earnings from Microsource from 1998 to 2000, which amounts were nominal. Microsource located in Santa Rosa, California develops and manufactures

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a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers, which are used by its customers in manufacturing a wide variety of microwave instruments or devices.

     Giga-tronics intends to broaden its product lines and expand its market, both by internal development of new products and through the acquisition of other business entities. From time to time, the Company considers a variety of acquisition opportunities.

Industry Segments

     The Company manufactures products used in test, measurement and handling. The Company operates primarily in four operating segments; Giga-tronics Instruments, ASCOR Inc., Microsource Inc. and DYMATIX (formerly the Semiconductor Equipment Group).

Products and Markets

     Giga-tronics Instruments

     The Giga-tronics Instrument segment produces signal sources, generators and sweepers, and power measurement instruments for use in the microwave and RF frequency range (10 kHz to 75 GHz). Within each product line are a number of different models and options allowing customers to select frequency range and specialized capabilities, features and functions. The end-user markets for these products can be divided into three broad segments: commercial telecommunications, radar and electronic warfare. This segment’s instruments are used in the design, production, repair and maintenance and calibration of other manufacturers’ products, from discrete components to complex systems.

     ASCOR Inc.

     The ASCOR Inc. segment produces switch modules, and interface adapters that operate with a bandwidth from direct current (DC) to 18 GHz. This segment’s switch modules may be incorporated within its customer’s automated test equipment. The end-user markets for these products are primarily related to electronic warfare, though the VXI architecture may become more accepted by the telecommunications market.

     DYMATIX (formerly the Semiconductor Equipment Group)

     The DYMATIX segment manufactures and markets a line of optical inspection equipment used in the testing of semiconductor devices. Products include die attachments, automatic die sorters, tape and reel equipment, and wafer inspection equipment. Further, DYMATIX manufacturers automation equipment for the test inspection and robotic handling of silicon wafers in addition to a line of probers for the testing and inspection of silicon devices.

     Microsource Inc.

     The Microsource segment develops and manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers, which are used by its customers in manufacturing a wide variety of microwave instruments or devices.

Sources and Availability of Raw Materials and Components

     Substantially all of the components required by Giga-tronics to make its assemblies are available from more than one source. The Company occasionally uses sole source arrangements to obtain leading-edge technology, favorable pricing or supply terms. Although extended delays in delivering components could result

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in longer product delivery schedules, the Company believes that its protection against this possibility stems from its practice of dealing with well-established suppliers and maintaining good relationships with such suppliers.

Patents and Licenses

     The Company attempts to obtain patents when appropriate. However, the Company believes that its competitive position depends primarily on the creative ability and technical competence of its personnel and the timely introduction of new products rather than on the ownership or development of patents.

     The Company licenses certain instrument operating system software from third parties. The Company believes, based on industry practice, that any additional licenses necessary could be obtained on conditions which would not have a materially adverse effect on the financial condition of the Company.

Seasonal Nature of Business

     The business of the Company is not seasonal.

Working Capital Practices

     Giga-tronics does not believe that it has any special practices or special conditions affecting working capital items that are significant for an understanding of its business.

Importance of Limited Number of Customers

     Commercial business accounted for 83% of net sales in fiscal 2002, 89% in fiscal 2001, and 84% in fiscal 2000. The Company had been a leading supplier of microwave and radio frequency (RF) test instruments to various U.S. Government defense agencies, as well as to their prime contractors. Management anticipates sales to U.S. Government agencies will remain significant in fiscal 2003. Defense-related agencies accounted for 17% of net sales in fiscal 2002, 11% in fiscal 2001, and 16% in fiscal 2000. Prior to the current year, where the defense business has improved, sales to the defense industry in general, and direct sales to the United States and foreign government agencies in particular, have declined. Any reversal of defense orders could have a negative effect on the business, operating results, financial condition and cash flows of Giga-tronics.

     During 2002 and 2001, a Japanese distributor of the Company, Midoriya, accounted for 16% and 10% of the Company’s consolidated sales. At year end, Midoriya had a negligible amount outstanding in accounts receivable while they composed about 11% of receivables at the fiscal year end of 2001.

Backlog of Orders

     On March 30, 2002, the Company’s backlog of unfilled orders was $21,387,000 compared to $39,964,000 at March 31, 2001. As of March 30, 2002, there were approximately $13,912,000 unfilled orders that were scheduled for shipment beyond a year, as compared to approximately $7,245,000 at March 31, 2001. Orders for the Company’s products include program orders from both the U.S. Government and defense contractors, with extended delivery dates. Accordingly, the backlog of orders may vary substantially from quarter to quarter and the backlog entering any single quarter may not be indicative of sales for any period.

     Backlog includes only those customer orders for which a delivery schedule has been agreed upon between the Company and the customer and, in the case of U.S. Government orders, for which funding has been appropriated.

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Competition

     Giga-tronics is engaged in a highly competitive field. Competition from numerous existing companies is intense and potential new entrants are expected to increase. The Company’s instrument, switch, oscillator and synthesizer products compete with Agilent, Anritsu, Racal, IFR and Rohde & Schwarz while the semiconductor equipment products compete with various other competitors. Many of these companies have substantially greater research and development, manufacturing, marketing, financial, technological, personnel and managerial resources than Giga-tronics. There can be no assurance that any products developed by these competitors will not gain greater market acceptance than any developed by Giga-tronics. Accordingly, Giga-tronics will be required to continue to devote substantial resources and efforts to marketing and research and development activities.

Sales and Marketing

     Giga-tronics Instruments, ASCOR Inc., DYMATIX and Microsource Inc. market their products through various distributors and representatives to commercial and government customers, although not necessarily through the same distributors and representatives.

Product Development

     Products of the type manufactured by Giga-tronics historically have had relatively long product life cycles. However, the electronics industry is subject to rapid technological changes at the component level. The future success of the Company is dependent on its ability to steadily incorporate advancements in component technologies into its new products.

     Product development expense was approximately $7,001,000 in fiscal 2002, $5,087,000 in fiscal 2001, and $4,180,000 in fiscal 2000. Activities included the development of new products and the improvement of existing products. It is management’s intention to maintain or increase expenditures for product development at levels required to sustain its competitive position. All of the Company’s product development activities are internally funded and expensed as incurred.

     Giga-tronics expects to continue to make significant investments in research and development. There can be no assurance that future technologies, processes or product developments will not render Giga-tronics’ current product offerings obsolete or that Giga-tronics will be able to develop and introduce new products or enhancements to existing products, which satisfy customer needs, in a timely manner or achieve market acceptance. The failure to do so could adversely affect Giga-tronics’ business.

Manufacturing

     The assembly and testing of Giga-tronics Instrument’s microwave, RF and power measurement products are done at its San Ramon facility. The assembly and testing of ASCOR’s switching and connecting devices are done at its Fremont facility. The assembly and testing of the DYMATIX products are done at its Santa Clara facility. The assembly and testing of Microsource’s line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave synthesizers are done at its Santa Rosa facility.

Environment

     To the best of its knowledge, the Company is in compliance with all federal, state and local laws and regulations involving the protection of the environment.

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Employees

     As of March 30, 2002, Giga-tronics employed 219 individuals on a full time basis. Management believes that the future success of the Company depends on its ability to attract and retain skilled personnel. None of the Company’s employees are represented by a labor union, and the Company considers its employee relations to be good.

Information about Foreign Operations

     The Company sells to its international customers through a network of foreign technical sales representative organizations. Sales to foreign customers were approximately $17,105,000 in fiscal 2002, $22,072,000 in fiscal 2001, and $14,468,000 in fiscal 2000.

     The Company closed its United Kingdom (UK) research & development facility as of March 30, 2002 for the Instruments division. The Company has no other foreign-based operations or material amounts of identifiable assets in foreign countries. Its gross margins on foreign and domestic sales are similar.

Certain Factors Which May Adversely Affect Future Operations Or An Investment In Giga-tronics

     Business climate is volatile

     Giga-tronics has a significant number of defense-related orders. If the defense market should soften, shipments in the current year could decrease more than current projected shipments with a concurrent decline in earnings. 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 under these orders. If this occurs, then shipments in the current year could decrease more than current projected shipments resulting in a decline in earnings. During fiscal 2002 and 2001, Midoriya, the Company’s Japanese distributor accounted for a significant amount of the Company’s commercial sales, while at year-end Giga-tronics’ backlog from this customer was negligible.

     Giga-tronics sales are substantially dependent on the wireless industry

     Giga-tronics sells directly or indirectly to customers and equipment manufacturers in the wireless industry. Currently, this industry is undergoing dramatic and rapid change. As such, the business that Giga-tronics records could decrease or existing recorded backlog could be stretched or deferred resulting in less than projected shipments. These reduced shipments may have a material adverse effect on operations.

