e10qsb
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
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| þ |
|
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 |
for the quarterly period ended September 30, 2006
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|
| o |
|
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT |
for the transition period from to
Commission File No. 0-12719
GIGA-TRONICS INCORPORATED
(Exact name of small business issuer as specified in its charter)
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| California
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|
94-2656341 |
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|
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| (State or other jurisdiction of
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|
(IRS Employer Identification No.) |
| incorporation or organization) |
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|
4650 Norris Canyon Road, San Ramon, CA 94583
(Address of principal executive offices)
Issuer’s telephone number: (925) 328-4650
N/A
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the
Exchange Act during the past 12 months (or for shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes o No þ
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the
latest practicable date:
Common stock outstanding as of November 3, 2006: 4,809,021 shares
Transitional Small Business Disclosure Format (Check one) Yes o No þ
GIGA-TRONICS INCORPORATED
INDEX
2
Part I — FINANCIAL INFORMATION
Item 1
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| (In thousands except share data) |
|
September 30, 2006 |
|
|
March 25, 2006 |
|
| (Unaudited) |
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,286 |
|
|
$ |
3,412 |
|
Notes receivable |
|
|
— |
|
|
|
3 |
|
Trade accounts receivable, net |
|
|
1,557 |
|
|
|
3,435 |
|
Inventories |
|
|
5,767 |
|
|
|
4,813 |
|
Prepaid expenses and other assets |
|
|
260 |
|
|
|
219 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
10,870 |
|
|
|
11,882 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
375 |
|
|
|
337 |
|
Other assets |
|
|
103 |
|
|
|
127 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
11,348 |
|
|
$ |
12,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders’ equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,019 |
|
|
$ |
870 |
|
Accrued commissions |
|
|
117 |
|
|
|
171 |
|
Accrued payroll and benefits |
|
|
733 |
|
|
|
781 |
|
Accrued warranty |
|
|
190 |
|
|
|
250 |
|
Customer advances |
|
|
997 |
|
|
|
521 |
|
Other current liabilities |
|
|
379 |
|
|
|
433 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
3,435 |
|
|
|
3,026 |
|
Deferred rent |
|
|
173 |
|
|
|
222 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,608 |
|
|
|
3,248 |
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Preferred stock of no par value; |
|
|
|
|
|
|
|
|
Authorized 1,000,000 shares; no shares outstanding
at September 30, 2006 and March 25, 2006 |
|
|
— |
|
|
|
— |
|
Common stock of no par value; |
|
|
|
|
|
|
|
|
Authorized 40,000,000 shares; 4,809,021 shares at
September 30, 2006 and March 25, 2006
issued and outstanding |
|
|
13,075 |
|
|
|
13,003 |
|
Accumulated deficit |
|
|
(5,335 |
) |
|
|
(3,905 |
) |
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
7,740 |
|
|
|
9,098 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
11,348 |
|
|
$ |
12,346 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
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|
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|
|
|
|
|
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|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (In thousands except per share data) |
|
September 30, 2006 |
|
|
September 24, 2005 |
|
|
September 30, 2006 |
|
|
September 24, 2005 |
|
| (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,934 |
|
|
$ |
3,614 |
|
|
$ |
7,320 |
|
|
$ |
9,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
2,077 |
|
|
|
2,391 |
|
|
|
4,264 |
|
|
|
5,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,857 |
|
|
|
1,223 |
|
|
|
3,056 |
|
|
|
3,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product development |
|
|
938 |
|
|
|
1,043 |
|
|
|
1,899 |
|
|
|
2,009 |
|
Selling, general and administrative |
|
|
1,368 |
|
|
|
1,331 |
|
|
|
2,665 |
|
|
|
2,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
2,306 |
|
|
|
2,374 |
|
|
|
4,564 |
|
|
|
4,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(449 |
) |
|
|
(1,151 |
) |
|
|
(1,508 |
) |
|
|
(925 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net |
|
|
37 |
|
|
|
9 |
|
|
|
66 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes |
|
|
(412 |
) |
|
|
(1,142 |
) |
|
|
(1,442 |
) |
|
|
(911 |
) |
Provision for income taxes |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(413 |
) |
|
|
(1,142 |
) |
|
|
(1,443 |
) |
|
|
(915 |
) |
Income from discontinued operations,
net of income taxes |
|
|
10 |
|
|
|
5 |
|
|
|
13 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(403 |
) |
|
$ |
(1,137 |
) |
|
$ |
(1,430 |
) |
|
$ |
(904 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
(0.08 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.19 |
) |
On discontinued operations |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share |
|
$ |
(0.08 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
(0.08 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.19 |
) |
On discontinued operations |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share |
|
$ |
(0.08 |
) |
|
$ |
(0.24 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
4,809 |
|
|
|
4,778 |
|
|
|
4,809 |
|
|
|
4,755 |
|
Dilutive |
|
|
4,809 |
|
|
|
4,778 |
|
|
|
4,809 |
|
|
|
4,755 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| (In thousands) |
|
September 30, 2006 |
|
|
September 24, 2005 |
