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 ]

 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
[    ]
  
Accelerated filer
[    ]
         
Non-accelerated filer
[    ]
  
Smaller reporting company
[ X ]
(Do not check if a smaller reporting company)
      

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes   [  ]    No  [ X ]

The aggregate market value of voting and non-voting common equity held by non-affiliates of the Registrant computed by reference to the price at which the common equity was sold or the average bid and asked prices as of September 28, 2007 was $9,058,171.

There were a total of 4,824,021 shares of the Registrant’s Common Stock outstanding as of June 11, 2008.


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
  
Registrant’s PROXY STATEMENT for its 2008 Annual Meeting of Shareholders to be filed no later than 120 days after the close of the fiscal year ended March 29, 2008.


 

TABLE OF CONTENTS


PART I
  
 
DESCRIPTION OF BUSINESS
 
RISK FACTORS
 
UNRESOLVED STAFF COMMENTS
 
DESCRIPTION OF PROPERTY
 
LEGAL PROCEEDINGS
 
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
  
 
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
SELECTED FINANCIAL DATA
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
 
CONTROLS AND PROCEDURES
  ITEM 9B.  OTHER INFORMATION
PART III
  
 
DIRECTOR, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
 
EXECUTIVE COMPENSATION
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
  
 
EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
EXHIBIT 21
  
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


 

PART 1


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.  DESCRIPTION OF BUSINESS

General

Giga-tronics Incorporated (Giga-tronics, or the Company) includes operations of Giga-tronics Instrument Division, ASCOR Inc. (ASCOR) and Microsource Inc. (Microsource).  As of April 1, 2008, ASCOR Inc. was merged into and is now a division of Giga-tronics Incorporated.

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 equipment.

Giga-tronics was incorporated on March 5, 1980.  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, previously 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 April 1, 2007, all ASCOR operations are conducted out of the San Ramon, California facility.  Its Fremont, California facility of approximately 18,700 square feet is available for sub-lease.

Effective May 18, 1998, Giga-tronics acquired Microsource.  Microsource, located in Santa Rosa, California, 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 and 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 and reporting segments:  Giga-tronics Instrument Division, ASCOR, Microsource and Corporate.

Products and Markets

Giga-tronics Instrument Division

The Giga-tronics Instrument Division segment produces signal sources, generators and sweepers, and power measurement instruments for use in the microwave and radio frequency (RF) range (10 kilohertz (kHz) to 50 gigahertz (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

The ASCOR segment produces switch modules and interface adapters that operate with a bandwidth from direct current (DC) to optical frequencies.  This segment’s switch modules may be incorporated within its customers’ automated test equipment.   The end-user markets for these products are primarily related to defense, aeronautics, communications, satellite and electronic warfare.

Microsource

The Microsource segment develops and manufactures a broad line of YIG 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 or favorable pricing or supply terms, but not in any material volume.  In the Company’s opinion, the loss of any sole source arrangement it has would not be material to its operations.

Although extended delays in receipt of components from its suppliers could result in longer product delivery schedules for the Company, 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’s competitive position is largely dependent upon its ability to provide performance specifications for its instruments and systems that (a) easily, effectively and reliably meet customers’ needs and (b) selectively surpass competitors’ specifications in competing products.  Patents may occasionally provide some short-term protection of proprietary designs.  However, because of the rapid progress of technological development in the Company’s industry, such protection is most often, although not always, short-lived.  Therefore, although the Company occasionally pursues patent coverage, it places major emphasis on the development of new products with superior performance specifications and the upgrading of existing products toward this same end.  This is reflected in a substantial allocation of budget to project development costs.

The Company’s products are based on its own designs, which in turn derive from its own engineering abilities.  If the Company’s new product engineering efforts fall behind, its competitive position weakens.  Conversely, effective product development greatly enhances its competitive status.

The Company presently holds 22 patents.  None of these are critical to the Company’s ongoing business, and the Company does not actively maintain them.  Capitalized costs relating to these patents were both incurred and fully amortized prior to March 1, 2003.  Accordingly, these patents have no recorded value included in the Company’s fiscal 2008 and 2007 consolidated financial statements.

The Company is not dependent on trademarks, licenses or franchises.  It does utilize certain software licenses in certain functional aspects for some of its products.  Such licenses are readily available, non-exclusive and are obtained at either no cost or for a relatively small fee.

Seasonal Nature of Business

The business of the Company is not seasonal.

 

Working Capital Practices

The Company generally strives to maintain at least 60 days of inventory and generally sells to customers on 30-day payment terms.  Typically, the Company receives payment terms of 30 days.  The Company believes that these practices are consistent with typical industry practices.

