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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-K  (Mark One)(X)
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934for the fiscal year ended
March 27, 2004, 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 
  California
    
    94-2656341(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 4650 Norris Canyon Road, San Ramon, CA
    
    
    94583(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number: (925) 328-4650 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which registeredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act: Common Stock, No par value 
  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.  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 ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b of the Act).  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 20,
2004 was $6,875,546. For purposes of this determination only, directors and
officers of the Registrant have been assumed to be affiliates. There were a
total of 4,724,896 shares of the Registrants Common Stock outstanding as of
May 20, 2004.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATACONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONSCONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITYCONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTSITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURESITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESINDEX TO EXHIBITSEXHIBIT 21EXHIBIT 23EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    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
    
    DOCUMENTPART
IIIItems 10, 11, 12 and 13
    
    Registrants PROXY STATEMENT for
its 2004 annual meeting of shareholders to
be filed no later than 120 days after the close
of the fiscal year ended March 27, 2004.
 2




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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, or the Company), includes
operations of Giga-tronics Instrument Division, ASCOR, Inc. (ASCOR), and
Microsource, Inc. (Microsource). In the first quarter of fiscal 2004,
Giga-tronics elected to discontinue the operations of DYMATiX, which was a
joint venture and principal activity of the Companys subsidiaries Viking
Semiconductor Equipment, Inc. and Ultracision, Inc. 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 manufactured and marketed 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 was
a manufacturer of automation equipment for the test and inspection of silicon
wafers. Ultracision also produced a line of probers for the testing and
inspection of silicon devices. With the discontinuance and sale of DYMATiX,
Giga-tronics is in the process of dissolving Viking and Ultracision. Effective May 18, 1998, Giga-tronics acquired Microsource. All the
outstanding shares of Microsource were acquired 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 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. 3




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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 Inc., Microsource Inc. 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 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 customers 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. Microsource Inc. 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, 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 we occasionally pursue patent coverage, we
place 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. 4




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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 is critical to the
Companys ongoing business, and the Company does not actively maintain them. The Company is not dependent on trademarks, licenses or franchises. We do
utilize certain software licenses in some functional aspects to some of our
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 worth 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 Commercial business accounted for 62% of net sales in fiscal 2004, 61% of
net sales in fiscal 2003, and 82% in fiscal 2002. The Company is 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 and their prime contractors will
remain significant in fiscal 2005. Defense-related agencies accounted for 38%
of net sales in fiscal 2004, 39% of net sales in fiscal 2003, and 18% in fiscal
2002. Prior to the current year, in which 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 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 2004, the U.S. Government defense agencies and their prime
contractors made up 24% of the Instrument Divisions 2004 revenue. During
fiscal 2003, the U.S. Government defense agencies and their prime contractors
made up 25% of the Instrument Divisions 2003 revenue. During fiscal 2002, the
Instrument Division had two major customer concentrations. In fiscal 2002,
Midoriya, the Divisions Japanese distributor, accounted for 30% of the
Instrument Divisions revenue and the U.S. Government defense agencies and
their prime contractors made up 10%. In fiscal 2004, ASCOR derived 57% of its revenues from U.S. Government
defense agencies and their prime contractors and another 23% from an automated
test equipment manufacturer. In fiscal 2003, ASCOR derived 24% of its revenues
from U.S. Government defense agencies and their prime contractors and another
34% from an automated test equipment manufacturer. During fiscal 2002, ASCOR
had three major customer concentrations. The U.S. Government defense agencies
and their prime contractors made up 18%, an automated test equipment
manufacturer comprised 30% and an international communications equipment
company comprised 11% of ASCORs fiscal 2002 revenue. During fiscal 2004, Microsource had three major customer concentrations.
The U.S. Government defense agencies and their prime contractors made up 47%,
an electronic instrument manufacturer comprised 39% and an international
communications equipment company comprised 13% of Microsources fiscal 2004
revenue. During fiscal 2003 and 2002, Microsource had two major customer
concentrations. U.S. Government defense agencies and their prime contractors
made up 62% and 35% of Microsources 2003 and 2002 revenue, respectively. An 5




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electronic instrument manufacturer accounted for 14% and 35% of
Microsources fiscal 2003 and fiscal 2002 revenue, respectively. Other than U.S. government agencies and their defense contractors, one
other customer accounted for 10% or more of consolidated revenues of the
Company in fiscal 2004, but no customer who accounted for 10% or more of
revenues of any one segment accounted for 10% or more of any other segment.
The Company did 12% of its fiscal 2004 consolidated revenue with an electronic
instrument manufacturer. In prior years, the Company did less than 10% of its
business with this customer. Other than U.S. government agencies and their defense contractors, no
customer accounted for 10% or more of consolidated revenues of the Company in
fiscal 2003 and no customer who accounted for 10% or more of revenues of any
one segment accounted for 10% or more of any other segment. Other than U.S.
Government agencies and their prime contractors, the Company has no customer
the loss of which would, in managements opinion, 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 27, 2004, the Companys backlog of unfilled orders was
$16,355,000 compared to $16,737,000 at March 29, 2003. As of March 27, 2004,
there were approximately $8,882,000 in unfilled orders that were scheduled for
shipment beyond a year, as compared to approximately $9,077,000 at March 29,
2003. 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, IFR
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. 6




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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 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 product with respect to each of the customers requirements but rather
to those few specifications that are most important to the customer. Occasionally 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 Inc., 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. Years Ended(In thousands)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Product development expense
    
    $
    3,766
    
    
    $
    4,321
    
    
    $
    5,892
 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 Division microwave, RF
and power measurement products are done at its San Ramon facility. The
assembly and testing of ASCORs switching and connecting 7




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devices are done at its Fremont 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 27, 2004, Giga-tronics employed 130 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. Geographic Distribution of Sales2004
    
    2003
    
    2002
    
    Percentage Change(Dollars in thousands)
    
    Amount/Percent
    
    Amount/Percent
    
    Amount/Percent
    
    2004 v. 2003
    
    2003 v. 2002Domestic
    
    $
    11,981
    
    
    
    68.5
    %
    
    $
    16,059
    
    
    
    77.1
    %
    
    $
    18,762
    
    
    
    53.1
    %
    
    
    (25.4
    %)
    
    
    (14.4
    %)International
    
    $
    5,510
    
    
    
    31.5
    %
    
    $
    4,763
    
    
    
    22.9
    %
    
    $
    16,601
    
    
    
    46.9
    %
    
    
    15.7
    %
    
    
    (71.3
    %)
 See footnote 5 of the financial statements for further breakdown of
international sales for the last three years. The Company closed its United Kingdom (UK) research & development facility
as of March 30, 2002. 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 any of these events
occurs, then shipments in the current year could fall below currently 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. 8




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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 anticipated operating needs
for the next two years. 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, obtain a line of credit or obtain additional
funds from other sources. Although the Company has obtained a commitment for a
line of credit for $2,500,000, there can be no assurance as to the exact length
of time for which the Company will have adequate liquidity. 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 six 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. 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
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 27, 2004, 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 9




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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, 2009. Included in this lease is approximately 9,000 square
feet that the Company effectively abandoned use of upon sale of Dymatix on
March 26, 2004. The Company accrued a loss of $114,000 for future lease
expense, net of future sub-lease rental income. Microsources marketing, sales and engineering offices and manufacturing
facilities for its YIG tuned oscillators, filters and microwave synthesizers
are located in an approximately 33,439 square foot facility in Santa Rosa,
California, which it 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 27, 2004, 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 27, 2004. Executive Officers of the Company are listed in Part III, Item 10 of this
Form 10-K. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER 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 27, 2004 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. 2004
    
    High
    
    Low
    
    2003
    
    High
    
    LowFirst quarter
    
    
    (3/30-6/28
    )
    
    $
    1.450
    
    
    $
    1.190
    
    
    
    (3/31-6/29
    )
    
    $
    3.700
    
    
    $
    2.330Second quarter
    
    
    (6/29-9/27
    )
    
    
    2.550
    
    
    
    1.600
    
    
    
    (6/30-9/28
    )
    
    
    2.220
    
    
    
    1.000Third quarter
    
    
    (9/28-12/27
    )
    
    
    2.410
    
    
    
    1.720
    
    
    
    (9/29-12/28
    )
    
    
    1.660
    
    
    
    0.910Fourth quarter
    
    
    (12/28-3/27
    )
    
    
    2.870
    
    
    
    1.960
    
    
    
    (12/29-3/29
    )
    
    
    1.510
    
    
    
    1.210
 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. 
 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. 10




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SELECTED CONSOLIDATED FINANCIAL DATA Summary of Operations: Years Ended(In thousands except per share data)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002
    
    March 31, 2001
    
    March 25, 2000Net sales
    
    $
    17,491
    
    
    $
    20,822
    
    
    $
    35,363
    
    
    $
    45,712
    
    
    $
    40,290Gross profit
    
    
    4,736
    
    
    
    6,187
    
    
    
    10,432
    
    
    
    16,761
    
    
    
    13,173Operating expenses
    
    
    9,179
    
    
    
    10,412
    
    
    
    14,030
    
    
    
    14,522
    
    
    
    12,173Interest income, net
    
    
    7
    
    
    
    60
    
    
    
    59
    
    
    
    202
    
    
    
    59Pre-tax (loss) earnings from continuing
operations before cumulative
effect of accounting change
    
    
    (4,440
    )
    
    
    (4,328
    )
    
    
    (3,514
    )
    
    
    2,673
    
    
    
    1,136Provision (benefit) for income taxes
    
    
    4
    
    
    
    4,098
    
    
    
    (1,983
    )
    
    
    911
    
    
    