|
| (Unaudited) |
|
|
|
|
|
|
|
|
Cash flows provided from operations: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,430 |
) |
|
$ |
(904 |
) |
Adjustments to reconcile net loss to net cash
provided by operations: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
124 |
|
|
|
266 |
|
Deferred rent |
|
|
(49 |
) |
|
|
(42 |
) |
Equity based compensation |
|
|
72 |
|
|
|
— |
|
Changes in operating assets and liabilities |
|
|
1,319 |
|
|
|
1,677 |
|
|
|
|
|
|
|
|
Net cash provided by operations |
|
|
36 |
|
|
|
997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of equipment |
|
|
2 |
|
|
|
— |
|
Purchases of property and equipment |
|
|
(164 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(162 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
— |
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents |
|
|
(126 |
) |
|
|
1,178 |
|
Cash and cash equivalents at beginning of period |
|
|
3,412 |
|
|
|
2,540 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,286 |
|
|
$ |
3,718 |
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information:
| (1) |
|
Cash paid for income taxes was $1 for the six month period ended September 30, 2006. Cash
paid for income taxes was $4 for the six month period ended September 24, 2005. |
See accompanying notes to unaudited condensed consolidated financial statements.
5
GIGA-TRONICS INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by Giga-tronics
(the “Company”), pursuant to the rules and regulations of the Securities and Exchange Commission.
The consolidated results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the fiscal year. In the opinion of
management, the information contained herein reflects all adjustments (consisting of only normal
recurring accruals) necessary to make the consolidated results of operations for the interim
periods a fair statement of such operations. For further information, refer to the consolidated
financial statements and footnotes thereto, included in the Annual Report on Form 10-KSB, filed
with the Securities and Exchange Commission for the year ended March 25, 2006.
Certain prior period amounts have been reclassified to conform with the current period’s
presentation.
(2) Discontinued Operations
In the first quarter of fiscal 2004, Giga-tronics discontinued the operations at its Dymatix
Division due to the substantial losses incurred over the previous two years. In the fourth quarter
of fiscal 2004, Giga-tronics consummated the sale of its Dymatix Division and recognized a gain of
$53,000 in connection with the sale. The sales price was $300,000. The Company received a $50,000
cash payment from the buyer and a $250,000 note receivable with $50,000 due in May 2004 and
quarterly installments of $25,000 due beginning in July 2004. The Company agreed to reschedule the
payment due in May 2004 to August 2004 and, to date, has not received payments due. The note is
secured by collateral and in management’s opinion the value of this collateral deteriorated during
fiscal 2005. Accordingly, the Company considers the note receivable to be impaired and has
recorded a provision for loss of $250,000 through discontinued operations in the 2005 fiscal year.
During the six month period ended September 30, 2006, the Company has received payments of
previously reserved receivables and has recorded $13,000 as income on discontinued operations.
(3) Revenue Recognition
The Company records revenue in accordance with SAB 101 and 104, Revenue Recognition in Financial
Statements. As such, revenue is recorded when there is evidence of an arrangement, delivery has
occurred, the price is fixed and determinable, and collectability is assured. This occurs when
products are shipped, unless the arrangement involves acceptance terms. If the arrangement
involves acceptance terms, the Company defers revenue until product acceptance is received.
The Company provides for estimated costs that may be incurred for product warranties at the time of
shipment. The Company’s warranty policy generally provides four years for the 2400 family of
Microwave Synthesizers and one year for all other products. The estimated cost of warranty
coverage is based on the Company’s actual historical experience with its current products or
similar products.
(4) Inventories
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (FAS 151). FAS 151 requires that
abnormal amounts of idle facility expense, freight, handling costs and spoilage be recognized as
current-period charges. Further, FAS 151 requires the allocation of fixed production overheads to
inventory based on the normal capacity of the production facilities. Unallocated overhead must be
recognized as an expense in the
6
period in which they are incurred. The Company adopted FAS 151 effective March 26, 2006, which did
not have a material impact on the Company’s financial statements and related disclosures.
| |
|
|
|
|
|
|
|
|
| (In thousands) |
|
September 30, 2006 |
|
|
March 25, 2006 |
|
| |
Raw materials |
|
$ |
3,301 |
|
|
$ |
3,025 |
|
Work-in-progress |
|
|
1,835 |
|
|
|
1,309 |
|
Finished goods |
|
|
368 |
|
|
|
246 |
|
Demonstration inventory |
|
|
263 |
|
|
|
233 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
5,767 |
|
|
$ |
4,813 |
|
|
|
|
|
|
|
|
(5) Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net income or loss by the weighted
average common shares outstanding during the period. Diluted earnings per share reflects the net
incremental shares that would be issued if dilutive outstanding stock options were exercised,
using the treasury stock method. In the case of a net loss, it is assumed that no incremental
shares would be issued because they would be antidilutive. In addition, certain options are
considered antidilutive because the options’ exercise price was above the average market price
during the period.