Importance of Limited Number of Customers

The Company is a leading supplier of microwave and RF test instruments to various United States (U.S.) government defense agencies, as well as to their prime contractors.  Management anticipates sales to U.S. government agencies and their prime contractors will remain significant in fiscal 2009.  U.S. and international defense-related agencies accounted for 62% and 61% of net sales in fiscal 2008 and 2007, respectively.  Commercial business accounted for the remaining 38% and 39% of net sales in fiscal 2008 and 2007, respectively.  Prior to the last five years, in which the defense business has improved, sales to the defense industry in general and direct sales to the U.S. and foreign government agencies in particular had declined.  Any decline of defense orders could have a negative effect on the business, operating results, financial condition and cash flows of Giga-tronics.

During fiscal 2008 and 2007, the U.S. government defense agencies and their prime contractors made up 40% and 39%, respectively, of the Giga-tronics Instrument Division’s revenues.

During fiscal 2008, ASCOR derived 53% of its revenues from the U.S. government defense agencies and their prime subcontractors.  During fiscal 2007, ASCOR derived 84% of its revenues from the U.S. government defense agencies and their prime subcontractors.

During fiscal 2008, Microsource derived 41% of its revenue from an electronic instrument manufacturer and 42% of its revenues from the U.S. government defense agencies and their prime contractors, and another 12% from foreign defense agencies and their prime contractors.  During fiscal 2007, Microsource derived 24% of its revenue from an electronic instrument manufacturer and 69% of its revenues from the U.S. government defense agencies and their prime contractors.

Other than U.S. government agencies and their defense contractors, no other customer accounted for 10% or more of consolidated revenues of the Company in fiscal 2008 or 2007.

In management’s opinion, other than U.S. government agencies and their prime contractors, the Company has no customers where the loss of which would have a material adverse effect on the Company and its subsidiaries as a whole.

The Company’s products are largely capital investments for its customers, and the Company’s belief is that its customers have economic cycles in which capital investment budgets for the kinds of products that the Company produces expand and contract.  The Company, therefore, expects that a major customer in one year will often not be a major customer in the following year.  Accordingly, the Company’s revenues and earnings will decline if the Company is unable to find new customers or increase its business with other existing customers to replace declining revenues from the previous year’s major customers.  A substantial decline in revenues from U.S. government defense agencies and their prime contractors would also have a material adverse effect on the Company’s revenues and results of operations unless replaced by revenues from the commercial sector.

Backlog of Orders

On March 29, 2008, the Company’s backlog of unfilled order was approximately $7,528,000 compared to approximately $8,439,000 at March 31, 2007.  As of March 29, 2008, there were approximately $2,924,000 in unfilled orders that were scheduled for shipment beyond one year, as compared to approximately $3,145,000 at March 31, 2007.  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.


 

Competition

Giga-tronics serves the broad market for electronic instrumentation with applications ranging from the design, test, calibration and maintenance of other electronic devices to providing sophisticated components for complex electronic systems to sub-systems capable of sorting and identifying high frequency communication signals.  These applications cut across the commercial, industrial and military segments of the broad market.  The Company has a variety of competitors.  Several of its competitors are much larger than the Company and have greater resources and substantially broader product lines.  Others are of comparable size with more limited product lines.

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, Aeroflex and Rohde & Schwarz.  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.

To compete effectively in this circumstance, the Company (a) places strong emphasis on maintaining a high degree of technical competence as it relates to the development of new products and the upgrading of existing products and (b) is highly selective in establishing technological objectives.  The Company does not attempt to compete ‘across the board’, but selectively based upon its particular strengths and the competitors’ perceived limitations.

Specification requirements of customers in this market vary widely.  The Company is able to compete by offering products that meet a customer’s particular specification requirements; by being able to offer certain product specifications at lower cost resulting from the Company’s past production of products with those of similar specifications; and by being able to offer certain product specifications at a higher quality level.  All of these advantages are attributable to the Company’s continuing investment in research and development and in a highly trained engineering staff.

The customer’s decision is most often based on the best match of its particular requirements and the supplier’s operating specifications.  In most cases, attracting and retaining customers does not require the Company to offer the best overall product with respect to each of the customer’s requirements, but rather the best product relative to the specifications that are most important to the customer.

Price is a competitive consideration.  In that circumstance, the Company believes it has more flexibility in making pricing decisions than its larger and more structured competitors.

Sales and Marketing

Giga-tronics Instrument Division, ASCOR, and Microsource market their products through various independent 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 expenses totaled approximately $2,248,000 and $3,731,000 in fiscal 2008 and 2007, respectively.

Activities included the development of new products and the improvement of existing products.  It is management’s intention to maintain 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 that satisfy customer need, 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 Division’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 was previously done at its Fremont facility, but effective April 1, 2007, was moved to the San Ramon facility.  The assembly and testing of Microsource’s line of YIG 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.

Employees

As of March 29, 2008, Giga-tronics employed 93 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.  All transactions between the Company and its international customers are in U.S. dollars.

Geographic Distribution of Net Sales
  
(Dollars in thousands)
  
   
Percent
    
   
Percent
  
Domestic
   $ 11,348       61.9 %   $ 14,218       78.8 %
International
     6,983       38.1 %     3,830       21.2 %

See footnote 5 of the financial statements for further breakdown of international sales for the last two years.