     Giga-tronics’ markets involve rapidly changing technology and standards

     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, and to develop new products and application and in part to develop, manufacture and successfully introduce new products and product lines with improved capabilities and to continue to enhance 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 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. Giga-tronics is subject to various risks in connection with 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

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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.

     Giga-tronics’ common stock price is volatile

     The market price of the Company’s common stock could be subject to significant fluctuations in response to variations in quarterly operating results, shortfalls in revenues or earning from levels expected by securities analysts and other factors such as announcements of technological innovations or new products by Giga-tronics or by competitors, government regulations or developments in patent or other proprietary rights. In addition, the NASDAQ National Market and other stock markets have experienced significant price fluctuations in recent periods. These fluctuations often have seemingly been unrelated to the operating performance of the specific companies whose stocks are traded. Broad market fluctuations, as well as general foreign and domestic economic conditions, may adversely affect the market price of the common stock.

     Giga-tronics stock at any time has historically traded on thin volume on NASDAQ. Sales of a significant volume of stock could result in a depression of Giga-tronics share prices.

ITEM 2.  PROPERTIES

     As of March 30, 2002, Giga-tronics’ principal executive office and the Instrument divisions’ marketing, sales and engineering offices and manufacturing facilities for its microwave and RF signal generator and power measurement products are located in approximately 47,300 square feet in San Ramon, California, which the Company occupies under a lease agreement expiring December 31, 2006.

     ASCOR’s marketing, sales and engineering offices and manufacturing facilities for its switching and connecting devices are located in approximately 18,756 square feet in Fremont, California, under a lease that expires on June 30, 2006.

     The DYMATIX marketing, sales and engineering offices and manufacturing facilities for its automation equipment for the inspection of silicon wafers, prober line and optical inspection equipment for the manufacture and test of semiconductor devices are located in an approximately 20,400 square foot facility in Santa Clara, California, under a lease expiring on June 30, 2002.

     Microsource’s marketing, sales and engineering offices and manufacturing facilities for its YIG tuned oscillators, filters and microwave synthesizers are located in an approximately 49,090 square foot facility in Santa Rosa, California, which the Company occupies under a lease expiring May 25, 2013.

     The Company believes that its facilities are adequate for its business activities.

ITEM 3.  LEGAL PROCEEDINGS

     As of March 30, 2002, the Company 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.

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ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended March 30, 2002.

     Executive Officers of the Company are listed on page 33 of this Form 10-K.

PART  II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Common Stock Market Prices

     Giga-tronics’ common stock is traded over the counter on NASDAQ National Market System using the symbol “GIGA”. The number of record holders of the Company’s common stock as of March 30, 2002 was approximately 1,400. The table below shows the high and low closing bid quotations for the common stock during the indicated fiscal periods. These quotations reflect inter-dealer prices without retail mark-ups, mark-downs, or commission and may not reflect actual transactions.

                                                 
    2002   High   Low   2001   High   Low
   
 
 
 
 
 
First quarter
    (4/1-6/30 )     5.810       3.200       (3/26-6/24 )     12.875       6.375  
Second quarter
    (7/1-9/29 )     3.760       2.170       (6/25-9/30 )     10.000       6.781  
Third quarter
    (9/30-12/29 )     4.160       2.320       (10/1-12/30 )     7.313       4.813  
Fourth quarter
    (12/30-3/30 )     4.630       3.450       (12/31-3/31 )     8.188       4.875  

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ITEM 6.  SELECTED FINANCIAL DATA

Effective March 26, 2000, the Company changed its method of accounting for revenue recognition to conform with the guidance provided by SAB 101 (see Note 1 to the consolidated financial statements). The impact of adopting SAB 101 was to increase earnings (loss) before the cumulative effect of the accounting  change in the year ended March 31, 2001 by $520,000, net of income taxes.

SELECTED FINANCIAL DATA

                                         
    Year Ended
   
    March 30,   March 31,   March 25,   March 27,   March 28,
(In thousands except per share data)   2002   2001   2000   1999   1998

 
 
 
 
 
Summary of Operations:
                                       
Net sales
  $ 39,036     $ 54,159     $ 47,577     $ 37,636     $ 36,813  
Gross profit
    11,535       19,056       15,810       11,534       15,789  
Operating expenses
    16,085       16,032       14,315       15,293       15,172  
Interest income, net
    63       205       59       121       457  
Earnings (loss) before cumulative effect of accounting change and income taxes
    (4,462 )     3,461       1,633       (3,006 )     1,096  
Earnings (loss) before cumulative effect of accounting change
    (2,102 )     2,421       1,139       (1,858 )     767  
Net earnings (loss)
    (2,102 )     1,901       1,139       (1,858 )     767  
Net earnings (loss) per share — basic
  $ (0.46 )   $ 0.42     $ 0.26     $ (0.43 )   $ 0.18  
Net earnings (loss) per share — diluted
  $ (0.46 )   $ 0.40     $ 0.24     $ (0.43 )   $ 0.18  
Shares of common stock — basic
    4,604       4,474       4,379       4,338       4,319  
Shares of common stock — diluted
    4,604       4,803       4,693       4,338       4,377  
                                         
    March 30,   March 31,   March 25,   March 27,   March 28,
(In thousands except ratio)   2002   2001   2000   1999   1998

 
 
 
 
 
Financial Position:
                                       
Current ratio
    5.46       4.06       3.17       3.32       5.06  
Working capital
  $ 23,012     $ 22,924     $ 21,066     $ 18,021     $ 23,484  
Total assets
  $ 32,880     $ 37,318     $ 37,526     $ 33,259     $ 32,672  
Shareholders’ equity
  $ 26,661     $ 28,475     $ 26,149     $ 24,710     $ 26,461  
                                         
    March 30,   March 31,   March 25,   March 27,   March 28,
    2002   2001   2000   1999   1998
   
 
 
 
 
Percentage Data:
                                       
Percent of net sales
                                       
Gross profit
    29.6 %     35.2 %     33.2 %     30.6 %     42.9 %
Operating expenses
    41.2       29.6       30.1       40.6       41.2  
Interest income, net
    0.2       0.4       0.1       0.3       1.2  
Earnings (loss) before cumulative effect of accounting change and income taxes
    (11.4 )     6.4       3.4       (8.0 )     3.0  
Net earnings (loss)
    (5.4 )     3.5       2.4       (4.9 )     2.1  

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SELECTED FINANCIAL DATA

Quarterly Financial Information (Unaudited)

                                         
    2002
   
(In thousands except per share data)   First   Second   Third   Fourth   Year

 
 
 
 
 
Net sales
  $ 11,797     $ 9,892     $ 9,720     $ 7,627     $ 39,036  
Gross profit
    3,326       3,612       3,405       1,192       11,535  
Operating expenses
    4,332       4,060       3,824       3,869       16,085  
Interest income, net
    19       15       13       16       63  
Loss before cumulative effect of accounting change and income taxes
    (934 )     (435 )     (402 )     (2,682 )     (4,462 )
Loss before cumulative effect of accounting change
    (566 )     (275 )     (191 )     (1,070 )     (2,102 )
Net loss
    (566 )     (275 )     (191 )     (1,070 )     (2,102 )
Net loss per share — basic
  $ (0.12 )   $ (0.06 )   $ (0.04 )   $ (0.23 )   $ (0.46 )
Net loss per share — diluted
  $ (0.12 )   $ (0.06 )   $ (0.04 )   $ (0.23 )   $ (0.46 )
Shares of common stock — basic
    4,565       4,591       4,626       4,635       4,604  
Shares of common stock — diluted
    4,565       4,591       4,626       4,635       4,604  
                                         
    2001
   
    First   Second   Third   Fourth   Year
   
 
 
 
 
Net sales
  $ 13,637     $ 13,642     $ 11,368     $ 15,512     $ 54,159  
Gross profit
    4,963       4,814       4,068       5,211       19,056  
Operating expenses
    3,775       4,298       3,883       4,076       16,032  
Interest income, net
    33       36       96       40       205  
Earnings before cumulative effect of accounting change and income taxes
    1,253       666       322       1,220       3,461  
Earnings before cumulative effect of accounting change
    877       465       225       854       2,421  
Net earnings
    357       465       225       854       1,901  
Net earnings per share — basic
  $ 0.08     $ 0.10     $ 0.05     $ 0.19     $ 0.42  
Net earnings per share — diluted
  $ 0.07     $ 0.10     $ 0.05     $ 0.18     $ 0.40  
Shares of common stock — basic
    4,437       4,460       4,488       4,511       4,474  
Shares of common stock — diluted
    4,817       4,796       4,777       4,801       4,803  

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ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

MANAGEMENT’S DISCUSSION AND ANALYSIS

Results of Operations for Fiscal 2002 as compared to 2001

     New orders received in fiscal 2002 were $20,461,000, a decrease of 65% from the $57,830,000 received in 2001. New orders declined primarily due to the weakness in the overall wireless market and major customer order cancellations during fiscal 2002 partially offset by increases in new military orders. New orders at Giga-tronics Instrument Division declined 65% to $10,357,000 for fiscal year 2002 after a net order cancellation of $2,900,000. In fiscal 2002, a significant customer of the Instrument Division stopped ordering from the company, primarily due to slack demand. The company expects the lower levels of business from this customer to continue. Orders at ASCOR declined 28% to $3,296,000. DYMATIX experienced a decline of 55% on new orders to $2,969,000 for the fiscal year 2002. Orders at Microsource decreased 77% to $3,839,000 which includes $5,120,000 order reversal for a customer that commenced liquidation proceedings. At year-end 2002, the Company’s backlog of unfilled orders was $21,387,000, compared to $39,964,000 at the end of 2001. The decrease in backlog is primarily due to weak order levels at the Giga-tronics Instrument Division and Microsource. As of year-end 2002, there were approximately $13,912,000 unfilled orders that were scheduled for shipment beyond a year and as of year end 2001 there were $7,245,000 unfilled orders scheduled for shipment beyond a year. The increase in unfilled orders scheduled for shipment beyond a year is attributable primarily to Microsource’s customers delaying shipments of their orders.