The number of stock options not included in the computation of diluted earnings per share (EPS) for
the three and six month periods ended September 30, 2006 and September 24, 2005 are a result of the
Company’s loss from continuing operations and, therefore, the options are antidilutive. Due to the
Company’s net loss, there were no shares considered to be potentially issuable for the three and
six month periods ended September 30, 2006 and September 24, 2005. Stock options not included in
the computation or earnings per share totaled 698 and 537 with a weighted average exercise price of
excluded options of $2.03 and $3.03 as of September 30, 2006 and September 24, 2005, respectively.
(6) Stock Based Compensation
The Company established a 2005 Equity Incentive Plan which provided for the granting of options for
up to 700,000 shares of Common Stock. Effective March 26, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123(R), Share Based Payment (“SFAS 123(R)”), using the modified
prospective application transition method, which requires recognizing expense for options granted
prior to the adoption date equal to the fair value of the unvested amounts over their remaining
vesting period, based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123 Accounting for Stock Based Compensation, and compensation cost for all
share based payments granted subsequent to January 1, 2006, based on the grant date fair values
estimated in accordance with the provisions of SFAS 123(R). There were 328,900 option grants made
in the six month period ended September 30, 2006 and no grants were made in the same period in the
prior year.
Results for prior periods have not been restated. Prior to March 26, 2006, the Company accounted
for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations (“APB 25”). No stock-based compensation
cost is reflected in net income prior to March 26, 2006, as all options granted under these plans
had an exercise price equal to the market value of the underlying common stock on the date of
grant.
As a result of adopting SFAS 123(R), the Company’s loss before provision for income taxes and net
income for the three and six month periods ended September 30, 2006 was $68,000 and $72,000,
respectively, higher than if the Company had continued to account for share-based compensation
under APB 25. Basic and diluted loss per share for the quarter ended September 30, 2006 would have
been $0.07 without the adoption of SFAS 123(R) compared to $0.08 as reported. Basic and diluted
loss per share for the six months ended September 30, 2006 would have been $0.28 without the
adoption of SFAS 123(R) compared to $0.30 as reported.
7
SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions
in excess of the compensation cost recognized for those options (excess tax benefits) to be
classified as a cash flow from financing in the statement of cash flows. These excess tax benefits
were not significant for the Company for the three and six month periods ended September 30, 2006.
In calculating compensation related to stock option grants, the fair value of each stock option is
estimated on the date of grant using the Black-Scholes option-pricing model and the following
weighted average assumptions:
| |
|
|
|
|
| |
|
Three Months Ended |
| |
|
September 30, 2006 |
Dividend yield |
|
None |
Expected volatility |
|
|
72.80 |
% |
Risk-free interest rate |
|
|
4.97 |
% |
Expected term (years) |
|
|
5 |
|
The computation of expected volatility used in the Black-Scholes option-pricing model is based on
the historical volatility of our share price. The expected term is estimated based on a review of
historical employee exercise behavior with respect to option grants.
A summary of the changes in stock options outstanding for the six months ended September 30, 2006
is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
|
|
|
|
Average |
|
|
Contractual Term |
|
|
Intrinsic |
|
| |
|
Shares |
|
|
Exercise Price |
|
|
(Years) |
|
|
Value |
|
Outstanding at March 25, 2006 |
|
|
438,975 |
|
|
$ |
2.57 |
|
|
|
2.7 |
|
|
$ |
122,173 |
|
Granted |
|
|
328,900 |
|
|
|
1.64 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Forfeited/Expired |
|
|
69,475 |
|
|
|
3.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2006 |
|
|
698,400 |
|
|
$ |
2.03 |
|
|
|
3.6 |
|
|
$ |
2,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
|
161,250 |
|
|
$ |
2.33 |
|
|
|
2.2 |
|
|
$ |
1,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the six month period ended
September 30, 2006 was $1.64. There was no intrinsic value of options exercised during the six
month period ended September 30, 2006.
As of September 30, 2006, there was $419,000 of total unrecognized compensation cost related to
nonvested options granted under the plans. That cost is expected to be recognized over a weighted
average period of one year. The total fair value of options vested during the three and six month
periods ended September 30, 2006 were $16,000 and $25,000. No cash was received from stock option
exercises for the three and six month periods ended September 30, 2006.