    442(Loss) earnings from continuing operations
    
    
    (4,444
    )
    
    
    (8,426
    )
    
    
    (1,531
    )
    
    
    1,762
    
    
    
    694(Loss) earnings on discontinued operations,
net of income taxes
    
    
    (2,377
    )
    
    
    (2,336
    )
    
    
    (571
    )
    
    
    659
    
    
    
    445(Loss) earnings before cumulative effect
of accounting change
    
    
    (6,821
    )
    
    
    (10,762
    )
    
    
    (2,102
    )
    
    
    2,421
    
    
    
    1,139Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (520
    )
    
    
    Net (loss) earnings
    
    $
    (6,821
    )
    
    $
    (10,762
    )
    
    $
    (2,102
    )
    
    $
    1,901
    
    
    $
    1,139Basic (loss) earnings per share:From continuing operations
    
    $
    (0.94
    )
    
    $
    (1.81
    )
    
    $
    (0.33
    )
    
    $
    0.39
    
    
    $
    0.16On discontinued operations
    
    
    (0.51
    )
    
    
    (0.50
    )
    
    
    (0.13
    )
    
    
    0.15
    
    
    
    0.10Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.12
    )
    
    
    Net (loss) earnings per share  basic
    
    $
    (1.45
    )
    
    $
    (2.31
    )
    
    $
    (0.46
    )
    
    $
    0.42
    
    
    $
    0.26Diluted (loss) earnings per share:From continuing operations
    
    $
    (0.94
    )
    
    $
    (1.81
    )
    
    $
    (0.33
    )
    
    $
    0.37
    
    
    $
    0.15On discontinued operations
    
    
    (0.51
    )
    
    
    (0.50
    )
    
    
    (0.13
    )
    
    
    0.14
    
    
    
    0.09Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.11
    )
    
    
    Net earnings (loss) per share  diluted
    
    $
    (1.45
    )
    
    $
    (2.31
    )
    
    $
    (0.46
    )
    
    $
    0.40
    
    
    $
    0.24Shares of common stock  basic
    
    
    4,704
    
    
    
    4,663
    
    
    
    4,604
    
    
    
    4,474
    
    
    
    4,379Shares of common stock  diluted
    
    
    4,704
    
    
    
    4,663
    
    
    
    4,604
    
    
    
    4,803
    
    
    
    4,693
 Financial Position: (In thousands except ratio)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002
    
    March 31, 2001
    
    March 25, 2000Current ratio
    
    
    2.92
    
    
    
    3.50
    
    
    
    5.49
    
    
    
    4.06
    
    
    
    3.23Working capital
    
    $
    7,997
    
    
    $
    13,697
    
    
    $
    23,135
    
    
    $
    22,924
    
    
    $
    21,645Total assets
    
    $
    13,733
    
    
    $
    21,875
    
    
    $
    32,880
    
    
    $
    37,318
    
    
    $
    37,526Shareholders equity
    
    $
    9,196
    
    
    $
    15,960
    
    
    $
    26,661
    
    
    $
    28,475
    
    
    $
    26,149
 Percentage Data: Percent of net sales
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002
    
    March 31, 2001
    
    March 25, 2000Gross profit
    
    
    27.1
    %
    
    
    29.7
    %
    
    
    29.5
    %
    
    
    36.7
    %
    
    
    32.7
    %Operating expenses
    
    
    52.5
    
    
    
    50.0
    
    
    
    39.7
    
    
    
    31.8
    
    
    
    30.2Interest income, net
    
    
    0.0
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.1Pre-tax (loss) earnings from
continuing operations before
cumulative effect of accounting
change
    
    
    (25.4
    )
    
    
    (20.8
    )
    
    
    (9.9
    )
    
    
    5.8
    
    
    
    2.8Earnings (loss) on discontinued
operations, net of income taxes
    
    
    (13.6
    )
    
    
    (11.2
    )
    
    
    (1.6
    )
    
    
    1.4
    
    
    
    1.1Cumulative effect of accounting change
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    (1.1
    )
    
    
    0.0Net (loss) earnings
    
    
    (39.0
    )
    
    
    (51.7
    )
    
    
    (5.9
    )
    
    
    4.2
    
    
    
    2.8
 11




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##### Table of Contents



SELECTED CONSOLIDATED FINANCIAL DATA Quarterly Financial Information (Unaudited) 2004(In thousands except per share data)
    
    First
    
    Second
    
    Third
    
    Fourth
    
    YearNet sales
    
    $
    5,239
    
    
    $
    5,135
    
    
    $
    3,822
    
    
    $
    3,295
    
    
    $
    17,491Gross profit
    
    
    1,363
    
    
    
    1,915
    
    
    
    1,090
    
    
    
    368
    
    
    
    4,736Operating expenses
    
    
    2,632
    
    
    
    2,285
    
    
    
    2,170
    
    
    
    2,092
    
    
    
    9,179Interest income, net
    
    
    (3
    )
    
    
    13
    
    
    
    
    
    
    
    (3
    )
    
    
    7Pre-tax loss from continuing operations
    
    
    (1,272
    )
    
    
    (357
    )
    
    
    (1,084
    )
    
    
    (1,727
    )
    
    
    (4,440
    )Provision for income taxes
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Loss from continuing operations
    
    
    (1,276
    )
    
    
    (357
    )
    
    
    (1,084
    )
    
    
    (1,727
    )
    
    
    (4,444
    )(Loss) earnings on discontinued
operations, net of income tax
    
    
    (2,356
    )
    
    
    (126
    )
    
    
    90
    
    
    
    15
    
    
    
    (2,377
    )Net loss
    
    $
    (3,632
    )
    
    $
    (483
    )
    
    $
    (994
    )
    
    $
    (1,712
    )
    
    $
    (6,821
    )Basic (loss) earnings per share:From continuing operations
    
    $
    (0.27
    )
    
    $
    (0.08
    )
    
    $
    (0.23
    )
    
    $
    (0.36
    )
    
    $
    (0.94
    )On discontinued operations
    
    
    (0.50
    )
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.00
    
    
    
    (0.51
    )Net loss per share  basic
    
    $
    (0.77
    )
    
    $
    (0.10
    )
    
    $
    (0.21
    )
    
    $
    (0.36
    )
    
    $
    (1.45
    )Diluted (loss) earnings per share:From continuing operations
    
    $
    (0.27
    )
    
    $
    (0.08
    )
    
    $
    (0.23
    )
    
    $
    (0.36
    )
    
    $
    (0.94
    )On discontinued operations
    
    
    (0.50
    )
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    0.00
    
    
    
    (0.51
    )Net loss per share  diluted
    
    $
    (0.77
    )
    
    $
    (0.10
    )
    
    $
    (0.21
    )
    
    $
    (0.36
    )
    
    $
    (1.45
    )Shares of common stock  basic
    
    
    4,693
    
    
    
    4,696
    
    
    
    4,708
    
    
    
    4,717
    
    
    
    4,704Shares of common stock  diluted
    
    
    4,693
    
    
    
    4,696
    
    
    
    4,708
    
    
    
    4,717
    
    
    
    4,704
 12




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##### Table of Contents



Quarterly Financial Information (Unaudited) 2003(In thousands except per share data)
    
    First
    
    Second
    
    Third
    
    Fourth
    
    YearNet sales
    
    $
    5,731
    
    
    $
    5,112
    
    
    $
    5,249
    
    
    $
    4,730
    
    
    $
    20,822Gross profit
    
    
    1,801
    
    
    
    1,728
    
    
    
    1,451
    
    
    
    1,207
    
    
    
    6,187Operating expenses
    
    
    3,173
    
    
    
    2,619
    
    
    
    2,236
    
    
    
    2,384
    
    
    
    10,412Interest income, net
    
    
    12
    
    
    
    18
    
    
    
    16
    
    
    
    14
    
    
    
    60Pre-tax loss from continuing operations
    
    
    (1,386
    )
    
    
    (918
    )
    
    
    (823
    )
    
    
    (1,201
    )
    
    
    (4,328
    )Provision for income taxes
    
    
    (100
    )
    
    
    
    
    
    
    4,298
    
    
    
    (100
    )
    
    
    4,098Loss from continuing operations
    
    
    (1,286
    )
    
    
    (918
    )
    
    
    (5,121
    )
    
    
    (1,101
    )
    
    
    (8,426
    )Loss on discontinued operations, net of income tax
    
    
    (313
    )
    
    
    (380
    )
    
    
    (357
    )
    
    
    (1,286
    )
    
    
    (2,336
    )Net loss
    
    $
    (1,599
    )
    
    $
    (1,298
    )
    
    $
    (5,478
    )
    
    $
    (2,387
    )
    
    $
    (10,762
    )Basic (loss) earnings per share:From continuing operations
    
    $
    (0.28
    )
    
    $
    (0.20
    )
    
    $
    (1.09
    )
    
    $
    (0.24
    )
    
    $
    (1.81
    )On discontinued operations
    
    
    (0.06
    )
    
    
    (0.08
    )
    
    
    (0.08
    )
    
    
    (0.27
    )
    
    
    (0.50
    )Net loss per share  basic
    
    $
    (0.34
    )
    
    $
    (0.28
    )
    
    $
    (1.17
    )
    
    $
    (0.51
    )
    
    $
    (2.31
    )Diluted (loss) earnings per share:From continuing operations
    
    $
    (0.28
    )
    
    $
    (0.20
    )
    
    $
    (1.09
    )
    
    $
    (0.24
    )
    
    $
    (1.81
    )On discontinued operations
    
    
    (0.06
    )
    
    
    (0.08
    )
    
    
    (0.08
    )
    
    
    (0.27
    )
    