     Net sales for 2002 were $39,036,000, a 28% decrease from the $54,159,000 in 2001. The reduction in sales was primarily due to fewer orders booked because of the slowdown in the commercial wireless market and stretch outs on existing orders in backlog. In fiscal 2002, Microsource revenues decreased 24% or $3,172,000, on weak orders and customer stretch outs. Giga-tronics Instrument Division sales decreased 14% or $3,442,000 and ASCOR sales decreased 50% or $3,735,000 primarily due to weak orders at both of these segments. Sales at DYMATIX decreased 57% or $4,774,000 on weak orders primarily due to customers delaying orders until their new product is released.

     Cost of sales increased 22% in fiscal 2002 to $27,501,000 from the $35,103,000 in 2001. The decrease is primarily attributable to the 28% decline in sales offset with higher costs for labor and material on the products shipped coupled with the write down of inventory and pre-production costs associated with the liquidation of a Microsource customer. Subsequent to year end, a telecommunications equipment customer of the Microsource Division commenced liquidation proceedings. As a result, the orders under the long term production contract with this customer were cancelled and Giga-tronics recorded a write-off of $1,100,000 of inventory and pre-production costs.

     Operating expenses increased less than 1% or $50,000 in fiscal 2002 over 2001 due to decreases of $1,984,000 in SG&A and $50,000 in total amortization offset by an increase of $1,914,000 in product development expenses. Product development costs increased 38% or $1,914,000 in fiscal 2002 primarily due to increased product development at DYMATIX and increased YIG product development costs at Microsource. Selling, general and administrative expenses decreased 19% or $1,984,000 for the fiscal year 2002 compared to the prior year. The decrease is a result of lower commission expense of $959,000 on lower sales for the year coupled with $752,000 less in administrative expenses and $322,000 less in marketing expenses primarily due to expense reduction measures taken during the year. These expense reductions were primarily personnel related. For fiscal year 2002 amortization of intangibles decreased 22% or $50,000 as compared to last fiscal year. The decrease in the amortization of intangibles is primarily a result of reduced amortization of patents and licenses. The Company wrote off $173,000 of remaining goodwill related to the Microsource acquisition as such goodwill was determined to be impaired. Interest income in 2002 decreased from 2001 due to lower interest rates.

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     Giga-tronics recorded a net loss of $2,102,000, or $0.46 per diluted share, in 2002 versus net earnings before cumulative effect of accounting change of $2,421,000, or $0.51 per diluted share, in 2001. The Company recorded $520,000 for the cumulative effect of accounting change in fiscal 2001 as a result of the implementation of SAB 101. As a result, Giga-tronics recorded net earnings of $1,901,000, or $0.40 per diluted share, in 2001.

Results of Operations for Fiscal 2001 as compared to 2000

     During the fourth quarter of fiscal 2001, the Company adopted SAB 101, Revenue Recognition in Financial Statements. The Company recorded a net cumulative effect adjustment related to this change in accounting of $520,000, effective March 26, 2000. The adoption of SAB 101 resulted in the deferral of $2,165,000 in sales as of the beginning of the 2001 fiscal year and subsequent recognition of the deferred sales during the year.

     New orders received in 2001 were $57,830,000, a decrease of 10% from $64,013,000 in 2000. This decrease was attributable primarily to the non-recurrence of a three-year contract for about $14,100,000 recorded at the end of fiscal 2000. At year-end 2001, the Company’s backlog of unfilled orders was $39,964,000, compared to $34,128,000 at the end of 2000. As of year end 2001, there were approximately $7,245,000 unfilled orders that were scheduled for shipment beyond a year and as of year end 2000 there were $10,201,000 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 2001 were $54,159,000, a 14% increase from $47,577,000 in 2000. Sales for the fiscal year 2001, without the SAB 101 adjustment, would have been $51,994,000, or over a 9% increase in revenue as compared to the $47,577,000 of the prior year. In fiscal 2001, Microsource revenues decreased 12% or $1,861,000, while Giga-tronics Instruments revenues increased 35% or $6,485,000, in sales and ASCOR improved 12% or $798,000, in sales. DYMATIX (formerly the Semiconductor Equipment Group) improved 16% or $1,160,000. DYMATIX sales for the fiscal year 2001, without the SAB 101 adjustment, would have declined over 14% or $1,005,000.

     Cost of sales increased 11% in 2001 to $35,103,000 from $31,767,000 in 2000. Cost of sales for the fiscal year 2001, without the SAB 101 adjustment, would have been $33,681,000, or over a 6% increase in cost of sales as compared to the prior year. The increase in fiscal 2001 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 increased 12% in 2001 over 2000. Product development costs increased $907,000 in fiscal 2001 to $5,087,000. This was principally due to increased development of new products at the Instruments division and at Microsource. Selling, general and administrative expenses increased $1,058,000 to $10,713,000 in 2001 due to higher commissions on higher revenues coupled with higher personnel and promotional expenses at the Instruments division. Amortization of intangibles decreased $248,000 to $232,000 principally, as a result of reduced amortization of patents and licenses.

     Other income increased in fiscal 2001 primarily due to increased sublease rent from the facilities leased in Santa Rosa. Net interest income in 2001 increased from 2000 due to higher average cash available for investment. The average cash improvement resulted principally from higher cash levels in the middle of the year. The provision for income taxes in 2001 was $1,040,000, or 30%, of the pre-tax earnings.

     Giga-tronics recorded net earnings before cumulative effect of accounting change of $2,421,000, or $0.51 per diluted share, in 2001 versus $1,139,000, or $0.24 per diluted share, in 2000. The improvement in 2001 earnings was due to the Company’s higher sales levels in 2001 as compared to 2000. The Company recorded $520,000 for the cumulative effect of accounting change in 2001 as a result of the implementation of SAB 101. As a result, Giga-tronics recorded net earnings of $1,901,000, or $0.40 per diluted share, in 2001 versus $1,139,000, or $0.24 per diluted share, in 2000.

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Critical Accounting Policies

Management of Giga-tronics has identified the following as the Company’s critical accounting policies:

Revenue

Revenues are recognized when there is evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectability is reasonably assured. This generally occurs when products are shipped and the risk of loss has passed. Upon shipment, the Company also provides for the estimated cost that may be incurred for product warranties. Revenue related to products shipped subject to customers’ evaluation is recognized upon final acceptance.

Inventory

Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.

Accounts Receivable

Accounts receivable are stated at the net realizable value. The Company has estimated an allowance for uncollectible accounts based on analysis of outstanding receivables, consideration of the age of those receivables, and the Company’s historical collection experience.

Deferred Tax Assets

The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based on the historical taxable income and projections for future taxable income over the periods in which the deferred tax assets become deductible, management believes it more likely than not that the Company will realize benefits of these deductible differences, net of valuation allowances, as of March 30, 2002.

Product Development Costs

The Company incurs pre-production costs on certain long-term supply arrangements. The costs, which represent non-recurring engineering and tooling costs, are capitalized as other assets and amortized over their useful life when reimbursable by the customer. Otherwise, they are expensed as incurred. Subsequent to fiscal 2002 year end, a telecommunications equipment customer of the Microsource division commenced liquidation proceedings. As a result, the orders under the long term production contract with this customer were cancelled and Giga-tronics recorded a write-off of $1,100,000 of inventory and pre-production costs. Included in other assets as of March 30, 2002 and March 31, 2001 were capitalized pre-production costs of $538,000, and $1,133,000, respectively.