The following table illustrates the pro forma effect on net income and earnings per share if the
fair value recognition provisions of SFAS 123 had been applied to the Company’s stock option plans
for the three month and six month periods ended September 24, 2005.
8
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (In thousands except per share data) |
|
September 24, 2005 |
|
|
September 24, 2005 |
|
| |
Net loss, as reported |
|
$ |
(1,137 |
) |
|
$ |
(904 |
) |
Deduct: |
|
|
|
|
|
|
|
|
Stock-based compensation expense included in reported net income |
|
|
— |
|
|
|
— |
|
Add: |
|
|
|
|
|
|
|
|
Total stock-based employee compensation determined under fair value
based method for all awards, net of related tax effect |
|
|
(29 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(1,166 |
) |
|
$ |
(975 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.24 |
) |
|
$ |
(0.19 |
) |
Pro forma |
|
|
(0.24 |
) |
|
|
(0.21 |
) |
Net loss per share – diluted: |
|
|
|
|
|
|
|
|
As reported |
|
|
(0.24 |
) |
|
|
(0.19 |
) |
Pro forma |
|
|
(0.24 |
) |
|
|
(0.21 |
) |
(7) Significant Customers and Industry Segment Information
The Company has four reportable segments: Giga-tronics Instrument Division, ASCOR, Microsource and
Corporate. Giga-tronics Instrument Division produces a broad line of test and measurement
equipment used in the development, test and maintenance of wireless communications products and
systems, flight navigational equipment, electronic defense systems and automatic testing systems.
ASCOR designs, manufactures, and markets a line of switching devices that link together many
specific purpose instruments that comprise automatic test systems. Microsource develops and
manufactures a broad line of YIG (Yttrium, Iron, Garnet) tuned oscillators, filters and microwave
synthesizers, which are used in a wide variety of microwave instruments and devices. Corporate
handles the financing needs of each segment and lends funds to each segment as required and are
eliminated in consolidation.
Information on reportable segments is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| (In thousands) |
|
September 30, 2006 |
|
|
September 24, 2005 |
|
| |
|
|
|
|
|
Pre-tax |
|
|
|
|
|
|
Pre-tax |
|
| |
|
Net Sales |
|
|
Income (loss) |
|
|
Net Sales |
|
|
Income (loss) |
|
Giga-tronics Instrument |
|
$ |
1,606 |
|
|
$ |
(615 |
) |
|
$ |
1,428 |
|
|
$ |
(724 |
) |
ASCOR |
|
|
885 |
|
|
|
(122 |
) |
|
|
914 |
|
|
|
(221 |
) |
Microsource |
|
|
1,443 |
|
|
|
77 |
|
|
|
1,272 |
|
|
|
(417 |
) |
Corporate |
|
|
— |
|
|
|
248 |
|
|
|
— |
|
|
|
220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,934 |
|
|
$ |
(412 |
) |
|
$ |
3,614 |
|
|
$ |
(1,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| (In thousands) |
|
September 30, 2006 |
|
|
September 24, 2005 |
|
| |
|
|
|
|
|
Pre-tax |
|
|
|
|
|
|
Pre-tax |
|
| |
|
Net Sales |
|
|
Income (loss) |
|
|
Net Sales |
|
|
Income (loss) |
|
Giga-tronics Instrument |
|
$ |
3,376 |
|
|
$ |
(1,253 |
) |
|
$ |
4,306 |
|
|
$ |
(675 |
) |
ASCOR |
|
|
1,487 |
|
|
|
(401 |
) |
|
|
2,191 |
|
|
|
(189 |
) |
Microsource |
|
|
2,457 |
|
|
|
(370 |
) |
|
|
2,900 |
|
|
|
(521 |
) |
Corporate |
|
|
— |
|
|
|
582 |
|
|
|
— |
|
|
|
474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,320 |
|
|
$ |
(1,442 |
) |
|
$ |
9,397 |
|
|
$ |
(911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
9
(8) Warranty Obligations
The Company’s warranty policy generally provides four years for the 2400 family of Microwave
Synthesizers and one year for all other products. The Company records a liability for estimated
warranty obligations at the date products are sold. The estimated cost of warranty coverage is
based on the Company’s actual historical experience with its current products or similar products.
For new products, the required reserve is based on historical experience of similar products until
such time as sufficient historical data has been collected on the new product. Adjustments are
made as new information becomes available.