    
    (0.50
    )Net loss per share  diluted
    
    $
    (0.34
    )
    
    $
    (0.28
    )
    
    $
    (1.17
    )
    
    $
    (0.51
    )
    
    $
    (2.31
    )Shares of common stock  basic
    
    
    4,656
    
    
    
    4,666
    
    
    
    4,677
    
    
    
    4,682
    
    
    
    4,663Shares of common stock  diluted
    
    
    4,656
    
    
    
    4,666
    
    
    
    4,677
    
    
    
    4,682
    
    
    
    4,663
 13




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION MANAGEMENTS DISCUSSION AND ANALYSIS Overview Giga-tronics produces instruments, subsystems and sophisticated microwave
components that have broad applications in both defense electronics and
wireless telecommunications. In 2004 our business consisted of four operating
and reporting segments: Giga-tronics Instrument division, ASCOR, Microsource
and Corporate. Our business is highly dependent on the wireless telecommunications
market. The commercial business environment was challenging in the first two
quarters of 2004, however in the last half of 2004, Giga-tronics experienced
improvements in new orders. Inquiries for Giga-tronics products, including the
new 2400 series synthesizer were also higher in the last two quarters. New
orders in the military sector are showing indications of increased strength,
however it is still too early to determine if the commercial wireless
telecommunications market has rebounded. The Companys cost reduction programs, including reductions in personnel
and new lease terms, are on track and have positioned Giga-tronics to take
advantage of any potential opportunities in our market. If new orders should
decrease or are canceled, cash may be used faster than currently anticipated.
Management would anticipate further cost and expense reductions in this
circumstance. The Company has recently released a new line of microwave synthesizers
that management believes have been well received in the marketplace. This
release demonstrates the Companys commitment to new product development.
Giga-tronics intends to continue research and development in key growth areas
in order to expand product lines and update existing lines with additional
features. While the management at Microsource anticipates that prospects for new
orders will improve results for the new fiscal year, its short-term growth will
be less than previously anticipated as there continue to be timing delays
associated with currently booked orders. In the first quarter of 2004, Giga-tronics decided to discontinue the
operations at its Dymatix division due to the substantial losses incurred over
the last two years. In fiscal 2004, the loss from discontinued operations was
$2,377,000. In the fourth quarter of fiscal 2004, Giga-tronics consummated the sale of
its Dymatix division. Under the terms of the sale, the Company will receive
$300,000, of which $50,000 was paid at closing, $50,000 is to be paid in May
2004 and $200,000 is to be paid in quarterly installments over the next two
years. In addition, Giga-tronics may receive earn-out payments based on a
percentage of sales on a monthly basis for two years after the closing date.
The Company recognized a net gain of $53,000 in fiscal 2004, relating to this
sale. With the sale of the Dymatix division, Giga-tronics will be able to
focus on its core business in order to release new products more quickly to
market. Results of Operations New orders received in fiscal 2004 increased 5% to $17,109,000 from the
$16,348,000 received in fiscal 2003. New orders increased primarily due to
strength in our commercial wireless market coupled with increases in new
military orders. New orders received in fiscal 2003 were $16,348,000, a decrease of 7% from
the $17,492,000 received in fiscal 2002. New orders declined in fiscal 2003
primarily due to the weakness in the commercial wireless market 14




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##### Table of Contents



and major customer order cancellations partially offset by increases in
new military orders. The following table shows changes in new orders overall
and by segment. New orders (Dollars in thousands)
    
    2004
    
    % change
    
    2003
    
    % change
    
    2002Instrument Division
    
    $
    10,772
    
    
    
    25
    %
    
    $
    8,590
    
    
    
    (17
    %)
    
    $
    10,357ASCOR
    
    
    2,574
    
    
    
    (47
    %)
    
    
    4,866
    
    
    
    48
    %
    
    
    3,296Microsource
    
    
    3,763
    
    
    
    30
    %
    
    
    2,892
    
    
    
    (25
    %)
    
    
    3,839Total
    
    $
    17,109
    
    
    
    5
    %
    
    $
    16,348
    
    
    
    (7
    %)
    
    $
    17,492
 Orders for the new synthesizer at the Instrument Division helped to
improve new orders in FY 2004. Orders at ASCOR decreased in 2004 primarily due
to a decrease in military and commercial demand for their products. In 2004,
orders at Microsource improved primarily due to an increase in military orders. Orders at the Instrument Division decreased in 2003 primarily due to the
weakness in the commercial wireless telecommunications market. Orders at ASCOR
increased in 2003 primarily due to increased military orders. The 2003 decrease
in orders at Microsource includes an order reversal of approximately $750,000
due to a contract re-negotiation with a long-term customer. The following table shows order backlog and related information at fiscal
year end. (Dollars in thousands)
    
    2004
    
    % change
    
    2003
    
    % change
    
    2002Backlog of unfilled orders
    
    $
    16,355
    
    
    
    (2
    %)
    
    $
    16,737
    
    
    
    (21
    %)
    
    $
    21,211Backlog of unfilled
orders shippable within
one year
    
    
    7,473
    
    
    
    (2
    %)
    
    
    7,660
    
    
    
    5
    %
    
    
    7,299Previous fiscal year end
(FYE) one-year backlog
reclassified during year
as shippable later than
one year
    
    
    1,804
    
    
    
    24
    %
    
    
    1,453
    
    
    
    (90
    %)
    
    
    15,275Net cancellations during
year of previous FYE
one-year backlog
    
    
    49
    
    
    
    (94
    %)
    
    
    861
    
    
    
    (92
    %)
    
    
    10,332
 The decrease in backlog at year-end 2004 was primarily due to weak order
levels at ASCOR, partially offset by strong order levels at the Instrument
Division and Microsource. The decrease in backlog at year-end 2003 was primarily due to weak order
levels at the Giga-tronics Instrument Division and Microsource partially offset
by stronger order levels at ASCOR. Fiscal 2004 net sales were $17,491,000, a 16% decrease from the
$20,822,000 in 2003. The decrease in sales was primarily due to lower order
levels at the Instrument Division in the first three quarters due to the
weakness in the commercial wireless market coupled with customer extension of
delivery dates at Microsource. Sales at the Instrument Division decreased 8% or
$732,000. ASCOR sales decreased 8% or $306,000 on weak orders. Sales at
Microsource decreased 30% or $2,293,000. Net sales for fiscal 2003 were $20,822,000, a 41% decrease from the
$35,363,000 in 2002. The reduction in sales was primarily due to fewer orders
booked because of the general slowdown in the commercial wireless market. In
fiscal 2003, Microsource revenues decreased 23% or $2,349,000, on weak orders
and customer extension of delivery dates. The Instrument Division sales
decreased 57% or $12,254,000 primarily due to weak orders. ASCOR sales
increased 2% or $62,000 primarily due to increased orders and higher backlog. Allocation of net sales (Dollars in thousands)
    
    2004
    
    % change
    
    2003
    
    % change
    
    2002Commercial
    
    $
    10,816
    
    
    
    (15
    %)
    
    $
    12,788
    
    
    
    (56
    %)
    
    $
    28,910Government/defense
    
    
    6,675
    
    
    
    (17
    %)
    
    
    8,034
    
    
    
    25
    %
    
    
    6,453
 15




---



##### Table of Contents



Allocation of net sales, by segment (Dollars in thousands)
    
    2004
    
    % change
    
    2003
    
    % change
    
    2002Instrument DivisionCommercial
    
    $
    6,478
    
    
    
    (7
    %)
    
    $
    6,985
    
    
    
    (64
    %)
    
    $
    19,338Government/defense
    
    
    2,095
    
    
    
    (10
    %)
    
    
    2,320
    
    
    
    4
    %
    
    
    2,221ASCORCommercial
    
    
    1,500
    
    
    
    (48
    %)
    
    
    2,907
    
    
    
    (6
    %)
    
    
    3,095Government/defense
    
    
    2,024
    
    
    
    119
    %
    
    
    923
    
    
    
    37
    %
    
    
    673MicrosourceCommercial
    
    
    2,838
    
    
    
    (2
    %)
    
    
    2,896
    
    
    
    (55
    %)
    
    
    6,477Government/defense
    
    
    2,556
    
    
    
    (47
    %)
    
    
    4,791
    
    
    
    35
    %
    
    
    3,559
 For fiscal 2004, cost of sales decreased 12% to $12,755,000 from
$14,635,000 in fiscal 2003. The decrease is primarily attributable to the 16%
decline in sales. The reduction in cost of sales was not proportional to the
decline in sales due to the level of fixed manufacturing costs. Cost of sales decreased 41% in fiscal 2003 to $14,635,000 from the
$24,931,000 in 2002. The decrease is primarily attributable to the 41% decline
in revenues. Operating Expenses and Cost of Sales (Dollars in thousands)
    
    2004
    
    % change
    
    2003
    
    % change
    
    2002Cost of sales
    
    $
    12,755
    
    
    
    (13
    %)
    
    $
    14,635
    
    
    
    (41
    %)
    
    $
    24,931Product development
    
    
    3,766
    
    
    
    (13
    %)
    
    
    4,321
    
    
    
    (27
    %)
    
    
    5,892Selling, general and admin.
    
