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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to _______________
Commission file number: 0-25560
Celeritek, Inc.
(Exact name of Registrant as specified in its charter)
California 77-0057484
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3236 Scott Boulevard, Santa Clara, California 95054
(Address of principal executive offices, including zip code)
Registrant's telephone number including area code: (408) 986-5060
================================================================================
Securities registered pursuant to Section 12(b) of the Act:
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. Yes [ X ] No [ ]
Indicate by a 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. [ ]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, as of May 16, 1997, was approximately
$56,437,178 based upon the closing price for shares of the Registrant's Common
Stock as reported by the Nasdaq National Market on such date. Shares of Common
Stock held by each executive officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On May 16, 1997, approximately 7,097,896 shares of the
Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II and Part IV of this Report on Form 10-K incorporates information
by reference from Registrant's 1997 Annual Report to Shareholders. Part III of
this Report on Form 10-K incorporates information by reference from Registrant's
Proxy Statement for its 1997 Annual Meeting of Shareholders.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of the risk
factors set forth herein.
GENERAL
Celeritek designs, develops, manufactures and markets high frequency
radio products that provide core transmit and receive functions for wireless
communications systems. The Company's products are utilized primarily in four
markets: (i) microwave radios; (ii) cellular telephone systems and personal
communications services ("PCS"); (iii) satellite-based communications; and (iv)
defense electronics. For the year ended March 31, 1997, approximately 61% of the
Company's total net sales were derived from the commercial wireless
communications markets.
The Company's gallium arsenide radio-frequency integrated circuits
("GaAs RF ICs") and high frequency radio transceiver subsystems and components
operate in the high radio frequency ("RF") range of 800 MHz to 1 GHz and in the
microwave frequency range of 1 GHz to 40 GHz. The Company's wireless subsystem
division's products include subsystems and components for point-to-point radios,
very small aperture terminals ("VSAT") and for cellular and PCS base stations.
The Company's semiconductor division's products include GaAs RF ICs for PCS,
wireless local loop and cellular subscriber equipment and base station
applications. The Company's defense electronics products are for applications
such as missile guidance, electronic countermeasures and communications
satellites. The Company believes that its integrated circuit and system design
expertise, together with its in-house semiconductor foundry and proprietary GaAs
process technologies, have enabled it to provide its OEM customers with
effective solutions tailored to their wireless transmission needs.
The Company markets its products worldwide to OEMs in commercial markets
and prime contractors in defense markets primarily through a network of
manufacturers' representatives managed by the Company's internal sales force.
The Company was incorporated in California in December 1984. The
Company's executive offices are located at 3236 Scott Boulevard, Santa Clara,
California 95054, and its telephone number is (408) 986-5060.
INDUSTRY BACKGROUND
The wireless communications industry has experienced significant
worldwide growth during the past decade. This growth has resulted from increased
business and consumer demand for wireless communications services. Cost
reductions and quality and performance improvements in such wireless
communications products as cellular, PCS and satellite-based voice and data
systems have also contributed to this growth. As demand for wireless
communications services grows, service providers are expanding associated
infrastructure. Wireless communications systems can offer the functional
advantages of wired communications systems without the costly and time consuming
development of an extensive wired infrastructure. The relative advantages of
wireless and wired communications systems with respect to cost, transmission
quality, reliability and other factors depend on the specific applications for
which such systems are used and the existence of a wired or wireless
infrastructure already in place. The factors responsible for the market's
growth, coupled with regulatory changes in the United States and abroad as well
as advances in wireless communications technology, have led to significant
growth in existing wireless telecommunications systems and the emergence of new
wireless applications.
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The growth in the wireless communications industry and the proliferation
of new applications have led to increased communication traffic and congestion
of the historically assigned lower frequency transmission bands. As a
consequence, new wireless communications applications are increasingly operating
at higher frequencies within the RF and microwave spectrum, where there is less
congestion and, due to greater bandwidth, transmission capacities are greater
than at lower frequency bands. To accommodate this trend in part, the FCC has
auctioned certain microwave frequencies for PCS applications in the United
States and governmental agencies worldwide have standardized on L-Band
frequencies (generally 1.5 GHz to 1.6 GHz) for mobile satellite services.
Market demands for high frequency wireless communications services are
being addressed by both satellite and terrestrial-based system architectures.