The following provides a reconciliation of changes in the Company’s warranty reserve. The Company
provides no other guarantees.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| (In thousands) |
|
September 30, 2006 |
|
|
September 24, 2005 |
|
|
September 30, 2006 |
|
|
September 24, 2005 |
|
| |
|
|
Balance at beginning of period |
|
$ |
244 |
|
|
$ |
345 |
|
|
$ |
250 |
|
|
$ |
378 |
|
(Reduction) provision, net |
|
|
(26 |
) |
|
|
59 |
|
|
|
16 |
|
|
|
134 |
|
Warranty costs incurred |
|
|
(28 |
) |
|
|
(101 |
) |
|
|
(76 |
) |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
190 |
|
|
$ |
303 |
|
|
$ |
190 |
|
|
$ |
303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF OPERATIONS AND FINANCIAL CONDITION
The forward-looking statements included in this report including, without limitation, statements
containing the words “believes”, “anticipates”, “estimates”, “expects”, “intends” and words of
similar import, which reflect management’s best judgment based on factors currently known, involve
risks and uncertainties. Actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including but not limited to those
listed in Giga-tronics’ Annual Report on Form 10-KSB for the fiscal year ended March 25, 2006 Part
I, under the heading “Certain Factors Which May Adversely Affect Future Operations or an Investment
in Giga-tronics”, and Part II, under the heading “Management’s Discussion and Analysis of Financial
Conditions and Results of Operations”.
Overview
Giga-tronics produces instruments, subsystems and sophisticated microwave components that have
broad applications in both defense electronics and wireless telecommunications. In 2006, our
business consisted of four operating and reporting segments: Instrument Division, ASCOR,
Microsource and Corporate.
Our business is highly dependent on government spending in the defense electronics sector and on
the wireless telecommunications market. While the Company has seen some improvement in its
international defense business, domestic spending remains sporadic. The commercial business
environment has shown some improvement; however, commercial orders for the year declined slightly
due to delays in new product introductions.
The Company continues to monitor costs, including reductions in personnel and other expenses, to
more appropriately align costs with revenues. The Company’s employees have been on salary
reductions over the last three years. Recently, the Company has reversed a portion of the prior
salary reductions and anticipates reinstating previous salary levels contingent on the Company’s
financial condition stabilizing.
The Company released the 2400B synthesizer (part of the 2400 family of products) during the 2006
fiscal year. These products are being accepted by the market and management believes there is
significant room for growth. This release demonstrates the Company’s commitment to new product
development.
In an effort to improve results and make optimal use of its resources, Giga-tronics intends to take
additional steps to restructure the company. The Company will continue to consolidate operations
and functions among its divisions as the Company has done with sales and marketing. Further
integration of product development efforts should enable Giga-tronics to achieve a better return on
its substantial investment in research and development (R&D). New development programs will focus
more on commercial products to reduce the Company’s dependence on the domestic defense sector.
Giga-tronics will look for any available opportunities to operate more efficiently and with greater
focus on customer needs. The Company hopes to accomplish these changes in a business-like manner
that is not overly disruptive to its very talented work force yet is decisive enough to yield
meaningful improvements to the bottom line.
While the management at Microsource estimates that prospects for new orders will improve in this
fiscal year, its short-term growth will be limited as to customer delivery schedules associated
with this new business.
Results of Operations
New orders received from continuing operations in the second quarter of fiscal 2007 increased 215%
to $5,812,000 from the $1,847,000 received in the second quarter of fiscal 2006. Orders received
for the first half of fiscal 2007 increased 19% to $8,745,000 from $7,340,000 for the first half of
fiscal 2006.
11
New orders by segment were as follows for the fiscal periods shown:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| New Orders |
| |
|
Three Months Ended |
|
Six Months Ended |
| (Dollars in thousands) |
|
September 30, 2006 |
|
% change |
|
September 24, 2005 |
|
September 30, 2006 |
|
% change |
|
September 24, 2005 |
| |
Instrument Division |
|
$ |
2,169 |
|
|
|
58 |
% |
|
$ |
1,376 |
|
|
$ |
4,067 |
|
|
|
(2 |
%) |
|
$ |
4,131 |
|
ASCOR |
|
|
1,528 |
|
|
|
378 |
% |
|
|
320 |
|
|
|
2,199 |
|
|
|
(2 |
%) |
|
|
2,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Microsource |
|
|
2,115 |
|
|
|
1301 |
% |
|
|
151 |
|
|
|
2,479 |
|
|
|
155 |
% |
|
|
974 |
|
| |
|
|
Total |
|
$ |
5,812 |
|
|
|
215 |
% |
|
$ |
1,847 |
|
|
$ |
8,745 |
|
|
|
19 |
% |
|
$ |
7,340 |
|
| |
|
|
Orders at the Instrument Division and ASCOR increased in the second quarter primarily due to
an increase in military demand for its products. Orders at Microsource increased primarily due to
an increase in commercial demand for its products.