    
    5,413
    
    
    
    (11
    %)
    
    
    6,071
    
    
    
    (22
    %)
    
    
    7,783Amortization of intangibles
    
    
    
    
    
    
    (100
    %)
    
    
    20
    
    
    
    (88
    %)
    
    
    182Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    %)
    
    
    173Total expenses
    
    $
    21,934
    
    
    
    (12
    %)
    
    $
    25,047
    
    
    
    (36
    %)
    
    $
    38,961
 Operating expenses decreased 12% or $1,233,000 in fiscal 2004 over 2003
due to decreases of $658,000 in selling, general and administrative, $555,000
in product development expenses and $20,000 in amortization of intangibles.
Product development costs decreased 13% or $555,000 in fiscal 2004 primarily
due to decreased product development expenses company wide on personnel cost
reductions and a more streamlined product development focus. Selling, general
and administrative expenses decreased 11% or $658,000 for the fiscal year 2004
compared to the prior year. The decrease is a result of $332,000 less in
marketing expenses, coupled with $284,000 less in administrative expenses and
lower commission expense of $42,000 on lower sales for the year. These expense
reductions were primarily personnel reductions and rent reductions due to
renegotiated lease terms. For fiscal year 2004 amortization of intangibles
decreased 100% or $20,000 as compared to last fiscal year. The decrease in the
amortization of intangibles is primarily a result of full amortization of
patents and licenses. Interest income in 2004 decreased from 2003 due to less
cash available for investment and lower interest rates. Operating expenses decreased 26% or $3,618,000 in fiscal 2003 over 2002
due to decreases of $1,712,000 in selling, general and administrative, $335,000
in total amortization and $1,571,000 in product development expenses. Product
development costs decreased 27% or $1,571,000 in fiscal 2003 primarily due to
decreased product development expenses at the Instrument Division and
Microsource. Selling, general and administrative expenses decreased 22% or
$1,712,000 for the fiscal year 2003 compared to the prior year. The decrease
was a result of $513,000 less in administrative expenses and $1,219,000 less in
marketing expenses offset by higher commission expense of $20,000 on higher
commissionable sales for the year. These expense reductions were primarily
personnel reductions and rent reductions on renegotiated lease terms. For
fiscal year 2003 amortization of intangibles decreased 94% or $335,000 as
compared to the previous fiscal year. The decrease in the amortization of
intangibles was primarily a result of reduced amortization of patents and
licenses as well as the goodwill write-off at Microsource that occurred in
2002, related to an impairment of this asset. Interest income in 2003
increased from 2002 due to more cash available for investment. 16




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##### Table of Contents



Giga-tronics recorded a net loss of $6,821,000 or $1.45 per fully diluted
share for the fiscal year 2004 versus a net loss of $10,762,000 or $2.31 per
fully diluted share in 2003. Giga-tronics recorded a net loss of $10,762,000 or $2.31 per fully diluted
share for the fiscal year 2003 versus a net loss of $2,102,000 or $0.46 per
fully diluted share in 2002. The loss for 2003 includes a one-time charge of
approximately $4,098,000 related to an increase in the allowance against the
deferred tax assets, in addition to approximately $1,450,000 in restructuring
and inventory write-offs related to discontinued products. Critical Accounting Estimates 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 or 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. The Company periodically reviews inventory on
hand to identify and write down excess and obsolete inventory based on
estimated product demand. 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 not realize benefits of these deductible differences
as of March 27, 2004. Management has, therefore, established a valuation
allowance against its net deferred tax assets as of March 27, 2004. 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. Financial Condition and Liquidity As of March 27, 2004, Giga-tronics had $2,752,000 in cash and cash
equivalents, compared to $5,005,000 as of March 29, 2003. Working capital for the 2004 year-end was $7,997,000 compared to
$13,697,000 in 2003 and $23,135,000 in 2002. The decrease in working capital in
2004 from 2003 was primarily due to decreases in cash, accounts receivable and
net inventories partially offset by a decrease in customer advances. The
decrease in working capital in 2003 versus 2002 was primarily a result of the
increased allowance against the deferred income tax benefit and its operating
loss in the current year. 17




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##### Table of Contents



The Companys current ratio (current assets divided by current
liabilities) at March 27, 2004 was 2.9 compared to 3.5 on March 29, 2003 and
5.5 in 2002. The reduction in this ratio is primarily the result of decreases
in inventories, cash and cash equivalents, and receivables. Cash used by operations amounted to $2,326,000 in 2004 and $2,059,000 in
2003. Cash provided by operations amounted to $3,766,000 in 2002. Cash used by
operations in 2004 is primarily attributed to the operating loss in the year
and a decrease in customer advances offset by depreciation and amortization
expenses that are non-cash items and decreases in net accounts receivable and
net inventories. Cash used by operations in 2003 was primarily attributed to
the operating loss in the year offset by non-cash depreciation and amortization
expenses, an increase in the deferred tax asset valuation allowance, and the
net change in operating assets and liabilities. Cash provided by operations in
2002 was attributed to accounts receivable collections, reduced inventory
purchases and non-cash depreciation and amortization expenses offset by the
operating loss in the year, and the net change in operating assets and
liabilities. Based on current operations, management believes that cash and cash
equivalents remain adequate to meet anticipated operating needs for the next
two years. However, this estimate is based on projections that may or may not
be realized, therefore actual cash usage could be greater than projected. To
operate beyond that term would require the Company to earn additional cash from
operations, obtain a line of credit or obtain additional funds from other
sources. On June 1, 2004, the Company obtained a secured revolving line of
credit for $2,500,000, with interest payable at prime rate plus 1 1/2%. The
borrowing under this line of credit is based on the Companys accounts
receivable and inventory and is secured by all of the assets of the Company. Additions to property and equipment were $18,000 in 2004 compared to
$160,000 in 2003 and $708,000 in 2002. The reduction in capital equipment
spending reflected the overall decline in business activity and increased
productivity. Other cash inflows in 2004, 2003 and 2002 consisted of $57,000,
$61,000 and $239,000, respectively, from the sale of common stock in connection
with the exercise of stock options and purchases under the employee stock
purchase plan. 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 $6,207,000 as follows: Fiscal years(In
thousands)2005
    
    $
    1,2312006
    
    
    1,2482007
    
    
    1,0902008
    
    
    5862009
    
    
    597Thereafter
    
    
    1,455$
    6,207
 The Company is committed to purchase certain inventory under
non-cancelable purchase orders. As of March 27, 2004, total non-cancelable
purchase orders were approximately $1,361,000 through fiscal 2005 and $7,000
beyond fiscal 2005 that are scheduled to be delivered to the Company at various
dates throughout fiscal 2006. 18




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##### Table of Contents



Contractual Obligations The following table discloses the amounts of payments due under certain
contractual obligations in the specified time periods. (In thousands)
    
    Under one year
    
    One to three years
    
    Three to five years
    
    More than five yearsCapital lease obligations
    
    $
    10
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating leases
    
    
    1,231
    
    
    
    2,338
    
    
    
    1,183
    
    
    
    1,455Purchase obligations
    
    
    1,361
    
    
    
    7
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    2,602
    
    
    $
    2,345
    
    
    $
    1,183
    
    
    $
    1,455
 The Company has no off-balance-sheet arrangements (including standby
letters of credit, guaranties, contingent interests in transferred assets,
contingent obligations indexed to its own stock or any obligation arising out
of a variable interest in an unconsolidated entity that provides credit or
other support to the Company), that have or are likely to have a material
effect on its financial condition, changes in financial condition, revenue,
expenses, results of operations, liquidity, capital expenditures or capital
resources. Giga-tronics intends to maintain 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 markets. Such acquisition activity could also increase the
Companys operating expenses and require the additional use of capital
resources. Recently Issued Accounting Standards In December 2003, the FASB issued FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities,which addresses
how a business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46, Consolidation of Variable Interest Entities.
Interpretation No. 46R is effective for public entities for periods ending
after March 15, 2004. The adoption of Interpretation No. 46R will not impact
the Companys financial position, results of operations or cash flows. 
 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. 19




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
 CONSOLIDATED BALANCE SHEETS (In thousands except share data)
    
    
    
    
    

    March 27, 2004
    
    March 29, 2003AssetsCurrent assetsCash and cash equivalents
    
    
    
    
    
    $
    2,752
    
    
    $
    5,005Notes receivable
    
    
    
    
    
    
    253
    
    
    
    6Trade accounts receivable, net of allowance
of $339 and $353, respectively
    
    
    
    
    
    
    1,959
    
    
    
    3,325Inventories
    
    
    
    
    
    
    6,920
    
    
    
    10,244Income tax refund receivable
    
    
    
    
    
    
    
    
    
    
    100Prepaid expenses
    
    
    
    
    
    
    271
    
    
    
    488Total current assets
    
    
    
    
    
    
    12,155
    
    
    
    19,168Property and equipmentLeasehold improvements
    
    
    
    
    
    
    373
    
    
    
    434Machinery and equipment
    
    
    
    
    
    
    15,969
    
    
    
    16,593Office furniture and fixtures
    
    
    
    
    
    
    712
    
    
    
    1,162Property and equipment
    
    
    
    
    
    
    17,054
    
    
    
    18,189Less accumulated depreciation and amortization
    
    
    
    
    
    
    15,803
    
    
    
    15,915Property and equipment, net
    
    
    
    
    
    
    1,251
    
    
    
    2,274Other assets
    
    
    
    
    
    
    327
    
    
    
    433Total assets
    
    
    
    
    
    $
    13,733
    
    
    $
    21,875Liabilities and shareholders equityCurrent liabilitiesAccounts payable
    
    
    
    
    
    $
    1,686
    
    
    $
    1,809Accrued commissions
    
    
    
    
    
    
    293
    
    
    
    249Accrued payroll and benefits
    
    
    
    
    
    
    889
    
    
    
    1,038Accrued warranty
    
    
    
    
    
    
    548
    
    
    
    859Customer advances
    
    
    
    
    
    
    58
    
    
    
    796Obligations under capital lease
    
    
    
    
    
    
    10
    
    
    