Financial Condition and Liquidity

     As of March 30, 2002, Giga-tronics had $7,180,000 in cash and cash equivalents, compared to $3,469,000 as of March 31, 2001. Cash provided by operations amounted to $3,795,000 in 2002, $1,951,000 in 2001, and $2,644,000 in 2000. Cash provided by operations in 2002 is attributed to accounts receivable collections and reduced inventory purchases offset by the operating loss in the year and the net change in operating assets and liabilities. Cash provided by operations in 2001 and 2000 is attributed to operating income in the year.

     Giga-tronics continues to maintain a strong financial position, with working capital at year-end of $23,012,000 compared to $22,924,000 in 2001 and $21,066,000 in 2000. The Company’s current ratio of 5.5 increased from the 2001 and 2000 current ratio of 4.1 and 3.2, respectively. The increase in working capital is primarily a result of the reduced inventory purchases of the Company.

     Additions to property and equipment were $811,000 in 2002, compared to $1,800,000 in 2001 and $1,361,000 in 2000. Fiscal 2002 spending reflects continuing investments to support new product development,

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increased productivity, and improved product quality. Other cash inflows in 2002 consist of $239,000 of common stock in connection with the exercise of stock options. Other cash inflows in 2001 were $367,000 of common stock in connection with the exercise of stock options.

     The Company leases various facilities under various operating leases that expire through May 2013. Total future minimum lease payments under these leases amount to approximately $10,908,000.

     The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 30, 2002, non-cancelable purchase orders were approximately $5,339,000 through fiscal 2003 and $256,000 beyond fiscal 2003 and were scheduled to be delivered to the company at various dates through October 2003.

     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. This line of credit expires September 30, 2002. Giga-tronics intends to increase research and development expenditures for the purpose of broadening its product base. From time to time, Giga-tronics considers a variety of acquisition opportunities to also broaden its product lines and expand its market. Such acquisition activity could also increase the Company’s operating expenses and require the additional use of capital resources.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” 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 Balance Sheet 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 adopted SFAS No. 133 in the first quarter of fiscal 2002. The adoption of SFAS No. 133 did not have a material effect on the financial position or results of operations of the Company.

In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement No. 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement No. 142. Statement No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of Statement No. 141 as of July 1, 2001. The adoption of Statement No. 141 did not have a material impact on the Company’s financial position or results of operations. The Company will adopt the provisions of Statement No. 142 effective March 31, 2002 and the Company does not expect this to have a material impact on the consolidated financial statements.

In August 2001, the FASB issued Statement No. 143, Accounting For Asset Retirement Obligations. Statement No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company will adopt Statement No. 143 on January 1, 2003 and the adoption will not have a material effect on our financial condition or results of operations.

In August 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Statement No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement No. 144 retains the fundamental provisions in Statement No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement No. 121. Statement No. 144 also

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retains the basic provisions of APB Opinion No. 30 on how to present discontinued operations in the statement of operations, but broadens that presentation to include a component of an entity (rather than a segment of a business). The Company will adopt the provisions of Statement No. 144 effective March 31, 2002. The impact of such adoption will not have a material effect on the Company’s financial position or results of operations.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Financial instruments that expose the company to market risk are cash and cash equivalents. The investments are held in recognized financial instruments and have limited market risk due to the short-term maturities of the instruments.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS

                   
(In thousands except share data)   March 30, 2002   March 31, 2001

 
 
Assets
               
Current assets
               
 
Cash and cash equivalents
  $ 7,180     $ 3,469  
 
Trade accounts receivable, net of allowance of $358 and $262, respectively
    3,881       7,767  
 
Inventories
    11,246       15,185  
 
Income tax refund receivable
    701        
 
Prepaid expenses
    320       424  
 
Deferred income taxes
    4,841       3,560  
 
   
     
 
Total current assets
    28,169       30,405  
Property and equipment
               
 
Leasehold improvements
    408       398  
 
Machinery and equipment
    16,590       16,123  
 
Office furniture and fixtures
    1,162       1,142  
 
   
     
 
Property and equipment, gross cost
    18,160       17,663  
Less accumulated depreciation and amortization
    14,098       12,357  
 
   
     
 
Property and equipment, net
    4,062       5,306  
Patents and licenses
    20       36  
Goodwill, net
          339  
Other assets
    629       1,232  
 
   
     
 
Total assets
  $ 32,880     $ 37,318  
 
   
     
 
Liabilities and shareholders’ equity
               
Current liabilities
               
 
Accounts payable
  $ 1,426     $ 3,347  
 
Accrued commissions
    224       435  
 
Accrued payroll and benefits
    1,249       1,687  
 
Accrued warranty
    779       732  
 
Customer advances
    780       690  
 
Obligation under capital lease
    89       167  
 
Other current liabilities
    610       423  
 
   
     
 
Total current liabilities
    5,157       7,481  
Obligations under capital lease, net of current portion
    94       115  
Deferred income taxes
    546       796  
Deferred rent
    422       451  
 
   
     
 
Total liabilities
    6,219       8,843  
 
   
     
 
Shareholders’ equity
               
Preferred stock of no par value
Authorized 1,000,000 shares; no shares outstanding at March 30, 2002 and March 31, 2001
           
Common stock of no par value;
Authorized 40,000,000 shares; 4,648,944 shares at March 30, 2002 and 4,542,694 shares at March 31, 2001 issued and outstanding
    12,634       12,346  
Retained earnings
    14,027       16,129  
 
   
     
 
Total shareholders’ equity
    26,661       28,475  
 
   
     
 
Total liabilities and shareholders’ equity
  $ 32,880     $ 37,318  
 
   
     
 

See Accompanying Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF OPERATIONS

                         
Years Ended
(In thousands except share data)
  March 30, 2002   March 31, 2001   March 25, 2000

 
 
 
Net sales
  $ 39,036     $ 54,159     $ 47,577  
Cost of sales
    27,501       35,103       31,767  
 
   
     
     
 
Gross profit
    11,535       19,056       15,810  
Product development
    7,001       5,087       4,180  
Selling, general and administrative
    8,729       10,713       9,655  
Amortization of intangibles
    182       232       480  
Goodwill impairment
    173              
 
   
     
     
 
Operating expenses
    16,085       16,032       14,315  
 
   
     
     
 
Operating income (loss)
    (4,550 )     3,024       1,495  
Other income (expense)
    25       232       79  
Interest income, net
    63       205       59  
 
   
     
     
 
Earnings (loss) before provision (benefit) for income taxes and cumulative effect of accounting change
    (4,462 )     3,461       1,633  
Provision (benefit) for income taxes
    (2,360 )     1,040       494  
 
   
     
     
 
Earnings (loss) before cumulative effect of accounting change
    (2,102 )     2,421       1,139  
Cumulative effect of accounting change
          520        
 
   
     
     
 
Net earnings (loss)
  $ (2,102 )   $ 1,901     $ 1,139  
 
   
     
     
 
Basic earnings (loss) per share:
                       
Before cumulative effect of accounting change
  $ (0.46 )   $ 0.54     $ 0.26  
 
   
     
     
 
 
   
     
     
 
Cumulative effect of accounting change
          (0.12 )      
 
   
     
     
 
Basic earnings (loss) per share
  $ (0.46 )   $ 0.42     $ 0.26  
 
   
     
     
 
Diluted earnings (loss) per share:
                       
Before cumulative effect of accounting change
  $ (0.46 )   $ 0.51     $ 0.24  
 
   
     
     
 
Cumulative effect of accounting change
          (0.11 )      
 
   
     
     
 
Diluted earnings (loss) per share
  $ (0.46 )   $ 0.40     $ 0.24  
 
   
     
     
 
Weighted average basic common shares outstanding
    4,604       4,474       4,379  
Weighted average diluted common shares outstanding
    4,604       4,803       4,693  
Pro forma amounts assuming accounting change is applied retroactively:
                       
(Unaudited)
                       
Net income
          $ 2,421     $ 623  
 
           
     
 
Basic earnings per share
          $ 0.54     $ 0.14  
 
           
     
 
Diluted earnings per share
          $ 0.51     $ 0.13  
 
           
     
 

See Accompanying Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’
EQUITY AND COMPREHENSIVE INCOME (LOSS)

                                                   
      Common Stock           Other                
     
  Comprehensive   Comprehensive   Retained        
(In thousands except share data)   Shares   Amount   Income (Loss)   Income (Loss)   Earnings   Total

 
 
 
 
 
 
Balance at March 27, 1999
    4,361,902     $ 11,621     $     $     $ 13,089     $ 24,710  
Comprehensive Income — net
 
Net earnings
                1,139             1,139       1,139  
 
                   
                         
Stock issuance under stock option plans
    69,106       174                         174  
Tax benefit associated with exercise of stock options
          126                         126  
 
   
     
     
     
     
     
 
Balance at March 25, 2000
    4,431,008     $ 11,921     $     $     $ 14,228     $ 26,149  
Comprehensive Income — net
 
Net earnings
                1,901             1,901       1,901  
 
                   
                         