Historically, satellite telephony technology was funded by the military for
defense applications, and was commercially cost-effective only for specialized
high-capacity applications within the telecommunications and broadcast
industries. Because of improvements in satellite technology resulting in
increased performance, size reductions and lower cost of equipment,
satellite-based wireless voice and data networks are increasingly being used for
a variety of lower-cost, high-volume commercial applications such as mobile and
rural telephony, credit card validation, inventory management and remote
monitoring. Satellite systems are being utilized by developing countries that
lack a terrestrial-based telecommunication infrastructure, and which seek to
provide telephone service for large areas fairly rapidly. Additionally, even
where terrestrial systems exist, satellite systems are used to fill in coverage
for remote areas.
As a result of the demand for new and higher performance wireless
communication services, there has been worldwide growth of cellular networks and
development of new PCS networks. Microwave point-to-point radio networks are
increasingly being used for connecting cellular and PCS base stations to a
mobile telephone switching office ("MTSO"), because they are often a
cost-effective alternative to using wire or fiber connections. Utilization of
radio networks offers more flexibility in base station placement and results in
lower installation, upgrade and maintenance costs than wired networks. In
addition, radio networks are often preferable to wired networks in areas of
difficult topography, where the installation or leasing of wire lines may be
cost-prohibitive or impractical.
The recent worldwide trend toward privatization of public telephone
operators and deregulation of local telephone or "local loop" services has
resulted in increased competition in the delivery of telephone services from
alternative access providers. Many of these new access providers, such as
long-distance telephone carriers, public utilities and cable television
companies, must install or upgrade infrastructure to support basic and enhanced
services. In addition, worldwide demand for basic telephone service has grown,
especially in developing countries. As new infrastructure is established to
deliver local telephone service, service providers are often choosing wireless
transmission systems, which involve a number of short-haul radio connections,
instead of a traditional wired approach, to connect subscribers to the public
telephone network because wireless systems generally offer lower cost and faster
installation.
A core component of any wireless transmission system is the radio
transceiver. A transceiver serves two signal processing functions: as a
transmitter, it transforms modulated voice and data into a radio signal for
wireless transmission; as a receiver, it converts the incoming radio signal back
into modulated voice or data. As use of wireless communications systems
increases and new wireless applications develop, there is a growing need for
cost-effective GaAs RF ICs and high-frequency radio transceiver subsystems,
components that meet demanding performance specifications of signal-to-noise
ratio, gain and distortion, as well as stringent requirements for size, weight
and power consumption.
CELERITEK SOLUTION
The Company provides GaAs RF ICs and high-frequency radio transceiver
subsystems and components to leading suppliers of wireless communications
systems. Using its integrated circuit and system design expertise, together with
its in-house semiconductor foundry and proprietary GaAs process technologies,
the Company provides its OEM customers with radio transceiver solutions tailored
to their specific wireless transmission needs, anticipating and solving system
architecture and performance
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problems. The Company believes that its solution-driven approach enables its
customers to concentrate on their core competencies, accelerate product time to
market and achieve cost savings. The Company has developed an extensive library
of signal processing functions that serve as the standard building blocks for
its products. The Company maintains manufacturing control of its products
through use of a wide range of in-house manufacturing technologies, including
its semiconductor foundry, which the Company believes enables it to reach
production volumes more quickly and provide greater control over quality and
delivery of its products; in addition, the Company can more easily modify system
and circuit designs to reduce wafer processing costs and cycle time. The Company
believes that its engineering capability, coupled with its in-house vertically
integrated manufacturing base, allows the Company to select the most appropriate
technology for a given application to optimize cost and performance, and
provides for a time-efficient product development process, from design through
prototype and into manufacturing.
STRATEGY
The Company's strategy is to identify high-growth markets of the
wireless communications industry, target leading OEMs in those markets and
provide its customers the application-specific products they require by
leveraging its expertise in integrated circuit and system design as well as GaAs
process technologies. The following are the key elements of the Company's
strategy:
Expand Penetration of Wireless Markets. The Company targets selected
high-growth commercial markets and focuses on specific opportunities where the
Company believes that it has developed or can develop a competitive advantage
and become a market leader. The Company targets a mix of established markets,
such point-to-point microwave radio applications, and emerging mainstream
markets, such as PCS, that it expects to generate revenue in the near-term,
while providing for medium and long-term growth.