    76Other current liabilities
    
    
    
    
    
    
    674
    
    
    
    644Total current liabilities
    
    
    
    
    
    
    4,158
    
    
    
    5,471Obligations under capital lease, net of current portion
    
    
    
    
    
    
    
    
    
    
    10Deferred rent
    
    
    
    
    
    
    379
    
    
    
    434Total liabilities
    
    
    
    
    
    
    4,537
    
    
    
    5,915Shareholders equityPreferred stock of no par valueAuthorized 1,000,000 shares; no shares outstanding
at March 27, 2004 and March 29, 2003
    
    
    
    
    
    
    
    
    
    
    Common stock of no par value;Authorized 40,000,000 shares; 4,724,896 shares atMarch 27, 2004 and 4,693,080 shares atMarch 29, 2003 issued and outstanding
    
    
    
    
    
    
    12,752
    
    
    
    12,695Retained earnings (accumulated deficit)
    
    
    
    
    
    
    (3,556
    )
    
    
    3,265Total shareholders equity
    
    
    
    
    
    
    9,196
    
    
    
    15,960Total liabilities and shareholders equity
    
    
    
    
    
    $
    13,733
    
    
    $
    21,875
 See Accompanying Notes to Consolidated Financial Statements 20




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CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended(In thousands except share data)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Net sales
    
    $
    17,491
    
    
    $
    20,822
    
    
    $
    35,363Cost of sales
    
    
    12,755
    
    
    
    14,635
    
    
    
    24,931Gross profit
    
    
    4,736
    
    
    
    6,187
    
    
    
    10,432Product development
    
    
    3,766
    
    
    
    4,321
    
    
    
    5,892Selling, general and administrative
    
    
    5,413
    
    
    
    6,071
    
    
    
    7,783Amortization of intangibles
    
    
    
    
    
    
    20
    
    
    
    182Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    173Operating expenses
    
    
    9,179
    
    
    
    10,412
    
    
    
    14,030Operating loss from continuing operations
    
    
    (4,443
    )
    
    
    (4,225
    )
    
    
    (3,598
    )Other income (expense)
    
    
    (4
    )
    
    
    (163
    )
    
    
    25Interest income, net
    
    
    7
    
    
    
    60
    
    
    
    59Loss from continuing operations before income taxes
    
    
    (4,440
    )
    
    
    (4,328
    )
    
    
    (3,514
    )Provision (benefit) for income taxes
    
    
    4
    
    
    
    4,098
    
    
    
    (1,983
    )Loss from continuing operations
    
    
    (4,444
    )
    
    
    (8,426
    )
    
    
    (1,531
    )Loss on discontinued operations, net of income taxes
    
    
    (2,377
    )
    
    
    (2,336
    )
    
    
    (571
    )Net loss
    
    $
    (6,821
    )
    
    $
    (10,762
    )
    
    $
    (2,102
    )Basic and diluted net loss per share:From continuing operations
    
    $
    (0.94
    )
    
    $
    (1.81
    )
    
    $
    (0.33
    )On discontinued operations
    
    
    (0.51
    )
    
    
    (0.50
    )
    
    
    (0.13
    )Basic and diluted net loss per share
    
    $
    (1.45
    )
    
    $
    (2.31
    )
    
    $
    (0.46
    )Shares used in per share calculation:Basic and dilutive
    
    
    4,704
    
    
    
    4,663
    
    
    
    4,604
 See Accompanying Notes to Consolidated Financial Statements 21




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##### Table of Contents



CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY Common Stock
    
    Retained Earnings(Accumulated(In thousands except share data)
    
    Shares
    
    Amount
    
    Deficit)
    
    TotalBalance at March 31, 2001
    
    
    4,542,694
    
    
    $
    12,346
    
    
    $
    16,129
    
    
    $
    28,475Comprehensive Income  netNet loss
    
    
    
    
    
    
    
    
    
    
    (2,102
    )
    
    
    (2,102
    )Stock issuance under stock option
and employee stock purchase plans
    
    
    106,250
    
    
    
    239
    
    
    
    
    
    
    
    239Tax benefit associated with exercise
of stock options
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    49Balance at March 30, 2002
    
    
    4,648,944
    
    
    $
    12,634
    
    
    $
    14,027
    
    
    $
    26,661Comprehensive Income  netNet loss
    
    
    
    
    
    
    
    
    
    
    (10,762
    )
    
    
    (10,762
    )Stock issuance under stock option
and employee stock purchase plans
    
    
    44,136
    
    
    
    61
    
    
    
    
    
    
    
    61Balance at March 29, 2003
    
    
    4,693,080
    
    
    $
    12,695
    
    
    $
    3,265
    
    
    $
    15,960Comprehensive Income  netNet loss
    
    
    
    
    
    
    
    
    
    
    (6,821
    )
    
    
    (6,821
    )Stock issuance under stock option
and employee stock purchase plans
    
    
    31,816
    
    
    
    57
    
    
    
    
    
    
    
    57Balance at March 27, 2004
    
    
    4,724,896
    
    
    $
    12,752
    
    
    $
    (3,556
    )
    
    $
    9,196
 See Accompanying Notes to Consolidated Financial Statements 22




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended(In thousands)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Cash flows provided from operations:Net loss
    
    $
    (6,821
    )
    
    $
    (10,762
    )
    
    $
    (2,102
    )Adjustments to reconcile net earnings (loss) to
net cash (used in) provided by operations:Net provision for doubtful accounts
    
    
    (14
    )
    
    
    (5
    )
    
    
    96Depreciation and amortization
    
    
    1,041
    
    
    
    2,164
    
    
    
    2,338Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    173Tax benefit from employee stock options
    
    
    
    
    
    
    
    
    
    
    49(Gain) loss on sales of fixed assets
    
    
    (4
    )
    
    
    7
    
    
    
    (1
    )Deferred income taxes
    
    
    
    
    
    
    4,085
    
    
    
    (1,653
    )Changes in operating assets and liabilities:Notes receivable
    
    
    (247
    )
    
    
    (6
    )
    
    
    Trade accounts receivable
    
    
    1,380
    
    
    
    647
    
    
    
    3,799Inventories
    
    
    3,324
    
    
    
    1,125
    
    
    
    3,939Prepaid expenses
    
    
    217
    
    
    
    (168
    )
    
    
    229Accounts payable
    
    
    (123
    )
    
    
    297
    
    
    
    (1,921
    )Accrued commissions
    
    
    44
    
    
    
    25
    
    
    
    (211
    )Accrued payroll and benefits
    
    
    (149
    )
    
    
    (211
    )
    
    
    (438
    )Accrued warranty
    
    
    (311
    )
    
    
    80
    
    
    
    47Accrued other liabilities
    
    
    30
    
    
    
    109
    
    
    
    62Customer advances
    
    
    (738
    )
    
    
    16
    
    
    
    90Income taxes receivable/payable
    
    
    100
    
    
    
    601
    
    
    
    (701
    )Reduction of deferred rent
    
    
    (55
    )
    
    
    (63
    )
    
    
    (29
    )Net cash (used in) provided by operations
    
    
    (2,326
    )
    
    
    (2,059
    )
    
    
    3,766Cash flows from investing activities:Proceeds from sale of property and equipment
    
    
    4
    
    
    
    7
    
    
    
    13Purchases of property and equipment
    
    
    (18
    )
    
    
    (160
    )
    
    
    (708
    )Other assets
    
    
    106
    
    
    
    73
    
    
    
    603Net cash provided by (used in) investing activities
    
    
    92
    
    
    
    (80
    )
    
    
    (92
    )Cash flows from financing activities:Issuance of common stock
    
    
    57
    
    
    
    61
    
    
    
    239Payments on capital leases
    
    
    (76
    )
    
    
    (97
    )
    
    
    (202
    )Net cash (used in) provided by financing activities
    
    
    (19
    )
    
    
    (36
    )
    
    
    37(Decrease) increase in cash and cash equivalents
    
    
    (2,253
    )
    
    
    (2,175
    )
    
    
    3,711Beginning cash and cash equivalents
    
    
    5,005
    
    
    
    7,180
    
    
    
    3,469Ending cash and cash equivalents
    
    
    2,752
    
    
    
    5,005
    
    
    
    7,180Supplementary disclosure of cash flow information:Cash paid for income taxes
    
    $
    4
    
    
    $
    6
    
    
    $
    56Cash paid for interest
    
    
    
    
    
    
    1
    
    
    
    21Non-cash investing and financing activities:Purchases under capital lease obligations
    
    
    
    
    
    
    
    
    
    
    103
 See Accompanying Notes to Consolidated Financial Statements 23




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data) 1 Summary of Significant Accounting Policies The CompanyThe 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 ConsolidationThe 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 EstimatesThe 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 YearThe 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 years 2004, 2003 and 2002 each
contained 52 weeks. ReclassificationsCertain reclassifications, none of
which affected net income (loss), have been made to prior year balances in
order to conform to the current year presentation. Revenue RecognitionRevenue
is recorded when there is evidence of an arrangement, delivery has occurred,
the price is fixed and determinable, and collectability reasonably assured.
This occurs when products are shipped, unless the arrangement involves
acceptance terms. If the arrangement involves acceptance terms, the Company
defers revenue until product acceptance is received. Further, sales made to
distributors do not include price protection or product return rights, except
for product defects covered under warranty arrangements. The Company has no
other post-shipment obligations. The Company provides an allowance for doubtful accounts. The balance of
customer receivables is net of the allowance for doubtful accounts at March 27,
2004 and March 29, 2003 of $339,000 and $353,000, respectively. The activity
in the reserve account is as follows: (In thousands)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Beginning balance
    