The following table shows order backlog and related information at the end of the respective
periods:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
September 30, 2006 |
|
% Change |
|
September 24, 2005 |
| |
Backlog of unfilled orders |
|
$ |
11,754 |
|
|
|
(14 |
%) |
|
$ |
13,735 |
|
Backlog of unfilled orders shippable within one year |
|
|
7,980 |
|
|
|
14 |
% |
|
|
7,014 |
|
Previous fiscal year (FY) quarter end backlog
reclassified during year as shippable later than
one year |
|
|
175 |
|
|
|
(6 |
%) |
|
|
186 |
|
| |
Net cancellations during year of previous FY
quarter end one-year backlog |
|
|
862 |
|
|
|
— |
|
|
|
— |
|
Backlog at the end of the second quarter 2007 decreased 14% as compared to the second quarter
end 2006.
The allocation of net sales was as follows for the fiscal periods shown:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allocation of Net Sales by Segment |
| |
|
Three Months Ended |
|
Six Months Ended |
| (Dollars in thousands) |
|
September 30, 2006 |
|
% change |
|
September 24, 2005 |
|
September 30, 2006 |
|
% change |
|
September 24, 2005 |
| |
Instrument Division |
|
$ |
1,606 |
|
|
|
12 |
% |
|
$ |
1,428 |
|
|
$ |
3,376 |
|
|
|
(22 |
%) |
|
$ |
4,306 |
|
ASCOR |
|
|
885 |
|
|
|
(3 |
%) |
|
|
914 |
|
|
|
1,487 |
|
|
|
(32 |
%) |
|
|
2,191 |
|
Microsource |
|
|
1,443 |
|
|
|
13 |
% |
|
|
1,272 |
|
|
|
2,457 |
|
|
|
(15 |
%) |
|
|
2,900 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,934 |
|
|
|
9 |
% |
|
$ |
3,614 |
|
|
$ |
7,320 |
|
|
|
(22 |
%) |
|
$ |
9,397 |
|
| |
|
|
Fiscal 2007 second quarter net sales from continuing operations were $3,934,000, a 9% increase
from the $3,614,000 in the second quarter of 2006. The increase in sales was primarily due to
higher order levels. For the six months ended September 30, 2006 sales declined 22% to $7,320,000
from $9,397,000 for the same period in the prior year due to a decrease in orders in the first
quarter. Sales at the Instrument Division and at Microsource improved in the second quarter due to
increased deliveries for military orders recorded in current and preceding periods. Sales at ASCOR
remained flat during the second quarter.
Cost of sales was as follows for the fiscal periods shown:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of Sales |
| |
|
Three Months Ended |
|
Six Months Ended |
| (Dollars in thousands) |
|
September 30, 2006 |
|
% change |
|
September 24, 2005 |
|
September 30, 2006 |
|
% change |
|
September 24, 2005 |
| |
Cost of sales |
|
$ |
2,077 |
|
|
|
(13 |
%) |
|
$ |
2,391 |
|
|
$ |
4,264 |
|
|
|
(23 |
%) |
|
$ |
5,529 |
|
In the second quarter of fiscal 2007, cost of sales from continuing operations decreased 13%
to $2,077,000 from $2,391,000 for the same period last year. For the six months ended September 30,
2006, the cost of sales from
12
continuing operations declined 23% to $4,264,000 from $5,529,000 for the similar period ending
September 24, 2005. Both of these declines are primarily attributable to the lower material and
labor costs.
Operating expenses were as follows for the fiscal periods shown:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating Expenses |
| |
|
Three Months Ended |
|
Six Months Ended |
| (Dollars in thousands) |
|
September 30, 2006 |
|
% change |
|
September 24, 2005 |
|
September 30, 2006 |
|
% change |
|
September 24, 2005 |
| |
Product development |
|
$ |
938 |
|
|
|
(10 |
%) |
|
$ |
1,043 |
|
|
$ |
1,899 |
|
|
|
(5 |
%) |
|
$ |
2,009 |
|
Selling, general and
administrative |
|
|
1,368 |
|
|
|
3 |
% |
|
|
1,331 |
|
|
|
2,665 |
|
|
|
(4 |
%) |
|
|
2,784 |
|
| |
|
|
Total |
|
$ |
2,306 |
|
|
|
(3 |
%) |
|
$ |
2,374 |
|
|
$ |
4,564 |
|
|
|
(5 |
%) |
|
$ |
4,793 |
|
| |
|
|
Operating expenses from continuing operations decreased 3% or $68,000 in the second quarter of
fiscal 2007 over 2006 due to a decrease of $105,000 in product development costs partially offset
by an increase of $37,000 in selling, general and administrative expenses. Product development
costs from continuing operations decreased 10% or $105,000 in the second quarter of fiscal 2007
primarily due to reduced consulting costs. Selling, general and administrative expenses from
continuing operations increased 3% or $37,000 for the second quarter of fiscal year 2007 compared
to the same period in the prior year. The increase is a result of higher marketing expenses of
$70,000 and administrative expenses of $61,000, offset by lower commission expenses of $94,000 on
lower commissionable sales for the quarter.