Target Worldwide Industry Leaders. Many of the wireless communication
markets are dominated by a limited number of large system manufacturers. The
Company targets industry leaders to optimize return from its engineering and
manufacturing resources.
Team with Customers. The Company's sales and engineering teams work
closely with its customers, from design through prototype and into
manufacturing, to help them develop system-wide solutions to their wireless
transmission needs. The Company's customer engineering support team uses its
expertise in components, subsystems and system architecture to develop
application-specific wireless transmission solutions for its customers'
products. The Company has successfully developed close working relationships
with many of its major customers where the Company's engineering organization
assists customers in their analysis and design of new wireless transmissions
systems.
Offer Broader Range of Solutions. The Company focuses on designing
application-specific products for its customers. Historically, the Company
manufactured transceiver components for the defense industry. A few years ago,
in order to address the needs of the commercial wireless communications
industry, the Company began focusing on developing and marketing higher level
assemblies, namely, radio transceiver subsystems. More recently, the Company has
developed a product line of GaAs RF ICs to service the cellular and PCS handset
market. The addition of these products allows the Company to address customer
needs from integrated circuits to fully integrated systems.
Capitalize on Demonstrated Expertise in High Frequency Signal
Processing. Since its inception in 1984, the Company has accumulated a
substantial base of knowledge in the development of system architectures and
integrated circuits for RF and microwave signal processing. The Company has
compiled an extensive library of signal processing functions that it integrates
into higher level systems. The Company markets its products based upon design
experience and expertise in RF and microwave transmission technologies to
wireless communication customers that are increasingly demanding RF and
microwave systems solutions.
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MARKET AND CUSTOMERS
The Company's products are utilized primarily in four markets: (i)
microwave radios; (ii) cellular telephone systems and personal communications
services; (iii) satellite-based communications; and (iv) defense electronics.
Microwave Radios
Wireless voice networks are expanding in response to the build-out of
infrastructure to support demand for cellular telephony, new PCS networks and
emerging wireless local telephone or "local loop" service.
Wireless voice networks generally consist of a series of base stations
that interconnect to an MTSO using microwave point-to-point radios. Subscribers
to these systems can be either mobile, as is the case with cellular and PCS, or
fixed-site, as is the case with wireless local loop networks. Subscribers
transmit to base stations, and base stations transmit to subscribers using RF
radios.
In certain high traffic applications, a point-to-point radio system is a
more economical means to connect base stations than wire or fiber connections. A
radio system can be installed more quickly and at a lower cost than a wired
system, primarily because of limitations and difficulties in installing land
lines for a wired system. The market for point-to-point radios is also
increasing as companies use radios to bypass local telephone operating companies
for private networking applications. Also, as alternative access providers
establish new infrastructures to deliver local telephone service, the Company
believes that they will likely use microwave radio networks as, in many cases,
these networks can be implemented faster and more cost-effectively than
traditional wired approaches.
The Company designs, manufactures and markets microwave radio
transceivers and outdoor units to customers including P-COM, Inc., Harris Corp.
and California Microwave, Inc. for point-to-point radio applications.
Cellular Telephone Systems and Personal Communication Services
As wireless usage grows, wireless service providers continue to improve
the quality and functionality of the services they offer and seek to offer
greater bandwidth for increased capacity. To expand capacity, governments are
making available less congested frequency bands for new wireless communications
services. PCS is a category of digital systems and services that lets users send
and transmit voice messages, e-mail, faxes and other data with a cordless
handset device. PCS technology is also used for wireless private branch exchange
(PBX) office-based systems. In such a system, digital cordless phones have the
same functionality as extensions, ringing when an office member is dialed
regardless of the user's location. These digital PCS networks - which require
more cells (base stations) but are much cheaper to install than cellular ones -
are stimulating competition from cellular providers as they overhaul their
analog networks to compete with the clarity, security and capacity of digital
processing.
The Company sells high-frequency radio transceiver subsystems and
components for PCS and cellular base station applications to customers including
Hughes Network Systems and Qualcomm. The Company has design-ins for GaAs RF ICs
for telephones and base stations for Motorola, Inc., Lucent Technologies, and
L.M. Ericsson Telefonaktiebolaget.
Satellite-based Communications
Very Small Aperture Terminals ("VSAT") are satellite communication
systems utilizing fixed-site terminals. Although primarily used for data
applications such as credit card validation, inventory
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management, accounting data collection and remote monitoring, VSATs are
increasingly being used for telephony applications.