    $
    353
    
    
    $
    358
    
    
    $
    262Provision for doubtful accounts
    
    
    4
    
    
    
    32
    
    
    
    110Recoveries of doubtful accounts
    
    
    (9
    )
    
    
    (29
    )
    
    
    Write-off of doubtful accounts
    
    
    (9
    )
    
    
    (8
    )
    
    
    (14
    )Ending balance
    
    $
    339
    
    
    $
    353
    
    
    $
    358
 Accrued WarrantyThe Companys warranty policy generally provides three
years for Fast Switching Microwave Synthesizers and Universal Power Meters and
one year for all other products. The Companys policy is to accrue the
estimated cost of warranty coverage at the time the sale is recorded. The
estimated cost of warranty coverage is 24




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##### Table of Contents



based on the Companys actual historical experience with its current products
or similar products. For new products, the required reserve is based on
historical experience of similar products until such time as sufficient
historical data has been collected on the new product. See Note 10 to the
consolidated financial statements, for the reconciliation of changes in the
Companys product warranty liabilities. InventoriesInventories are stated
at the lower of cost or market. Cost is determined on a first-in, first-out
basis. Property and EquipmentProperty 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 to future cash flows the property and equipment are
expected to generate. The Company follows Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets, which requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If such review indicates that the carrying amount of an asset
exceeds the sum of its expected future cash flows on an undiscounted basis, the
assets carrying amount would be written down to fair value. Additionally,
SFAS No. 144 requires that long-lived assets to be disposed of be reported at
the lower of carrying amount or fair value less cost to sell. As of March 27,
2004, management believes that there has been no impairment of the Companys
assets. Deferred RentRent 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. Income TaxesIncome 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. Future tax benefits are subject to a valuation allowance when
management is unable to conclude that its deferred tax assets will more
likely than not be realized from the results of operations. Goodwill
The Company amortized goodwill 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
on the remaining balance of $173,000. Pre-production CostsThe 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 27, 2004 and March 29,
2003 were capitalized pre-production costs of $268,000, and $341,000,
respectively. Product Development CostsProduct development costs are charged to
operations as incurred. Software Development CostsDevelopment 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. 25




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##### Table of Contents



Stock-based CompensationDuring the first quarter of fiscal year 2004, the
Company adopted SFAS No. 148 (SFAS 148), Accounting for Stock-Based
Compensation  Transition and Disclosure  an Amendment of FAS 123.The
Company accounts for stock-based employee compensation using the intrinsic
value method under Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees,and related interpretations and
complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation.The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation: Years Ended(In thousands except per share
data)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Net loss, as reported
    
    $
    (6,821
    )
    
    $
    (10,762
    )
    
    $
    (2,102
    )Deduct:Stock-based compensation
expense included in reported
net loss
    
    
    
    
    
    
    
    
    
    
    Add:Total stock-based employee
compensation determined under
fair value based method for all
awards, net of related tax
effects
    
    
    (271
    )
    
    
    (203
    )
    
    
    (271
    )Pro forma net loss
    
    $
    (7,092
    )
    
    $
    (10,965
    )
    
    $
    (2,373
    )Net loss per share  Basic:As reported
    
    $
    (1.45
    )
    
    $
    (2.31
    )
    
    $
    (0.46
    )Pro forma
    
    
    (1.51
    )
    
    
    (2.35
    )
    
    
    (0.52
    )Net loss per share  Diluted:As reported
    
    
    (1.45
    )
    
    
    (2.31
    )
    
    
    (0.46
    )Pro forma
    
    
    (1.51
    )
    
    
    (2.35
    )
    
    
    (0.52
    )
 For purposes of computing pro-forma consolidated net 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 27, 2004
    
    March 29, 2003
    
    March 30, 2002Expected life of options
    
    4 years
    
    4 years
    
    4 yearsExpected life of purchase rights
    
    6 mos
    
    6 mos
    
    6 mosAnnualized volatility
    
    87%
    
    60%
    
    60%Risk-free interest rate
    
    2.87 to 3.12
    
    2.90 to 4.49
    
    4.39 to 4.93Dividend yield
    
    Zero
    
    Zero
    
    Zero
 Loss Per ShareBasic earnings (loss) per share is 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. The
number of stock options not included in the computation of diluted earnings is
556,000, 528,000 and 550,000 for fiscal 2004, 2003 and 2002, respectively. Comprehensive Income (Loss)There are no items of other comprehensive
income (loss). Financial Instruments and Concentration of Credit RiskFinancial
instruments, which potentially subject the Company to credit risk consist
principally of cash, cash equivalents and trade accounts receivable. The
Companys cash equivalents consist principally of overnight deposits and money
market funds. 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. 26




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##### Table of Contents



Fair Market Value of Financial InstrumentsThe 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. Recently Issued Accounting StandardsIn December 2003, the FASB issued
FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities,which addresses how a business enterprise should evaluate
whether it has a controlling financial interest in an entity through means
other than voting rights and accordingly should consolidate the entity. FIN
46R replaces FASB Interpretation No. 46, Consolidation of Variable Interest
Entities.Interpretation No. 46R is effective for public entities for periods
ending after March 15, 2004. The adoption of Interpretation No. 46R will not
impact the Companys financial position, results of operations or cash flows. 2 Cash and Cash Equivalents Cash equivalents of $1,117 and $3,650 at March 27, 2004 and March 29, 2003
respectively, consist of money market funds. 3 Inventories Years Ended(In thousands)
    
    March 27, 2004
    
    March 29, 2003Raw materials
    
    $
    4,036
    
    
    $
    4,669Work-in-progress
    
    
    1,915
    
    
    
    3,427Finished goods
    
    
    724
    
    
    
    1,096Demonstration inventory
    
    
    245
    
    
    
    1,052$
    6,920
    
    
    $
    10,244
 4 Selling Expenses Selling expenses consist primarily of commissions paid to
various marketing agencies. Commission expense totaled $1,034,000, $1,011,000,
and $1,535,000 in fiscal 2004, 2003, and 2002, respectively. Advertising costs
which are expensed as incurred totaled $75,000, $87,000, and $269,000 for
fiscal 2004, 2003, and 2002, respectively. 5 Significant Customers and Industry Segment Information The Company has four reportable segments: Giga-tronics Instrument
Division, ASCOR, Microsource, and Corporate. Giga-tronics Instrument division
produces a broad line of test and measurement equipment used in the
development, test and maintenance of wireless communications products and
systems, flight navigational equipment, electronic defense systems and
automatic testing systems. ASCOR designs, manufactures, and markets a line of
switching devices that link together many specific purpose instruments that
comprise automatic test systems. Microsource develops and manufactures a broad
line of YIG tuned oscillators, filters and microwave synthesizers, which are
used in a wide variety of microwave instruments or devices. 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. Segment net sales includes sales to external customers.
Segment pre-tax loss includes an allocation for corporate expenses,
amortization of goodwill, and interest expense on 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 4%) plus 11⁄2% 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 and other long-term
assets. The Company accounts for inter-segment sales and transfers at terms
that 27




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##### Table of Contents



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 Instrument Division
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 2004, 2003 and 2002: March 27, 2004 (In thousands):
    
    Instrument Division
    
    ASCOR
    
    Microsource
    
    Corporate
    
    TotalRevenue
    
    $
    8,573
    
    
    $
    3,524
    
    
    $
    5,394
    
    
    $
    
    
    
    $
    17,491Interest income
    
    
    3
    
    
    
    6
    
    
    
    
    
    
    
    675
    
    
    
    684Interest expense
    
    
    (153
    )
    
    
    (15
    )
    
    
    (509
    )
    
    
    
    
    
    
    (677
    )Depreciation and amortization
    
    
    468
    
    
    
    85
    
    
    
    456
    
    
    
    32
    
    
    
    1,041Loss from continuing operations before income taxes
    
    
    (2,185
    )
    
    
    (763
    )
    
    
    (2,257
    )
    
    
    765
    
    
    
    (4,440
    )Assets
    
    
    5,527
    
    
    
    2,406
    
    
    
    4,415
    
    
    
    1,385
    
    
    
    13,733
 March 29, 2003 (In thousands):
    
    Instrument Division
    
    ASCOR
    
    Microsource
    
    Corporate
    
    TotalRevenue
    
    $
    9,305
    
    
    $
    3,830
    
    
    $
    7,687
    
    
    $
    
    
    
    $
    20,822Interest income
    
    
    17
    
    
    
    28
    
    
    
    2
    
    
    
    532
    
    
    
    579Interest expense
    
    
    (36
    )
    
    
    
    
    
    
    (460
    )
    
    
    (23
    )
    
    
    (519
    )Depreciation and amortization
    
    
    556
    
    
    
    108
    
    
    
    1,250
    
    
    
    40
    
    
    
    1,954Loss from continuing operations before income taxes
    
    
    (3,477
    )
    
    
    (473
    )
    
    
    (999
    )
    
    
    621
    
    
    
    (4,328
    )Assets
    
    
    6,554
    
    
    
    3,973
    
    
    
    6,275
    
    
    
    5,073
    
    
    
    21,875
 March 30, 2002 (In thousands):
    
    Instrument Division
    
    ASCOR
    
    Microsource
    
    Corporate
    
    TotalRevenue
    
    $
    21,559
    
    
    $
    3,768
    
    
    $
    10,036
    
    
    $
    
    
    
    $
    35,363Interest income
    
    
    28
    
    
    
    74
    
    
    
    
    
    
    
    701
    
    
    
    803Interest expense
    
    
    (130
    )
    
    
    
    
    
    
    (561
    )
    
    
    (53
    )
    