Stock issuance under stock option plans
    111,686       367                         367  
Tax benefit associated with exercise of stock options
          58                         58  
 
   
     
     
     
     
     
 
Balance at March 31, 2001
    4,542,694     $ 12,346     $     $     $ 16,129     $ 28,475  
Comprehensive Income — net
 
Net earnings
                (2,102 )           (2,102 )     (2,102 )
 
                   
                         
Stock issuance under stock option plans
    106,250       239                         239  
Tax benefit associated with exercise of stock options
          49                         49  
 
   
     
     
     
     
     
 
Balance at March 30, 2002
    4,648,944     $ 12,634     $     $     $ 14,027     $ 26,661  
 
   
     
     
     
     
     
 

See Accompanying Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS

                           
Years ended                        
(In thousands)   March 30, 2002   March 31, 2001   March 25, 2000

 
 
 
Cash flows provided from operations:
                       
Net earnings (loss)
  $ (2,102 )   $ 1,901     $ 1,139  
Adjustments to reconcile net earnings (loss) to net cash provided by operations:
                       
Provision for bad debt
    96       8       (182 )
Depreciation and amortization
    2,216       2,120       2,111  
Impairment of Goodwill
    173              
Tax benefit from employee stock options
    49       58       126  
Tax benefit of pre acquisition NOL utilization
                394  
Gain on sales of fixed assets
    (1 )     (20 )     (20 )
Deferred income taxes
    (1,531 )     (205 )     (81 )
Changes in operating assets and liabilities:
                       
 
Trade accounts receivable
    3,799       1,419       (2,578 )
 
Inventories
    3,939       (1,072 )     (864 )
 
Prepaid expenses
    229       20       (61 )
 
Accounts payable
    (1,921 )     (718 )     1,043  
 
Accrued commissions
    (211 )     (190 )     256  
 
Accrued payroll and benefits
    (438 )     49       292  
 
Accrued warranty
    47       179       86  
 
Accrued other expenses
    62       (613 )     535  
 
Customer advances
    90       (846 )     (112 )
 
Income taxes receivable/payable
    (701 )     (139 )     560  
 
   
     
     
 
Net cash provided by operations
    3,795       1,951       2,644  
Cash flows from investing activities:
                       
Proceeds from sale of property and equipment
    13       26       7  
Additions to property and equipment
    (708 )     (1,645 )     (1,311 )
Payment for purchase of Microsource, including transaction costs
                (8 )
Other assets
    603       (489 )     (565 )
 
   
     
     
 
Net cash used in investing activities
    (92 )     (2,108 )     (1,877 )
Cash flows from financing activities:
                       
Issuance of common stock
    239       367       174  
Payment on notes payable and other long term liabilities
    (29 )     (78 )     (45 )
Payments on capital lease and other long term obligations
    (202 )     (118 )     (127 )
 
   
     
     
 
Net cash provided by financing activities
    8       171       2  
Increase in cash and cash equivalents
    3,711       14       769  
 
   
     
     
 
Beginning cash and cash equivalents
    3,469       3,455       2,686  
Ending cash and cash equivalents
    7,180       3,469       3,455  
 
   
     
     
 
Supplementary disclosure of cash flow information:
                       
 
Cash paid for income taxes
  $ 56     $ 988     $ 86  
 
   
     
     
 
 
Cash paid for interest
                 
 
   
     
     
 
Non-cash investing and financing activities:
                       
 
Purchases under capital lease obligations
    103       155       50  
 
   
     
     
 

See Accompanying Notes to Consolidated Financial Statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     1  Summary of Significant Accounting Policies

The Company The accompanying consolidated financial statements include the accounts of Giga-tronics and its wholly owned subsidiaries. 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. During March 2002 the Company closed its United Kingdom (UK) research & development facility. The Company currently has no other foreign-based operations or material amounts of identifiable assets in foreign countries. Its gross margins on foreign and domestic sales are similar, and all non-U.S. sales are made in U.S. dollars.

Principles of Consolidation The consolidated financial statements include the accounts of Giga-tronics and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 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 March. Fiscal year 2002 contained 52 weeks while fiscal year 2001 contained 53 weeks and fiscal year 2000 contained 52 weeks.

Revenue Recognition Revenues are recognized when there is evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectability is reasonably assured. This generally occurs when products are shipped and the risk of loss has passed. Upon shipment, the Company also provides for the estimated cost that may be incurred for product warranties. Revenue related to products shipped subject to customers’ evaluation is recognized upon final acceptance.

During the fourth quarter of fiscal 2001, the Company adopted Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, effective March 26, 2000. Prior to the adoption of SAB 101, the Company recognized revenue on sales with final customer acceptance upon delivery and provided for the estimated costs of installation obligations at the time the revenue was recognized. The Company recorded a cumulative effect adjustment related to this change in accounting of $520,000, net of income taxes at the beginning of fiscal year 2001. The adoption of SAB 101 resulted in the deferral of $2,165,000 in revenue as of the beginning of the 2001 fiscal year, and subsequent recognition of the deferred sales during the year.

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Pro forma effect of SAB 101 assuming accounting change is applied retroactively is as follows:

                         
Years ended                        
(In thousands except per share data)   March 30, 2002   March 31, 2001   March 25, 2000

 
 
 
(Unaudited)
                       
Net Sales
  $ 39,036     $ 54,159     $ 45,412  
Cost of Sales
    27,501       35,103       30,345  
 
   
     
     
 
Gross Profit
    11,535       19,056       15,067  
Operating Expense
    16,085       16,032       14,315  
 
   
     
     
 
Operating Income (loss)
    (4,550 )     3,024       752  
Interest and other income
    88       437       138  
 
   
     
     
 
Earnings (loss) before taxes
    (4,462 )     3,461       890  
Provision (benefit) for income taxes
    (2,360 )     1,040       267  
 
   
     
     
 
Net income (loss)
  $ (2,102 )   $ 2,421     $ 623  
 
   
     
     
 
Net income (loss) per share — Basic
  $ (0.46 )   $ 0.54     $ 0.14  
 
   
     
     
 
Net income (loss) per share — Diluted
  $ (0.46 )   $ 0.51     $ 0.13  
 
   
     
     
 

Cash Equivalents The Company considers all highly liquid debt instruments with remaining maturity dates of 90 days or less from date of purchase to be cash equivalents.

Inventories Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis.

Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated 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.

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 using 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 Patents and licenses are being amortized using the straight-line method over periods of five to seven years. As of March 30, 2002 and March 31, 2001 accumulated amortization on patents and licenses was $2,176,000 and $2,160,000, respectively.

Goodwill Goodwill is being amortized using the straight-line method over a period of five years. In March 2002, the Company determined that the remaining goodwill balance was impaired and recorded an impairment charge of $173,000. As of March 30, 2002 and March 31, 2001 accumulated amortization on goodwill was $2,220,000 and $1,881,000 respectively.

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Pre-production costs The Company incurs pre-production costs on certain long-term supply arrangements. The costs, which represent non-recurring engineering and tooling costs, are capitalized as other assets and amortized over their useful life when reimbursable by the customer. Otherwise, they are expensed as incurred. Subsequent to fiscal 2002 year end, a telecommunications equipment customer of the Microsource division commenced liquidation proceedings. As a result, the orders under the long term production contract with this customer were cancelled and Giga-tronics recorded a write-off of $1,100,000 of inventory and pre-production costs in the fourth quarter of fiscal 2002. Included in other assets as of March 30, 2002 and March 31, 2001 were capitalized pre-production costs of $538,000, and $1,133,000, respectively.

Product Development Costs Product development costs are charged to operations in the year incurred.

Software Development Costs Development costs included in the research and development of new products and enhancements to existing products are expensed as incurred until technological feasibility in the form of a working model has been established. To date, completion of software development has been concurrent with the establishment of technological feasibility, and accordingly, no costs have been capitalized.

Stock-based Compensation The Company uses the intrinsic value method to account for employee stock-based compensation.

Earnings (Loss) Per Share Basic earnings (loss) per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed exercise of stock options using the treasury method. Antidilutive options are not included in the computation of diluted earnings per share.

Financial Instruments and Concentration of Credit Risk Financial instruments, which potentially subject the Company to credit risk as of March 30, 2002, 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. Cash and cash equivalents 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.

Fair Market Value of Financial Instruments The carrying amount for the Company’s cash equivalents, trade accounts receivable and accounts payable approximates fair market value because of the short maturity of these financial instruments.

Recent Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” 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 Balance Sheet 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 adopted SFAS No. 133 in the first quarter of fiscal 2002. The adoption of SFAS No. 133 did not have a material effect on the financial position or results of operations of the Company.

In July 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. Statement No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement No. 142. Statement No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated

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useful lives, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of Statement No. 141 as of July 1, 2001. The adoption of Statement No. 141 did not have a material impact on the Company’s financial position or results of operations. The Company will adopt the provisions of Statement No. 142 effective March 31, 2002. The Company does not expect this to have a material effect on the consolidated financial statements.