Operating expenses from continuing operations decreased 5% or $229,000 for the six months ended
September 30, 2006 over the same period for the prior year due to a decrease of $110,000 in product
development costs and a decrease of $119,000 in selling, general and administrative expenses.
Product development costs from continuing operations decreased 5% or $110,000 for the six months
ended September 30, 2006 primarily due to reduced consulting costs. Selling, general and
administrative expenses from continuing operations decreased 4% or $119,000 for the six months
ended September 30, 2006. The decrease is a result of lower commission expenses of $343,000 on
lower commissionable sales for the quarter, offset by higher marketing expenses of $133,000 and
administrative expenses of $91,000.
Giga-tronics recorded a net loss of $403,000 or $0.08 per fully diluted share for the second
quarter of fiscal 2007 versus a net loss of $1,137,000 or $0.24 per fully diluted share in the same
period last year. Giga-tronics recorded a net loss of $1,430,000 or $0.30 per fully diluted share
for the first half of fiscal 2007 versus a net loss of $904,000 or $0.19 per fully diluted share in
the same period last year.
Financial Condition and Liquidity
As of September 30, 2006, Giga-tronics had $3,286,000 in cash and cash equivalents, compared to
$3,412,000 as of March 25, 2006.
Working capital at the end of the second quarter of fiscal 2007 was $7,435,000 compared to
$8,864,000 at the end of second quarter 2006.
The Company’s current ratio (current assets divided by current liabilities) at September
30, 2006 was 3.2 compared to 3.7 on September 24, 2005.
Cash provided by operations amounted to $85,000 in the first half of fiscal 2007. Cash provided by
operations amounted to $1,039,000 in the same period of fiscal 2006. Cash provided by operations in
the first half of fiscal 2007 is primarily attributed to the net change in operating assets and
liabilities offset by the operating loss in the year. Cash provided by operations in the first
half of fiscal 2006 is primarily attributed to the net change in operating assets and liabilities
offset by the operating loss in the year.
13
Additions to property and equipment were $164,000 in the first half of fiscal 2007 compared to
$66,000 for the same period last year. The increase in capital equipment spending in fiscal 2007
was due to an upgrade of capital equipment enabling the manufacture of new products being released.
On June 19, 2006, the Company renewed its secured revolving line of credit for $2,500,000, with
interest payable at prime rate plus 1%. The borrowing under this line of credit is based on the
Company’s accounts receivable and inventory and is secured by all of the assets of the Company.
The Company had no borrowings under this line of credit during the period ended September 30, 2006.
From time to time, Giga-tronics considers a variety of acquisition opportunities to also broaden
its product lines and expand its market. Such acquisition activity could also increase the
Company’s operating expenses and require the additional use of capital resources. The Company also
intends to maintain research and development expenditures for the purpose of broadening its product
line.
Future tax benefits are subject to a valuation allowance when management is unable to conclude that
its deferred tax assets will more likely than not be realized from the results of operations. The
ultimate realization of deferred tax assets is dependent upon generation of future taxable income
during the periods in which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this assessment. Based on
historical taxable income and projections for future taxable income over the periods in which the
deferred tax assets become deductible, management believes it more likely than not that the Company
will not realize benefits of these deductible differences as of September 30, 2006. Management
has, therefore, established a valuation allowance against its net deferred tax assets as of
September 30, 2006.
Recent Accounting Pronouncements
On September 13, 2006, the Securities and Exchange Commission published Staff Accounting Bulleting
No. 108 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements. The interpretations in this Staff Accounting Bulleting are
being issued to address diversity in practice in quantifying financial statement misstatements and
the potential under current practice to build up improper amounts on the balance sheet. This
guidance will apply to the first fiscal quarter ending after November 15, 2006. We do not believe
the adoption of SAB 108 will have a material impact on our financial position, results of
operations or cash flows.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this section of the report, including statements regarding sales
under “OVERVIEW” and statements under “FINANCIAL CONDITION AND LIQUIDITY”, are forward-looking.
While Giga-tronics believes that these statements are accurate, Giga-tronics’ business is dependent
upon general economic conditions and various conditions specific to the test and measurement,
wireless and semiconductor industries. Future trends and these factors could cause actual results
to differ materially from the forward-looking statements that we have made. In particular:
Giga-tronics’ core business is test and measurement, as well as components for the wireless
communications market, which continues to be soft. The Company’s commercial product backlog has a
number of risks and uncertainties such as the cancellation or deferral of orders, dispute over
performance and our ability to collect amounts due. If the commercial market should decline
further, then shipments in the current year could fall short of plan resulting in a decline in
earnings or further losses. Also, Giga-tronics has a significant number of defense-related orders.