    
    (744
    )Depreciation and amortization
    
    
    593
    
    
    
    138
    
    
    
    1,408
    
    
    
    77
    
    
    
    2,216Loss from continuing operations before income taxes
    
    
    (548
    )
    
    
    (655
    )
    
    
    (3,011
    )
    
    
    700
    
    
    
    (3,514
    )Assets
    
    
    12,122
    
    
    
    3,479
    
    
    
    9,661
    
    
    
    7,618
    
    
    
    32,880
 The Companys Giga-tronics Instrument Division, ASCOR, and Microsource
segments sell to agencies of the U.S. Government and U.S. defense-related
customers. In fiscal 2004, 2003, and 2002 U.S. Government and U.S.
defense-related customers accounted for 38%, 39%, and 18%, of sales,
respectively. During fiscal 2004, an electronic instrument manufacturer
accounted for 12% of the Companys consolidated revenue and less that 1% of
accounts receivable at year-end. During fiscal 2003, a Japanese distributor of
the Company, Midoriya, accounted for less than 10% of the Companys revenues
and a negligible amount outstanding in accounts receivable. During 2002,
Midoriya accounted for 18% of the Companys consolidated sales, respectively.
At fiscal 2002 year end, Midoriya had a negligible amount outstanding in
accounts receivable. 28




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##### Table of Contents



Export sales accounted for 32%, 23%, and 47% of the Companys sales in fiscal
2004, 2003 and 2002, respectively. Export sales by geographical area are shown
below: Years
Ended(In thousands)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Americas
    
    $
    157
    
    
    $
    279
    
    
    $
    1,089Europe
    
    
    2,562
    
    
    
    2,052
    
    
    
    4,845Asia
    
    
    1,858
    
    
    
    1,468
    
    
    
    8,948Rest of world
    
    
    933
    
    
    
    964
    
    
    
    1,719$
    5,510
    
    
    $
    4,763
    
    
    $
    16,601
 6 Loss per Share Net loss and shares used in per share computations for the years ended
March 27, 2004, March 29, 2003, and March 30, 2002 are as follows. Years Ended(In thousands except per share data)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Net loss
    
    $
    (6,821
    )
    
    $
    (10,762
    )
    
    $
    (2,102
    )Weighted average:Common shares outstanding
    
    
    4,704
    
    
    
    4,663
    
    
    
    4,604Potential common shares
    
    
    
    
    
    
    
    
    
    
    Common shares assuming dilution
    
    
    4,704
    
    
    
    4,663
    
    
    
    4,604Net earnings (loss) per share of common stock
    
    $
    (1.45
    )
    
    $
    (2.31
    )
    
    $
    (0.46
    )Net earnings (loss) per share of common stock
assuming dilution
    
    $
    (1.45
    )
    
    $
    (2.31
    )
    
    $
    (0.46
    )Stock options not included in computation
    
    
    556
    
    
    
    528
    
    
    
    550
 The number of stock options not included in the computation of diluted
earnings per share (EPS) for the period ended March 27, 2004, March 29, 2003
and March 30, 2002 is a result of the Companys loss from continuing operations
and, therefore, the options are antidilutive. 7 Income Taxes Following are the components of the provision (benefit) for income taxes: Years Ended(In thousands)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    (760
    )State
    
    
    4
    
    
    
    4
    
    
    
    44
    
    
    
    4
    
    
    
    (756
    )Deferred:Federal
    
    
    
    
    
    
    2,885
    
    
    
    (1,143
    )State
    
    
    
    
    
    
    1,200
    
    
    
    (510
    )
    
    
    
    4,085
    
    
    
    (1,653
    )Charge in lieu of taxes
attributable to employer stock
option plans
    
    
    
    
    
    
    9
    
    
    
    49Provision (benefit) for income taxes
    
    $
    4
    
    
    $
    4,098
    
    
    $
    (2,360
    )
 29




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##### Table of Contents



The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities are as follows: Deferred tax assets Years Ended(In thousands)
    
    March 27, 2004
    
    March 29, 2003Allowance for doubtful accounts
    
    $
    145
    
    
    $
    151Inventory reserves and additional costs capitalized
    
    
    2,920
    
    
    
    3,272Accrued vacation
    
    
    110
    
    
    
    152Accrued warranty
    
    
    266
    
    
    
    368Other accrued liabilities
    
    
    352
    
    
    
    256Net operating loss carryforward
    
    
    11,320
    
    
    
    8,448Income tax credits
    
    
    2,148
    
    
    
    1,894Future state tax effect
    
    
    (771
    )
    
    
    (417
    )16,490
    
    
    
    14,124Valuation allowances
    
    
    (16,440
    )
    
    
    (13,921
    )Deferred tax liabilitiesFixed asset depreciation
    
    
    (50
    )
    
    
    (203
    )$
    
    
    
    $
    
 Years Ended(In thousands except percentages)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Statutory federal income tax (benefit)
    
    $
    (2,318
    )
    
    
    (34.0
    )%
    
    $
    (2,266
    )
    
    
    (34.0
    )%
    
    $
    (1,517
    )
    
    
    (34.0
    )%Beginning of year change in deferred
tax asset valuation allowance
    
    
    
    
    
    
    
    
    
    
    6,610
    
    
    
    99.2
    
    
    
    161
    
    
    
    3.6Valuation allowance
    
    
    2,519
    
    
    
    37.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    State income tax, net of federal benefit in 2002
    
    
    (398
    )
    
    
    (5.8
    )
    
    
    (253
    )
    
    
    (3.8
    )
    
    
    (143
    )
    
    
    (3.2
    )Non-tax deductible expenses
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    0.1
    
    
    
    9
    
    
    
    0.2Tax credits
    
    
    
    
    
    
    
    
    
    
    (577
    )
    
    
    (8.7
    )
    
    
    (894
    )
    
    
    (20.0
    )Goodwill and patent amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142
    
    
    
    3.2Interest income exempt from federal tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (82
    )
    
    
    (1.8
    )Other
    
    
    201
    
    
    
    2.9
    
    
    
    575
    
    
    
    8.7
    
    
    
    (36
    )
    
    
    (0.8
    )Effective income tax expense (benefit)
    
    $
    4
    
    
    
    0.10
    %
    
    $
    4,098
    
    
    
    61.5
    %
    
    $
    (2,360
    )
    
    
    (52.8
    )%
 The change in valuation allowance from March 29, 2003 to March 27, 2004
was $2,519,000. The change in valuation allowance from March 30, 2002 to March
29, 2003 was $6,610,000. The change in valuation allowance from March 31, 2001
to March 30, 2002 was $161,000. 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 27, 2004. During the year ended March 27, 1999, the Company acquired approximately
$7,600,000 of deferred tax assets in the acquisition of Microsource, which was
fully offset by a valuation allowance. Subsequent recognition of tax benefits
relating to the valuation allowance for deferred tax assets of Microsource will
be allocated to goodwill and the remainder to income tax benefit. At March
31, 2002, goodwill was reduced by $452,000 for the tax benefits realized from
the Microsource deferred tax assets. 30




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##### Table of Contents



During the year ended March 30, 2002, disqualifying employee stock option
dispositions resulted in an income tax deduction to the Company of
approximately $122,000 and a tax benefit of approximately $49,000. The tax
benefit has been reflected as an increase to the Companys paid-in capital in
the accompanying financial statements.  8
    
    Stock Options and Employee Benefit Plans Stock Option PlanThe 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 27, 2004, no SARs
have been granted under the option plan. As of March 27, 2004, the total number
of shares of common stock available for issuance is 176,400 under the 2000
stock option plan. All outstanding options have a term of five years. Per Share Weighted Average
    
    Options
    
    Total Options
    
    Weighted AverageFair Value Of Options Granted
    
    Exercisable
    
    Outstanding
    
    Fair ValueOutstanding as of March 31, 2001
    
    
    
    
    
    
    143,988
    
    
    
    594,736
    
    
    $
    3.610Exercised
    
    
    
    
    
    
    
    
    
    
    (67,275
    )
    
    
    2.163Forfeited
    
    
    
    
    
    
    
    
    
    
    (145,437
    )
    
    
    3.783Granted
    
    $
    4.290
    
    
    
    
    
    
    
    168,150
    
    
    
    4.290Outstanding as of March 30, 2002
    
    
    
    
    
    
    194,437
    
    
    
    550,174
    
    
    $
    3.838Exercised
    
    
    
    
    
    
    
    
    
    
    (12,188
    )
    
    
    2.094Forfeited
    
    
    
    
    
    
    
    
    
    
    (113,750
    )
    
    
    4.097Granted
    
    $
    2.605
    
    
    
    
    
    
    
    104,000
    
    
    
    2.605Outstanding as of March 29, 2003
    
    
    
    
    
    
    269,874
    
    
    
    528,236
    
    
    $
    3.580Exercised
    
    
    
    
    
    
    
    
    
    
    (21,110
    )
    
    
    2.170Forfeited
    
    
    
    
    
    
    
    
    
    
    (203,526
    )
    
    
    2.535Granted
    
    $
    2.184
    
    
    
    
    
    
    
    252,500
    
    
    
    2.184Outstanding as of March 27, 2004
    
    
    
    
    
    
    168,926
    
    
    
    556,100
    
    
    $
    3.382
 Following is a summary of stock option activity: Options Outstanding and Exercisable as of March 27, 2004, by Price Range Total
    
    Weighted Average
    
    Weighted
    
    Number
    
    WeightedRange of
    
    Options
    
    Remaining
    
    Average
    
    of Options
    
    AverageExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Exercise Price
    
    Exercisable
    
    Exercise PriceFrom $1.22 to $1.96
    
    
    100,000
    
    
    