In August 2001, the FASB issued Statement No. 143, Accounting For Asset Retirement Obligations. Statement No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company will adopt Statement No. 143 on January 1, 2003 and the adoption will not have a material effect on our financial condition or results of operations.

In August 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Statement No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Statement No. 144 retains the fundamental provisions in Statement No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement No. 121. Statement No. 144 also retains the basic provisions of APB Opinion No. 30 on how to present discontinued operations in the statement of operations, but broadens that presentation to include a component of an entity (rather than a segment of a business). The Company adopted the provisions of Statement No. 144 effective March 31, 2002. The impact of such adoption did not have a material effect on the Company’s financial position or results of operations.

     2  Cash and Cash Equivalents

Cash and cash equivalents consisted of the following at March 30, 2002 and March 31, 2001:

                   
      Cash and Cash Equivalents
     
March 30, 2002   Amortized   Fair
(In thousands)   Cost   Value

 
 
Cash
  $ 7,180     $ 7,180  
 
   
     
 
 
Total
  $ 7,180     $ 7,180  
 
   
     
 
                   
      Cash and Cash Equivalents
     
March 31, 2001   Amortized   Fair
(In thousands)   Cost   Value

 
 
Cash
  $ 3,469     $ 3,469  
 
   
     
 
 
Total
  $ 3,469     $ 3,469  
 
   
     
 

     3  Inventories

                     
Years ended                
(In thousands)   March 30, 2002   March 31, 2001

 
 
Raw materials
  $ 6,034     $ 8,432  
Work-in-progress
    3,852       4,833  
Finished goods
    683       1,020  
Demonstration inventory
    677       900  
 
   
     
 
 
  $ 11,246     $ 15,185  
 
   
     
 

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     4  Selling Expenses

Selling expenses consist primarily of commissions paid to various marketing agencies. Commission expense totaled $1,620,000, $2,579,000, and $2,360,000 in fiscal 2002, 2001, and 2000, respectively. Advertising costs which are expensed as incurred totaled $362,000, $579,000, and $511,000 for fiscal 2002, 2001, and 2000, respectively.

     5  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. Interest expense is charged at approximately prime which is currently 5% 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 2002, 2001 and 2000:

March 30, 2002 (In thousands):

                                                 
    Giga-tronics                                        
    Instruments   ASCOR   Microsource   DYMATIX   Corporate   Total
   
 
 
 
 
 
Revenue
  $ 21,559     $ 3,768     $ 10,036     $ 3,673     $     $ 39,036  
Interest income
    28       74       0       4       69       175  
Interest expense
    (130 )     0       (561 )     (234 )     813       (112 )
Depreciation and amortization
    593       138       1,408       77             2,216  
Pre-tax income (loss)
    (548 )     (655 )     (3,011 )     (1,182 )     934       (4,462 )
Assets
    12,122       3,479       9,661       4,037       3,581       32,880  

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March 31, 2001 (In thousands):

                                                 
    Giga-tronics                                        
    Instruments   ASCOR   Microsource   DYMATIX   Corporate   Total
   
 
 
 
 
 
Revenue
  $ 25,001     $ 7,503     $ 13,208     $ 8,447     $     $ 54,159  
Interest income
    25       93       6       3       109       236  
Interest expense
    (196 )     (4 )     (744 )     (354 )     1,267       (31 )
Depreciation and amortization
    604       148       1,270       98             2,120  
Income before taxes and accounting change
    1,193       1,436       (985 )     434       1,383       3,461  
Assets
    15,518       4,172       11,937       5,236       455       37,318  

March 25, 2000 (In thousands):

                                                 
    Giga-tronics                                        
    Instruments   ASCOR   Microsource   DYMATIX   Corporate   Total
   
 
 
 
 
 
Revenue
  $ 18,516     $ 6,705     $ 15,069     $ 7,287     $     $ 47,577  
Interest income
          34       1             70       105  
Interest expense
    (25 )     (15 )     (634 )     (329 )     957       (46 )
Depreciation and amortization
    699       153       1,164       95             2,111  
Pre-tax income (loss)
    361       53       132       168       919       1,633  
Assets
    13,546       5,299       11,874       5,396       1,411       37,526  

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 2002, 2001, and 2000 U.S. Government and U.S. defense-related customers accounted for 17%, 11%, and 16%, of sales, respectively. During 2002 and 2001, a Japanese distributor of the Company, Midoriya, accounted for 16% and 10% of the Company’s consolidated sales. At year end, Midoriya had a negligible amount outstanding in accounts receivable compared to about 11% of the Company’s receivables at the fiscal year end of 2001.

Export sales accounted for 44%, 41%, and 30% of the Company’s sales in fiscal 2002, 2001, and 2000, respectively. Export sales by geographical area are shown below:

                            
Years ended                        
(In thousands)   March 30, 2002   March 31, 2001   March 25, 2000

 
 
 
Americas
  $ 1,112     $ 4,256     $ 1,989  
Europe
    4,860       6,831       6,448  
Asia
    9,412       9,512       4,981  
Rest of world
    1,721       1,473       1,050  
 
   
     
     
 
 
  $ 17,105     $ 22,072     $ 14,468  
 
   
     
     
 

     6  Earnings (loss) per Share

Shares used in per share computations for the years ended March 30, 2002, March 31, 2001 and March 25, 2000 are as follows:

                               
Years ended                        
(In thousands except per share data)   March 30, 2002   March 31, 2001   March 25, 2000

 
 
 
Net earnings (loss)
  $ (2,102 )   $ 1,901     $ 1,139  
 
   
     
     
 
Weighted average:
                       
Common shares outstanding
    4,604       4,474       4,379  
Potential common shares
          329       314  
 
   
     
     
 
Common shares assuming dilution
    4,604       4,803       4,693  
 
   
     
     
 
Net earnings (loss) per share of common stock
  $ (0.46 )   $ 0.42     $ 0.26  
 
   
     
     
 
Net earnings (loss) per share of common stock assuming dilution
  $ (0.46 )   $ 0.40     $ 0.24  
 
   
     
     
 
Stock options not included in computation
    550       57       24  
 
   
     
     
 

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The number of stock options not included in the computation of diluted earnings per share (EPS) for the period ended March 30, 2002 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 31, 2001 and March 25, 2000 reflects stock options where the exercise prices were greater than the average market price of the common shares and are therefore antidilutive.

     7  Income Taxes

Following are the components of the provision (benefit) for income taxes:

                           
Years ended                        
(In thousands)   March 30, 2002   March 31, 2001   March 25, 2000

 
 
 
Current:
                       
 
Federal
  $ (817 )   $ 1,063     $ 46  
 
State
    (61 )     66       7  
 
   
     
     
 
 
    (878 )     1,129       53  
Deferred:
                       
 
Federal
    (1,078 )     58       (180 )
 
State
    (453 )     (263 )     100  
 
   
     
     
 
 
    (1,531 )     (205 )     (80 )
Charge in lieu of taxes attributable to employer stock option plans
    49       58       127  
Goodwill, for initial recognition of acquired tax benefits that previously were included in the valuation reserve
          58       394  
 
   
     
     
 
Provision (benefit) for income taxes
  $ (2,360 )   $ 1,040     $ 494  
 
   
     
     
 

     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)   March 30, 2002   March 31, 2001

 
 
Current deferred tax assets, net
  $ 4,841     $ 3,560  
Noncurrent deferred tax asset (liabilities), net
    (546 )     (796 )
 
   
     
 
Net deferred taxes
  $ 4,295     $ 2,764  
 
   
     
 
Future state tax effect
    (274 )     (182 )
Allowance for doubtful accounts
    154       112  
Fixed asset depreciation
    (586 )     (855 )
Inventory basis and additional costs capitalized
    3,309       2,529  
Accrued vacation
    191       284  
Accrued warranty
    334       314  
Other accrued liabilities
    217       212  
Net operating loss carryforward
    5,964       6,056  
Income tax credits
    1,317       786  
Valuation allowances
    (6,331 )     (6,492 )
 
   
     
 
 
  $ 4,295     $ 2,764  
 
   
     
 

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Years ended                                                
(In thousands except percentages)   March 30, 2002   March 31, 2001   March 25, 2000

 
 
 
Statutory federal income tax (benefit)
  $ (1,517 )     (34.0 )%   $ 1,176       34.0 %   $ 555       34.0 %
Beginning of year change in deferred Tax asset valuation allowance
    117       2.6                   (55 )     (3.4 )
State income tax, net of federal benefit
    (143 )     (3.2 )     200       5.8       57       3.5  
Nontax deductible expenses
    9       0.2       6       0.2       6       0.4  
Tax credits
    (894 )     (20.0 )     (297 )     (8.6 )     (98 )     (6.0 )
Goodwill and patent amortization
    142       3.2       60       1.7       88       5.4  
Interest income exempt from federal tax
    (82 )     (1.8 )     (58 )     (1.7 )     (51 )     (3.1 )
Other
    8       .3       (47 )     (1.4 )     (8 )     (.5 )
 
   
     
     
     
     
     
 
Effective income tax (benefit)
  $ (2,360 )     (52.7 )%   $ 1,040       30.0 %   $ 494       30.3 %
 
   
     
     
     
     
     
 

The change in valuation allowance from March 31, 2001 to March 30, 2002 was $161,000. The change in valuation allowance from March 25, 2000 to March 31, 2001 was $395,000. The change in valuation allowance from March 27, 1999 to March 25, 2000 was $860,000.