The VSAT market has grown because VSATs have an established track record
of providing reliable, cost-effective alternatives to existing wired networks,
and, where no network exists, the cost of installing the VSAT infrastructure is
generally lower as compared to a wired system. In addition, VSAT system
manufacturers are developing lower cost equipment to expand into higher volume
applications.
Use of VSATs for telephony applications is being driven by the demand
for basic telephone service in rural and urban areas of countries that lack an
adequate telecommunications infrastructure such as India and China in Asia, the
developing nations in Eastern Europe, and South America. VSAT telephony systems
also have applications in remote locations and inaccessible terrains. These
systems offer a cost-effective alternative to traditional wired telephony
systems, with a faster installation time.
The Company produces subsystems and components for use in VSAT data and
telephony systems for system providers including Hughes Network Systems and
Gilat Satellite Networks Ltd., which provide VSAT earth stations and related hub
equipment.
The Company's ability to grow will depend substantially on its ability
to continue to apply its RF and microwave signal processing expertise and GaAs
semiconductor technologies to existing and emerging commercial wireless
communications markets. If the Company is unable to design, manufacture and
market new products for existing or emerging commercial markets successfully,
its business, operating results and financial condition will be adversely
affected. Furthermore, if the markets for the Company's products in the
commercial wireless communications area fail to grow, or grow more slowly than
anticipated, the Company's business, operating results and financial condition
could be materially adversely affected.
The Company's customers establish demanding specifications for
performance and reliability. There can be no assurance that problems will not
occur in the future with respect to performance and reliability of the Company's
products. If such problems occur, the Company could experience increased costs,
delays in or reductions, cancellations or rescheduling of orders and shipments,
product returns and discounts, and product redesigns, any of which would have a
material adverse effect on the Company's business, operating results and
financial condition.
Defense Electronics Market
Military forces worldwide are dependent on sophisticated electronic
equipment. Military aircraft and naval vessels generally contain extensive
electronic countermeasure equipment for defense against enemy missile and radar
systems. These systems typically provide protection for the aircraft or the ship
from incoming enemy missiles by jamming the missiles' tracking systems through
various RF and microwave signal processing techniques. The Company supplies its
transceiver components to major electronic system manufacturers such as
Lockheed-Martin, Northrop-Grumman Corp., and ITT Aerospace for installation into
electronic countermeasure, radar systems and communications satellites for
various military aircraft and missile systems. The Company's customers, in turn,
sell their equipment to major aerospace manufacturers or directly to
governments.
In response to changing market conditions, over the last three years the
Company has shifted its focus from defense markets to commercial wireless
communications markets. During fiscal 1996 and 1997, defense sales accounted for
26% and 39% of total net sales, respectively. The Company does not expect sales
to defense customers to increase from the levels achieved in the 1997 fiscal
year due to reductions in funding for new defense programs. While the Company
has developed and will continue to develop products for defense programs, there
can be no assurance that sales to defense customers will not further decrease in
the future.
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TECHNOLOGY
The Company utilizes its experience and expertise in RF and microwave
circuit design and GaAs semiconductor technology to design and manufacture
transceiver subsystems for commercial and military wireless transmissions
applications. The Company also designs and manufactures component parts for
transceivers such as amplifiers, oscillators and mixers as well as devices such
as transistors, diodes, switches and integrated circuits that make up such
components.
Transceivers
A transceiver serves two signal processing functions: as a transmitter,
it transforms modulated voice or data into a signal for wireless transmission;
as a receiver, it converts the incoming signal back into modulated voice or
data. In the transmission process, lower frequency voice or data signals are
converted to higher frequency signals in components such as mixers or
multipliers by using signals generated by oscillators. The signals are then
amplified so that they will have sufficient strength to reach the next location
and filtered so that only the desired signal will be transmitted. When received,
the signals are weak and are amplified with an amplifier and converted with a
mixer back to the modulated voice or data that was originally transmitted.