    4.20
    
    
    $
    1.775
    
    
    
    6,250
    
    
    $
    1.220From $2.12 to $6.13
    
    
    440,350
    
    
    
    3.16
    
    
    
    3.551
    
    
    
    148,426
    
    
    
    4.464From $8.88 to $8.88
    
    
    15,750
    
    
    
    1.11
    
    
    
    8.88
    
    
    
    14,250
    
    
    
    8.88From $1.22 to $8.88
    
    
    556,100
    
    
    
    3.29
    
    
    $
    3.382
    
    
    
    168,926
    
    
    $
    4.716
 Employee Stock Purchase PlanUnder 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 27, 2004, 56,631 shares remain
available for issuance under the Purchase Plan. The weighted average fair
value of the purchase rights granted in fiscal 2004 was $1.05. 31




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401(k) PlanThe Company has established 401(k) plans which cover
substantially all employees. Participants may make voluntary contributions to
the plans 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 2004, 2003, and 2002
were approximately $73,000, $138,000, and $159,000, respectively.  9
    
    Commitments The Company leases a 47,397 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 ten-year lease that commenced in July 1999 and amended in
May 2003. Included in this lease is approximately 9,000 square feet that the
Company effectively abandoned use of upon sale of Dymatix on March 26, 2004.
The Company accrued a loss of $114,000 for future lease expense, net of future
sub-lease rental income. The Company leases a 33,439 square foot facility
located in Santa Rosa, California, under a twenty-year lease that commenced in
July 1993 and amended in April 2003. These facilities accommodate all of the
Companys present operations. The Company also has acquired equipment under
capital and leases other equipment under operating leases. The future minimum
lease payments for operating equipment and facility leases are shown below: Fiscal years(In thousands)2005
    
    $
    1,2312006
    
    
    1,2482007
    
    
    1,0902008
    
    
    5862009
    
    
    597Thereafter
    
    
    1,455$
    6,207
 The aggregate rental expense was $1,383,000, $1,848,000, and $1,695,000 in
fiscal 2004, 2003, and 2002, respectively. As of March 27, 2004, Property and Equipment includes equipment under
capital lease of $241,000 and related accumulated amortization of $144,000. As
of March 29, 2003, Property and Equipment includes equipment under capital
lease of $241,000 and related accumulated amortization of $95,000. The future
minimum lease payments for capital leases are $10,000, which is due in fiscal
2005. The Company is committed to purchase certain inventory under
non-cancelable purchase orders. As of March 27, 2004, total non-cancelable
purchase orders were approximately $1,361,000 through fiscal 2005 and $7,000
beyond fiscal 2005 and were scheduled to be delivered to the Company at various
dates through September 2005.  10
    
    Warranty Obligations The Company records a liability for estimated warranty
obligations at the date products are sold. Adjustments are made as new
information becomes available. The following provides a reconciliation of
changes in the Companys warranty reserve. The Company provides no other
guarantees. Years Ended(In thousands)
    
    March 27, 2004
    
    March 29, 2003
    
    March 30, 2002Balance at beginning of year
    
    $
    859
    
    
    $
    779
    
    
    $
    731Provision for current year sales
    
    
    257
    
    
    
    750
    
    
    
    875Warranty costs incurred
    
    
    (568
    )
    
    
    (670
    )
    
    
    (827
    )Balance at end of year
    
    $
    548
    
    
    $
    859
    
    
    $
    779
 32




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11 Subsequent Event On June 1, 2004, the Company executed a commitment letter with a financial
institution for a secured revolving line of credit for $2.5 million, which is
subject to certain closing conditions, including the execution of a loan
agreement. The maximum amount that can be borrowed is limited to 80% of trade
receivables, plus 25% raw material and finished goods inventory up to $500,000.
Interest is payable at prime plus 11⁄2%. The Company is required to comply
with certain financial covenants under the arrangement. 33




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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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 27, 2004 and March 29, 2003, and the related consolidated statements of
operations, shareholders equity and cash flows for each of the years in the
three year period ended March 27, 2004. 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 the
standards of the Public Company Accounting Oversite Board (United States).
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 27, 2004 and March 29,
2003, and the results of their operations and their cash flows for each of the
years in the three year period ended March 27, 2004, in conformity with
accounting principles generally accepted in the United States of America. /s/ KPMG LLP Mountain View, California
May 7, 2004, except as to Note 11, which is as of June 1, 2004. 34




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. Not applicable 
 ITEM 9A. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this
report, the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures as
defined in Exchange Act Rule 13a-15 (e) and 13d  15(e). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are effective in ensuring
that all material information required to be included in this annual report
have been made known to them in a timely fashion. There were no significant
changes in the Companys internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation. 
 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 2004 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 27, 2004. 35




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##### Table of Contents



GIGA-TRONICS INCORPORATED
EXECUTIVE OFFICERS Name
    
    Age
    
    PositionGeorge H. Bruns, Jr.
    
    
    85
    
    
    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
    
    
    53
    
    
    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.Jeffrey T. Lum
    
    
    58
    
    
    President, ASCOR, Inc. since November 1987.
Mr. Lum founded ASCOR in 1987 and has been
President since inception. Mr. Lum was a
founder and Vice President of Autek Systems
Corporation, a manufacturer of precision
waveform analyzers. Mr. Lum is on the Board
of Directors for the Santa Clara Aquamaids,
a non-profit organization dedicated to
advancing athletes in synchronized swimming
to the Olympics games.Daniel S. Markowitz
    
    
    53
    
    
    President of Microsource, Inc. since 2003.
Prior to that, President of Dymatix, a
subsidiary of Giga-tronics, Inc., and its
Ultracision and Viking predecessors from
1996 through 2003. General Manager of Mar
Engineering from 1993 to 1996. Prior to
that, some 20 years of varied positions in
the aerospace industry.
 36




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##### Table of Contents



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 2004 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 27, 2004. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS 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 2004 Annual Meeting of Shareholders,
incorporated herein by reference. Information about securities authorized for
issuance under equity compensation plans is set forth under the heading Equity
Compensation Plan Information of its Proxy Statement for the 2004 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 27, 2004. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information set forth in the Proxy Statement under the section
captioned Transactions with Management and Others is incorporated herein by
reference. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES KPMG LLP served as
Giga-tronics independent auditors for the fiscal year ending March 27, 2004. Audit
Fees
KPMG LLPs fees for audit services for our fiscal 2004 and 2003 were $194,000
and $180,000. Audit-Related Fees
There were no KPMG LLPs fees for audit-related services in our fiscal 2004 or
2003. Tax Fees
There were no KPMG LLPs fees for tax services for our fiscal 2004 and 2003. All Other Fees
We did not incur any fees payable to KPMG for other professional services in
fiscal 2004 or 2003. Audit Committee Pre-Approval Policy
Our Audit Committee has not adopted a policy pre-approving any non-audit
services by the independent accountants. 37




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1)
    
    Financial StatementsThe 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(Page No.)Financial StatementsConsolidated Balance Sheets -
As of March 27, 2004 and
March 29, 2003
    
    
    20Consolidated Statements of Operations -
Years Ended March 27, 2004,
March 29, 2003 and March 30, 2002
    
    
    21Consolidated Statements of Shareholders Equity -
Years Ended March 27, 2004,
March 29, 2003 and March 30, 2002
    
    
    22Consolidated Statements of Cash Flows -
Years Ended March 27, 2004,
March 29, 2003 and March 30, 2002
    
    
    23Notes to Consolidated Financial Statements
    
    
    24 - 33Report of Independent Registered Public Accounting Firm
    
    
    34
 (a)(2)
    
    Schedules
 Form 10-K(Page No.)Consent of Independent Registered Public Accounting Firm
    
    
    42
 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 2004 Annual Report and the Proxy Statement are not to be deemed filed
as part of this report. (a)(3)
    
    ExhibitsReference is made to the Exhibit Index which is found on page 40 of this Annual Report on Form 10-K.(b)
    
    Reports on Form 8-KForm 8-K filed on February 5, 2004, reporting under Items 7 and 12,
announcing the Companys results for the fiscal quarter ended December 27,
2003.
 38




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##### Table of Contents



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 INCORPORATEDBy       /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)
    
    6/3/2004
(Date)/s/ MARK H. COSMEZ II
Mark H. Cosmez II
    
    Vice President, Finance, Chief
Financial Officer and Secretary
(Principal Accounting Officer)
    
    6/15/2004
(Date)/s/ JAMES A. COLE
James A. Cole
    
    Director
    
    6/3/2004
(Date)/s/ KENNETH A HARVEY
Kenneth A. Harvey
    
    Director
    
    6/4/2004
(Date)/s/ ROBERT C. WILSON
Robert C. Wilson
    
    Director
    
    6/3/2004
(Date)/s/ WILLIAM E. WILSON
William E. Wilson
    
    Director
    
    6/3/2004
(Date)
 39




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##### Table of Contents



GIGA-TRONICS INCORPORATED 
   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.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.**10.8
    
    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.**21*
    
    Significant Subsidiaries.23
    
    Consent of Independent Registered Public Accounting Firm. (See page 42 of
this Annual Report on Form 10-K.) Exhibits  31.1
    
    Certification of Chief Executive Officer pursuant to
Section 302 of Sarbanes-Oxley Act.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302
of Sarbanes-Oxley Act.32.1
    
    Certification of Chief Executive Officer pursuant to
Section 906 of Sarbanes-Oxley Act.32.2
    
    Certification of Chief Financial Officer pursuant to Section
906 of Sarbanes-Oxley Act. * Attached as exhibits to this Form 10-K.
** Management contract or compensatory plan or arrangement. 40