The Company has no foreign-based operations or material amounts of identifiable assets in foreign countries.  Its gross margins on foreign and domestic sales are similar.


ITEM 1A.  RISK FACTORS

Business climate is volatile

Giga-tronics has a significant number of defense-related orders.  If the defense market demand decreases, actual shipments could be less than projected shipments with a resulting decline in sales.  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 the Company’s ability to collect amounts due under these orders.  If any of these events occurs, actual shipments could be less than projected shipments and earnings could decline.

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.  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, develop new products and applications, 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.

Liquidity

Based on current levels of sales and expenses, management believes that cash and cash equivalents remain adequate to meet current operating needs.  However, this estimate is based on projections that may or may not be realized, and therefore actual cash usage could be greater than projected.  To operate beyond that term would require the Company to earn additional cash from operations, renew or obtain a line of credit or obtain additional funds from other sources.  The Company maintains a line of credit for $2,500,000; however, the Company has not utilized this line of credit.

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 earnings 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 Capital 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.

Performance problems in Giga-tronics’ products or problems arising from the use of its products together with other vendors’ products may harm its business and reputation

Products as complex as those Giga-tronics produces may contain unknown and undetected defects or performance problems.  For example, it is possible that a product might not comply with stipulated specifications under all circumstances.  In addition, Giga-tronics’ customers generally use its products together with their own products and products from other vendors.  As a result, when problems occur in a combined environment, it may be difficult to identify the source of the problem.  A defect or performance problem could result in lost revenues, increased warranty costs, diversion of engineering and management time and effort, impaired customer relationships and injury to Giga-tronics’ reputation generally.  To date, performance problems in Giga-tronics’ products or in other products used together with Giga-tronics’ products have not had a material adverse effect on its business.  However, management cannot be certain that a material adverse impact will not occur in the future.

Competition

The Company’s instrument, switch, oscillator and synthesizer products compete with Agilent, Anritsu, Racal, Aeroflex and Rohde & Schwarz.  Many of these companies have substantially greater research and development, manufacturing, marketing, financial, technological, personnel and managerial resources than Giga-tronics.  These resources also make these competitors better able to withstand difficult market conditions than the Company.  There can be no assurance that any products developed by the competitors will not gain greater market acceptance than any developed by Giga-tronics.

Giga-tronics acquisitions may not be effectively integrated and their integration may be costly

As part of its business strategy, Giga-tronics may 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 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.  The Company has not made any acquisitions in the past nine years.  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.


ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not applicable.


ITEM 2.  DESCRIPTION OF PROPERTY

As of March 29, 2008, Giga-tronics’ principal executive office and the Instrument Division 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 squire feet in San Ramon, California, which the Company occupies under a lease agreement expiring December 31, 2011.

ASCOR’s marketing, sales and engineering offices and manufacturing facilities for its switching and connecting devices were previously located in approximately 18,700 square feet in Fremont, California under a lease that expires on June 30, 2009.  The Company effectively abandoned this property as a part of its restructuring plan as of March 31, 2007.  All of the above activities have been conducted in the San Ramon, California facility effective April 1, 2007.  The Company has an accrued loss of approximately $355,000 for future lease expense, net of estimated future sub-lease rental income.  As of March 29, 2008, the Company has not sub-leased the available space.

Microsource’s manufacturing facilities for its YIG tuned oscillators, filters and microwave synthesizers are located in an approximately 33,400 square foot facility in Santa Rosa, California, which it occupies under a lease expiring May 31, 2013.

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


ITEM 3.  LEGAL PROCEEDINGS

As of March 29, 2008, 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.


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 29, 2008.


 

PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Common Stock Market Prices

Giga-tronics’ common stock is traded on the NASDAQ Capital Market (formerly the NASDAQ Small Cap Market) using the symbol ‘GIGA’.  The number of record holders of the Company’s common stock as of March 29, 2008 was approximately 1,600.  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 retain mark-ups, mark-downs, or commission and may not reflect actual transactions.

 
     2008
  
High
    
Low
  
        2007
  
High
    
Low
  
First Quarter
(4/1 - 6/30)
   $ 2.22     $ 1.61  
(3/26 - 6/24)
   $ 2.89     $ 1.78  
Second Quarter
(7/1 - 9/29)
     2.36       1.62  
(6/25 - 9/30)
     1.94       1.29  
Third Quarter
(9/30 - 12/29)
     3.85       1.71  
(10/1 - 12/30)
     2.45       1.39  
Fourth Quarter
(12/30 - 3/29)
     1.87       1.27  
(12/31 - 3/31)
     2.97       1.83  

Giga-tronics has not paid cash dividends in the past and has no plans to do so in the future, based upon its belief that the best use of its available capital is in the enhancement of its product position.

Giga-tronics has not issued any unregistered securities or repurchased any of its securities during the past fiscal year.

Equity Compensation Plan Information

The following table provides information on options and other equity rights outstanding and available at March 29, 2008.

Equity Compensation Plan Information