Transceivers and component parts for transceivers are circuits that
perform the functions described above. RF and microwave circuits can be either
non-integrated (called hybrid circuits) or integrated (called ICs). The hybrid
circuit is a basic building block of a transceiver. A hybrid circuit typically
consists of a ceramic platform called a substrate on which GaAs field effect
transistors ("FETs") and other electronic components are interconnected to
perform signal processing functions such as amplification, conversion from one
frequency to another and filtering. The performance of the circuit is affected
by the characteristics of the FETs and other electronic components, the
inter-connectivity patterns of various components, the shape, size and location
of the components with respect to each other, the type of material used for the
substrate, and the size, shape and type of enclosure that is designed to hold
the circuit. Predicting and controlling performance in circuit designs at RF and
microwave frequencies requires a combination of design experience and precise
modeling of component performance. Perfecting circuit designs also requires
expertise in partitioning circuit blocks. Knowledge of which functions to
integrate or separate and how various blocks will interact in the system results
in better overall performance and small circuit size.
An IC is a highly integrated circuit on a single chip that is capable of
performing functions similar to those performed by a hybrid circuit and is
typically manufactured using GaAs. Because of their high degree of integration,
ICs are substantially smaller, lighter weight, less costly, more reliable and
more easily incorporated into customers' end equipment than hybrid circuits
intended to perform the same function. However, unlike hybrid circuits, ICs
typically cannot achieve certain specialized performance levels and cannot be
easily customized through tuning. As a result, ICs are particularly well suited
for cost-sensitive, high volume applications.
The packaging and testing of high frequency ICs is particularly
challenging. The plastic packaging of microwave circuits acts as a tuning
element for the high frequency IC, causing the performance of the circuit when
packaged to differ from its performance before packaging. The Company has
invested significant resources resolving these performance problems associated
with package design and plastic packaging compounds and has designed circuits
with low-cost packages that meet specific performance objectives. To test its IC
products, the Company uses its knowledge of RF and microwave test equipment and
test circuit environments to produce test stations that interface directly with
commercially available automated handlers. These test circuits are designed to
closely simulate the end application environment while maintaining very high
throughput to keep manufacturing costs down and to minimize the effort needed to
achieve test correlation with customers.
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Gallium Arsenide
Gallium arsenide, referred to as GaAs, is a semiconductor material that
has an electron mobility that is up to five times faster than silicon. As a
result, it is possible to design GaAs circuits that operate at significantly
higher frequencies than silicon circuits. At similar frequencies, GaAs circuits
will produce higher signal strength (gain) and lower background interference
(noise) than silicon circuits, permitting the transmission and reception of
information over longer distances. GaAs circuits can also be designed to consume
less power and operate more efficiently at lower voltages than silicon circuits,
yielding transceiver products that can operate with smaller batteries or longer
battery life.
The Company's proprietary wafer fabrication process produces line-width
geometries as small as 0.25 microns that permit the production of high
performance, highly integrated devices. In a GaAs process, the circuit is
layered on top of a GaAs wafer that has a specially prepared surface. The
Company has accumulated a sizable base of technology associated with the
specification of this special starting material and uses its knowledge of GaAs
surface preparation techniques to design the surface of its GaAs products to
optimize its customers' specific price and performance objectives. The Company's
GaAs process has seven major steps for both its FET and IC products. This is
simpler than typical silicon processes, which frequently use 15 to 25 steps. As
a result, manufacturing cycle times are generally shorter. The Company's GaAs
manufacturing process is accomplished with commercially available fabrication
equipment that has been used by the silicon industry for many years. The Company
is able to use contact photolithography equipment in its fabrication process,
which is less expensive than alternatives, such as stepper technology and E-beam
technology typically used with silicon processing. Notwithstanding the simpler
GaAs manufacturing process, the production of GaAs integrated circuits has been
and continues to be more costly than the production of silicon devices. This
cost differential relates primarily to higher costs of raw materials, lower
production yields associated with GaAs technology and higher unit costs
associated with lower production volumes.
The markets in which the Company competes are characterized by rapidly
changing technologies, evolving industry standards and continuous improvements
in products and services. There can be no assurance that the Company will be
able to respond to technological advances, changes in customer requirements or
changes in regulatory requirements or industry standards, and any significant
delays in the development, introduction or shipment of products could have a
material adverse effect on the Company's business, operating results and
financial condition.