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 periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based on the historical taxable income and projections for future taxable income over the periods in which the deferred tax assets become deductible, management believes it more likely than not that the Company will realize benefits of these deductible differences, net of valuation allowances as of March 30, 2002.

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. As of March 30, 2002, goodwill related to the acquisition of Microsource has been reduced by a cumulative adjustment of $452,000 for the tax benefits realized from the acquired Microsource deferred tax assets.

During the years ended March 30, 2002, March 31, 2001 and March 25, 2000, disqualifying employee stock option dispositions resulted in an income tax deduction to the Company of approximately $122,000, $145,000 and $269,000, respectively, and a tax benefit of approximately $49,000, $58,000 and $127,000, respectively. The tax benefit has been reflected as an increase to the Company’s paid-in capital in the accompanying Statement of Shareholders’ Equity.

     8  Stock Options and Employee Benefit Plans

Stock Option Plan The Company established a 1990 Stock Option Plan which provided for the granting of options for up to 700,000 shares of common stock. The 1990 Plan expired during the 2001 fiscal year. The Company subsequently established the 2000 Stock Option Plan which provides for the granting of options for up to 700,000 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 agreements 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. 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 30, 2002, no SAR’s have been granted under the option plan. As of March 30, 2002, the total number of shares of common stock available for issuance is 428,100 under the 2000 stock option plan. All outstanding options have a term of five years.

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Following is a summary of stock option activity:

                                   
      Per Share Weighted                        
      Average Fair Value   Options           Weighted Average
      of Options Granted   Exercisable   Shares   Exercise Price
     
 
 
 
Outstanding as of March 27, 1999
            48,814       635,564       2.391  
 
   
     
     
     
 
 
Exercised
                    (28,204 )     2.515  
 
Forfeited
                    (168,875 )     2.118  
 
Granted
  $ 2.613               115,500       2.613  
 
   
     
     
     
 
Outstanding as of March 25, 2000
            131,424       553,985       2.514  
 
Exercised
                    (84,212 )     2.247  
 
Forfeited
                    (89,737 )     4.786  
 
Granted
  $ 6.407               214,700       6.407  
 
   
     
     
     
 
Outstanding as of March 31, 2001
            143,988       594,736     $ 3.610  
 
   
     
     
     
 
 
Exercised
                    (67,275 )     2.163  
 
Forfeited
                    (145,437 )     3.783  
 
Granted
  $ 4.290               168,150       4.290  
 
   
     
     
     
 
Outstanding as of March 30, 2002
            194,437       550,174     $ 3.838  
 
   
     
     
     
 

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)   March 30, 2002   March 31, 2001   March 25, 2000

 
 
 
Net earnings (loss)
                       
 
As reported
  $ (2,102 )   $ 1,901     $ 1,139  
 
Pro-forma
    (2,373 )     1,537       872  
Net earnings (loss) per share — basic
                       
 
As reported
    (0.46 )     0.42       0.26  
 
Pro-forma
    (0.52 )     0.34       0.20  
Net earnings (loss) per share — diluted
                       
 
As reported
    (0.46 )     0.40       0.24  
 
Pro-forma
    (0.52 )     0.32       0.19  

             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 30, 2002   March 31, 2001   March 25, 2000

 
 
 
Expected life of options
  4 years   4 years   4 years
Expected life of purchase rights
  6 mos   6 mos   6 mos
Volatility
    60 %     60 %     60 %
Risk-free interest rate
  4.39 to 4.93   4.64 to 6.30   5.08 to 5.97
Dividend yield
  Zero   Zero   Zero

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Options Outstanding and Exercisable as of March 30, 2002, by Price Range

                                           
    Number   Weighted Average   Weighted   Number   Weighted
Range of   of Options   Remaining   Average   of Options   Average
Exercise Prices   Outstanding   Contractual Life   Exercise Price   Exercisable   Exercise Price

 
 
 
 
 
$2.09
    170,724       1.70     $ 2.094       119,637     $ 2.094  
From $2.12 to $5.75
    311,825       3.63       4.063       55,175       3.553  
From $6.13 to $8.88
    67,625       3.38       7.209       19,625       7.112  
 
   
     
     
     
     
 
From $2.09 to $8.88
    550,174       3.00     $ 3.838       194,437     $ 3.014  
 
   
     
     
     
     
 

Employee Stock Purchase Plan Under the Company’s Employee Stock Purchase Plan (the Purchase Plan), employees meeting specific 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 30, 2002, 99,285 shares remain available for issuance under the Purchase Plan. The weighted average fair value of the purchase rights granted in fiscal 2002 was $2.392.

401(k) Plan The Company has established 401(k) plans which cover substantially all employees. Participants may make voluntary 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 2002, 2001, and 2000 were approximately $163,000, $208,000, and $151,000, respectively.

     9  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 operating equipment and facility leases are shown below:

         
Fiscal years        
(In thousands)
       
2003
  $ 1,843  
2004
    1,678  
2005
    1,511  
2006
    1,522  
2007
    667  
Thereafter
    3,687  
 
   
 
 
  $ 10,908  
 
   
 

The aggregate rental expense was $1,951,000, $1,816,000, and $1,812,000 in fiscal 2002, 2001, and 2000, respectively.

As of March 30, 2002, Property and Equipment includes equipment under capital lease of $491,000 and related accumulated amortization of $223,000. As of March 31, 2001, Property and Equipment includes equipment

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under capital lease of $283,000 and related accumulated amortization of $162,000. The future minimum lease payments for capital leases are shown below:

         
Fiscal years        
(In thousands)
       
2003
  $ 90  
2004
    88  
2005
    10  
 
   
 
Total
    188  
Less interest costs
    5  
 
   
 
Present value of minimum lease payments
    183  
Less current portion
    89  
 
   
 
Long term portion of capital lease obligations
  $ 94  
 
   
 

The Company is committed to purchase certain inventory under non-cancelable purchase orders. As of March 30, 2002, non-cancelable purchase orders were approximately $5,339,000 through fiscal 2003 and $256,000 beyond fiscal 2003 and were scheduled to be delivered to the Company at various dates through October 2003.

     10  Line of Credit

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 1-1/2 percent. As of March 30, 2002, this credit line has not been utilized by the Company and expires September 30, 2002.

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INDEPENDENT AUDITORS’ REPORT

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 30, 2002 and March 31, 2001, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three year period ended March 30, 2002. 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 auditing standards generally accepted in the United States of America. 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 30, 2002 and March 31, 2001, and the results of their operations and their cash flows for each of the years in the three year period ended March 30, 2002, in conformity with accounting principles generally accepted in the United States of America.

     As discussed in Note 1 to the consolidated financial statements, effective March 26, 2000, the Company changed its method of accounting for certain equipment sales.

/s/
KPMG LLP

Mountain View, California
May 6, 2002

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ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.

     Not applicable.

PART  III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information regarding directors of the Company is set forth under the heading “Election of Directors” of the Company’s Proxy Statement for its 2002 Annual Meeting of Shareholders, incorporated herein by reference. This Proxy Statement is to be filed no later than 120 days after the close of the fiscal year ended March 30, 2002.

GIGA-TRONICS INCORPORATED
EXECUTIVE OFFICERS

             
Name   Age   Position

 
 
George H. Bruns, Jr.     83     Chief Executive Officer since January, 1995, Chairman of the Board and a Director of the Company. He provided seed financing for the Company in 1980 and has been a Director since inception. Mr. Bruns is General Partner of The Bruns Company, a private venture investment and management consulting firm. Mr. Bruns is Director of Testronics, Inc. of McKinney, Texas.

           
Mark H. Cosmez II     50     Vice President, Finance/Chief Financial Officer, Giga-tronics since October 1997. Before joining Giga-tronics, Mr. Cosmez was the Chief Financial Officer for Pacific Bell Public Communications. Prior to 1997, he was the Vice President of Finance and Chief Financial Officer for International Microcomputer Software Inc., a NASDAQ-traded software company.