While Giga-tronics has seen some improvement in the defense sector, it is not significant enough
to offset the decline in the commercial sector. If the defense market should decline, shipments in
the current year could be less than anticipated and cause a decrease in earnings.
The market for electronics equipment is characterized by rapidly changing technology and evolving
industry standards. Giga-tronics believes that its future success will depend, in part, upon its
ability to develop and commercialize its existing products, develop new products and applications
and in part to develop, manufacture
14
and successfully introduce new products and product lines with improved capabilities and continue
enhancing existing products. There can be no assurance that Giga-tronics will successfully
complete the development of current or future products or that such products will achieve market
acceptance. Giga-tronics may also experience difficulty obtaining critical parts or components
required in the manufacturing of our products, resulting in an inability to fulfill orders in a
timely manner, which may have a negative impact on earnings. Also, the Company may not timely ramp
manufacturing capacity to meet order demand and quickly adapt cost structures to changing market
conditions.
As part of its business strategy, Giga-tronics has in the past broadened its product lines and
expanded its markets, in part through the acquisition of other business entities, and it may do so
in the future. The Company is subject to various risks in connection with past and any future
acquisitions. Such risks include, among other things, the difficulty of assimilating the
operations and personnel of the acquired companies, the potential disruption of the Company’s
business, the inability of the Company’s management to maximize the financial and strategic
position of the Company by the successful incorporation of acquired technology and rights into the
Company’s product offerings, the maintenance of uniform standards, controls, procedures and
policies, and the potential loss of key employees of acquired companies. No assurance can be given
that any acquisition by Giga-tronics will or will not occur, that if an acquisition does occur,
that it will not materially and adversely affect the Company or that any such acquisition will be
successful in enhancing the Company’s business. Giga-tronics currently contemplates that future
acquisitions may involve the issuance of additional shares of the Company’s common stock. Any such
issuance may result in dilution to all shareholders of the Company, and sales of such shares in
significant volume by the shareholders of acquired companies may depress the price of the Company’s
common stock.
Item 3
Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures as of the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures provide reasonable assurances that the information the Company is required
to disclose in the reports it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time period required by the Commission’s
rules and forms. There were no significant changes in the Company’s internal control over
financial reporting during the period covered by this report that have materially affected, or are
reasonably likely to materially affect our internal controls over financial reporting.
15
Part II — OTHER INFORMATION
Item 1
Legal Proceedings
As of November 3, 2006, Giga-tronics has no material pending legal proceedings. From time to
time, Giga-tronics is involved in various disputes and litigation matters that arise in the
ordinary course of business.
Item 4
Submission of matters to a vote of security holders
Annual Meeting of stockholders was held on September 12, 2006.
(1) The vote for the nominated Directors was as follows:
| |
|
|
|
|
|
|
|
|
| Nominee |
|
In Favor |
|
Withheld |
George H. Bruns, Jr. |
|
|
4,102,700 |
|
|
|
358,218 |
|
James A. Cole |
|
|
4,099,400 |
|
|
|
361,518 |
|
Garrett A. Garrettson |
|
|
4,100,900 |
|
|
|
360,018 |
|
Kenneth A. Harvey |
|
|
4,100,900 |
|
|
|
360,018 |
|
John R. Regazzi |
|
|
3,995,747 |
|
|
|
465,171 |
|
Robert C. Wilson |
|
|
4,078,567 |
|
|
|
382,351 |
|
(2) Other matters voted upon at the meeting were as follows:
| |
(a) |
|
Ratification of the selection of Perry-Smith LLP as independent public
accountants for the fiscal year 2007 was approved as follows: |
| |
|
|
|
|
|
|
|
|
| |
|
No. of Votes on Proposal |
|
Percent of Votes Cast |
For |
|
|
4,443,618 |
|
|
|
92.40 |
% |
Against |
|
|
14,153 |
|
|
|
0.29 |
% |
Abstain |
|
|
3,147 |
|
|
|
0.07 |
% |
Quorum |
|
|
4,460,918 |
|
|
|
92.76 |
% |
Broker non-voted Shares = 0
Outstanding shares on Record Date = 4,809,918
Item 6
Exhibits
Exhibits
| |
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act. |
| |
| |
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act. |
| |
| |
32.1 |
|
Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act. |
| |
| |
32.2 |
|
Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act. |
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
|
|
|
|
GIGA-TRONICS INCORPORATED |
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
By: |
|
|
|
|
|
|
|
Date: November 3, 2006
|
|
/s/ JOHN R. REGAZZI
John R. Regazzi
|
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
Date: November 3, 2006
|
|
/s/ MARK H. COSMEZ II
Mark H. Cosmez II
|
|
|
|
|
Vice President, Finance/ |
|
|
|
|
Chief Financial Officer and Secretary |
|
|
|
|
(Principal Accounting Officer) |
|
|
17