PRODUCTS
The Company's products include a range of GaAs RF ICs and high-frequency
radio transceiver subsystems and components used for commercial and defense
wireless communications applications. The Company's GaAs RF ICs and
high-frequency radio transceiver subsystems and components operate in the RF
range of 800 MHz to 1 GHz and in the microwave frequency range of 1 GHz to 40
GHz. The Company's products include subsystems for microwave radios, cellular
and PCS base stations and satellite communication systems. The Company's
component products include GaAs RF ICs for PCS, wireless local loop and cellular
subscriber equipment and base station applications. The Company's defense
electronics products are for applications such as missile guidance, electronic
counter-measures and communications satellites.
The Company offers both standard products with published data sheets and
price lists and products based upon application-specific designs for its major
customers. The Company's transceiver subsystems are generally based upon
application-specific designs. The standard building blocks for these designs are
derived from the Company's extensive library of signal processing functions used
in products previously designed and manufactured by the Company. The Company's
semiconductor products are generally standard products or slight modifications
of standard products.
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GaAs RF ICs, Radio Transceiver Subsystems and Components
The Company manufactures the key components of the transceiver,
including amplifiers, filters, mixers and oscillators, in three different forms:
hybrid circuits, high frequency circuit boards using surface mount technology
and GaAs ICs. The Company's transceiver subsystems are multifunction assemblies
manufactured by integrating the Company's own components with components from
third party vendors and may include lower frequency signal processing and
antenna functionality.
Amplifiers are key transceiver components that determine many of the
basic performance characteristics of a signal processing system. Low noise
amplifiers are used to receive low level signals and increase their level to a
usable range. Power amplifiers are used to increase signal levels to the
required transmit power range. The Company offers amplifiers which cover a wide
frequency range from 500 MHz to 40 GHz in various commercial and defense
transmission bands. The Company specializes in medium power amplifiers for
narrow band commercial applications and broadband defense electronics
applications. Amplifiers represent the Company's major type of product for sale
to its defense customers.
Semiconductors
The Company offers a line of GaAs semiconductor products to OEM
customers for use in the commercial wireless communications markets, in addition
to those semiconductor products that it incorporates into its own assemblies.
The GaAs semiconductor products produced by the Company are transceiver
components such as amplifiers, switches and converters. Some of these products
are combined to function as complete transceivers. The Company's current
revenues from semiconductor products are derived principally from the sale of
discreet GaAs FETs and GaAs ICs for use in wireless communications applications
such as cellular, PCS and wireless local loop base stations and subscriber
units.
SALES AND MARKETING
The Company markets its products worldwide to OEMs in commercial markets
and prime contractors in defense markets primarily through a network of
manufacturers' representatives managed by the Company's internal sales force of
nine people. This internal sales force is generally organized by geographic
territory. The Company has contracts with 15 manufacturers' representatives in
the United States and 15 international representatives which are located in
Western Europe, the Middle East and Asia. As part of its marketing efforts,
Celeritek advertises in major trade publications and attends major industry
shows in the commercial wireless communications and defense markets.
After the Company has identified key potential customers in its market
segments, the Company makes sales calls with its manufacturers' representatives
and its own sales, management and engineering personnel. Many of the companies
entering the wireless communications markets possess expertise in digital
processing and wired systems but relatively little experience in analog signal
processing and wireless transmission. In order to promote widespread acceptance
of its transceiver products and provide customers with support for their
wireless transmission needs, the Company's sales and engineering teams work
closely with its customers to develop tailored solutions to their wireless
transmission needs. The Company believes that its customer engineering support
provides it with a key competitive advantage.
During the year ended March 31, 1997, Celeritek had two customers, P-Com
and Westinghouse, who accounted for approximately 20% and 11% of total net
sales, respectively. In fiscal 1996, two customers, P-Com and Westinghouse,
accounted for 29% and 19% of total net sales, respectively, and in fiscal 1995,
no customer accounted for over 10% of total net sales. A relatively limited
number of OEM customers have historically accounted for a substantial portion of
the Company's sales. In fiscal 1996 and 1997, sales to the top ten customers
accounted for approximately 74% and 66%, respectively, of total net sales. The
Company expects that sales of its products to a limited number of OEM customers
will continue to account for a high percentage of its sales for the foreseeable
future.
For fiscal 1997 and fiscal 1996, sales from international customers
accounted for 20% and 12%, respectively, of total net sales, primarily for
defense electronics applications. In addition, many of the Company's domestic
customers sell their products outside of the United States. These sales carry a
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number of inherent risks, including the need for export licenses, tariffs and
other potential trade barriers; reduced protection for intellectual property
rights in some countries; the impact of recessionary environments in economies
outside the United States and generally longer receivables collection periods.