           
Claudio S. Mariotta     58     President, Giga-tronics Instrument Division since April 2001. From December 2000 to April 2001, Mr. Mariotta served as Vice President of Operations for the Giga-tronics Instrument Division. Mr. Mariotta came to Giga-tronics in August 1999 as Vice President of Product Development of the Giga-tronics Instrument Division. Prior to joining Giga-tronics Mr. Mariotta was the Chief Operating Officer and Chief Technical Officer of SSE Telecom a provider of Satellite transceivers worldwide.

           
Jeffrey T. Lum     56     President, ASCOR, Inc. since November 1987. Mr. Lum founded ASCOR in 1987 and has been President since inception. Before founding ASCOR, Mr. Lum was Vice President and founder of Autek Systems Corporation.

           
Daniel S. Markowitz     51     President, Dymatix, a joint venture between Ultracision, Inc. and Viking Semiconductor Equipment, Inc. since January 2000. Also, President of Ultracision, Inc. and Viking Semiconductor Equipment, Inc. since April 1999. Assistant to the Chairman of Giga-tronics, Inc. from September 1998 to March 1999. Vice President, Automation Products, Ultracision, Inc. from February 1996 to August 1998. Mr. Markowitz was the General Manager of Mar Engineering from September 1993 to January 1996. Mar Engineering is a manufacturer of precision machined components for the aerospace industry.

           
William E. Wilson     62     President of Microsource, Inc. since April 2001. Mr. Wilson has been a director of the Company since December 1998. Before joining the Company as the President of Microsource, Inc., Mr. Wilson was the Chairman and CEO of Microwave Technology Incorporated of Fremont, CA, a producer of Microwave Devices and Amplifiers with broad application to defense electronics, telecommunications and the test and measurement industries.

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ITEM 11.  EXECUTIVE COMPENSATION

     Information regarding the Company’s compensation of its executive officers is set forth under the heading “Executive Compensation” of the Company’s Proxy Statement for its 2002 Annual Meeting of Shareholders, incorporated herein by reference. This Proxy Statement is to be filed no later than 120 days after the close of the fiscal year ended March 30, 2002.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information regarding security ownership of certain beneficial owners and management is set forth under the heading “Stock Ownership of Certain Beneficial Owners and Management” of its Proxy Statement for the 2002 Annual Meeting of Shareholders, incorporated herein by reference. This Proxy Statement is to be filed no later than 120 days after the close of the fiscal year ended March 30, 2002.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Not applicable.

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PART  IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)     Financial Statements

     The following financial statements and schedules are filed or incorporated by reference as a part of this report.

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

         
    Form 10K
Financial Statements   (Page No.)

 
Consolidated Balance Sheets - As of March 30, 2002 and March 31, 2001
    17  
Consolidated Statements of Operations - Years Ended March 30, 2002, March 31, 2001 and March 25, 2000
    18  
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) - Years Ended March 30, 2002, March 31, 2001 and March 25, 2000
    19  
Consolidated Statements of Cash Flows - Years Ended March 30, 2002, March 31, 2001 and March 25, 2000
    20  
Notes to Consolidated Financial Statements
    21 - 31  
Independent Auditors’ Report
    32  
           
      Form 10-K
(a)(2) Schedules   (Page No.)
 
Report on Financial Statement Schedule and Consent of Independent Auditors
    37  
Schedule II — Valuation and Qualifying Accounts
    38  

     All other schedules are not submitted because they are not applicable or not required or because the required information is included in the financial statements or notes thereto.

     Except for those portions thereof incorporated by reference in this Form 10-K, the 2002 Annual Report and the Proxy Statement are not to be deemed filed as part of this report.

(a)(3)    Exhibits

     Reference is made to the Exhibit Index which is found on page 39 of this Annual Report on Form 10-K.

(b)    Reports on Form 8-K

     No reports on Form 8-K were filed during the quarter ended March 30, 2002.

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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

       
    By   /s/   GEORGE H. BRUNS, JR.
George H. Bruns, Jr.
Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

         
/s/   GEORGE H. BRUNS, JR.
George H. Bruns, Jr.

  Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
  5/21/02
(Date)
 
/s/   MARK H. COSMEZ II
Mark H. Cosmez II
  Vice President, Finance, Chief
Financial Officer and Secretary
(Principal Accounting Officer)
  5/21/02
(Date)
 

       
 
/s/   JAMES A. COLE
James A. Cole
  Director   5/20/02
(Date)
 

       
 
/s/   ROBERT C. WILSON
Robert C. Wilson
  Director   5/20/02
(Date)
 

       
 
/s/   WILLIAM E. WILSON

William E. Wilson
  Director   5/21/02
(Date)

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Exhibit 23.0

REPORT ON FINANCIAL STATEMENT SCHEDULE AND CONSENT OF
INDEPENDENT AUDITORS

The Board of Directors
Giga-tronics Incorporated

     The audits referred to in our report dated May 6, 2002, included the related financial statement schedule for the years ended March 30, 2002, March 31, 2001, and March 25, 2000, included herein. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

     We consent to incorporation by reference in the registration statements (Nos. 333-45476, 333-34719, 333-39403, and 333-69688) on Form S-8 of Giga-tronics Incorporated of our reports included herein.

  /s/   KPMG LLP
KPMG LLP

Mountain View, California
May 21, 2002

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Schedule II

                                 
Column A   Column B   Column C   Column D   Column E
                 
    Balance at   Charged to           Balance
    Beginning of   Cost and   Deductions   at End
Description   Period   Expenses   (Recoveries)   of Period

 
 
 
 
 
  $       $       $       $    
Year ended March 30, 2002
                               
Allowances deducted from assets:
                               
Accounts receivable:
                               
For allowance for doubtful accounts1
    261,776       110,430       14,071       358,135  
Total
    261,776       110,430       14,071       358,135  
 
   
     
     
     
 
Year ended March 31, 2001
                               
Allowances deducted from assets:
                               
Accounts receivable:
                               
For allowance for doubtful accounts1
    253,890       13,589       5,703       261,776  
Total
    253,890       13,589       5,703       261,776  
 
   
     
     
     
 
Year ended March 25, 2000
                               
Accounts receivable:
                               
For allowance for doubtful accounts1
    434,613       36,624       217,347       253,890  
Total
    434,613       36,624       217,347       253,890  
 
   
     
     
     
 


1   Allowance for accounts receivable collection exposure.

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GIGA-TRONICS INCORPORATED

INDEX TO EXHIBITS
             
      3.1     Articles of Incorporation of the Registrant, as amended, previously filed as Exhibit 3.1 to Form 10-K for the fiscal year ended March 27, 1999 and incorporated herein by reference.
      3.2     By-laws of Registrant, as amended, previously filed as Exhibit 3.2 to Form 10-K for the fiscal year ended March 28, 1998, and incorporated herein by reference.
      4.1     Rights Agreement dated as of November 6, 1998 between Giga-tronics Incorporated and ChaseMellon Shareholder Services LLC, as previously filed on November 9, 1998 as Exhibit 4.1 to Form 8-K and incorporated herein by reference.
      10.1     1990 Restated Stock Option Plan and form of Incentive Stock Option Agreement, previously filed on November 3, 1997 as Exhibit 99.1 to Form S-8 (33-39403) and incorporated herein by reference.**
      10.2     Standard form Indemnification Agreement for Directors and Officers, previously filed on June 21, 1999, as Exhibit 10.2 to Form 10-K for the fiscal year ended March 27, 1999 and incorporated herein by reference.**
      10.3     Lease between Giga-tronics Incorporated and Calfront Associates for 4650 Norris Canyon Road, San Ramon, CA, dated December 6, 1993, previously filed as Exhibit 10.12 to Form 10-K for the fiscal year ended March 26, 1994 and incorporated herein by reference.
      10.4     Employee Stock Purchase Plan, previously filed on August 29, 1997, as Exhibit 99.1 to Form S-8 (33-34719), and incorporated herein by reference.
      10.5     Ultracision, Inc. 1986 Stock Option Plan, filed on March 30, 1998 as Exhibit 99.1 to Form S-8 (33-48889), incorporated herein by reference.**
      10.6     Ultracision, Inc. 1987 Stock Option Plan, filed on March 30, 1998 as Exhibit 99.2 to Form S-8 (33-48889), incorporated herein by reference.**
      10.7     Form of Incentive Stock Option Agreements for Ultracision Inc., as Amended by the Assumed Option Agreement, as previously filed on March 30, 1998 as Exhibit 99.3 to Form S-8 (33-48889) and incorporated herein by reference.**
      10.8     2000 Stock Option Plan and form of Incentive Stock Option Agreement, previously filed on September 8, 2000 as Exhibit 99.1 to Form S-8 (33-45476) and incorporated herein by reference.**
      23.0 *   Report on Financial Statement Schedule and Consent of Independent Auditors. (See page 37 of this Annual Report on Form 10-K.)


*   Attached as exhibits to this Form 10-K.
**   Management contract or compensatory plan or arrangement.

39