BACKLOG
The Company includes in its backlog all purchase orders and contracts
for products with requested delivery dates within twelve months.
The Company's backlog at March 31, 1997 was approximately $35 million,
of which 50% was for commercial customers, as compared to approximately $34
million at March 31, 1996, of which 66% was for commercial customers. Generally,
purchase orders in backlog are subject to cancellation without penalty at the
option of the customer, and from time to time the Company has experienced
cancellation of orders in backlog. Most of the Company's quarterly net sales
have generally resulted from orders obtained in prior quarters. The Company's
backlog is subject to fluctuations and is not necessarily indicative of the
Company's future sales. In addition, there can be no assurance that current
backlog will necessarily lead to sales in any future period.
Of the Company's current backlog, approximately one third is
attributable to orders received from two customers. If the Company were to lose
a major customer, or if orders by a major OEM customer were to otherwise
decrease or be delayed, including reductions due to market or competitive
conditions in the wireless communications markets or decreases in government
defense spending, the Company's business, operating results and financial
condition would be materially adversely affected.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on the design
of new integrated circuits, improvement of existing device performance, process
improvements in GaAs wafer fabrication and improvements in device packaging. As
of March 31, 1997, Celeritek employed 33 people to support its research and
development efforts. In addition to their design and development activities, the
engineering staff participates with the Company's marketing department in
proposal preparation and applications support for customers. The Company has
developed an extensive library of proven circuits that can be integrated into
higher level systems. The Company believes that its ability to leverage this
library of modules reduces product time to market and development costs.
The Company uses advanced RF and microwave development tools, including
RF and microwave test equipment and computer aided design ("CAD") systems. The
Company uses workstations and analog simulation tools for circuit design and CAD
systems for mechanical design and thin film mask layouts.
The Company's total expenses for research and development for the fiscal
years ended March 31, 1997, 1996 and 1995 were $4.3 million, $3.8 million, and
$5.3 million, respectively.
MANUFACTURING
The Company substantially relies on its internal manufacturing
capabilities for production of its radio transceiver subsystems and transceiver
components, GaAs FETs and RF ICs, hybrid circuits and high frequency circuit
boards with surface mount technology. The Company's extensive quality control
system is designed to meet the requirements of sophisticated defense and
commercial communications products. The Company has been approved by defense
customers under the requirements of the U.S. military's MIL-Q9858A quality
system, which approval is also generally accepted by commercial customers.
The Company maintains manufacturing control of its products through the
use of its in-house GaAs wafer production facility. The fabrication of
semiconductor products is highly complex and sensitive to dust and other
contaminants, requiring production in a highly controlled, clean environment.
The Company's facility includes clean rooms, with class 10 performance (no more
than ten particles larger than 0.5 microns in size per cubic foot of air) for
fabrication operations. Minute impurities,
10
<PAGE> 11
difficulties in the fabrication process or defects in the masks used to print
circuits on the wafer can cause a substantial percentage of the wafers to be
rejected or numerous die on each wafer to be nonfunctional. In addition, the
less mature stage of GaAs technology leads to somewhat greater difficulty in
circuit design and in controlling parametric variations, thereby yielding fewer
good die per wafer. In addition, the more brittle nature of the GaAs wafers can
result in higher processing losses. To maximize wafer yield and quality, the
Company tests its products at various stages in the fabrication process,
maintains continuous reliability monitoring and conducts numerous quality
control inspections throughout the entire production flow using analytical
manufacturing controls.
The Company manufactures its microwave circuits in-house using thin film
hybrid techniques that deposit resistors and thin film metalization on the
ceramic substrates of its circuits. The Company mounts FETs, ICs and passive
components to the substrate and wire bonds these components to the metalization.
The Company assembles the circuits in packages and tunes and electrically tests
the circuits prior to sealing and environmentally testing them.
The Company's manufacturing operations entail a high degree of fixed
costs. These fixed costs consist primarily of investments in manufacturing
equipment, repair, maintenance and depreciation costs related to such equipment
and fixed labor costs related to manufacturing and process engineering. The
Company has in the past and may in the future experience significant delays in
product shipments due to lower than expected production yields, and there can be
no assurance that the Company will not experience problems in maintaining
acceptable yields in the future. The Company's manufacturing yields vary
significantly among products, depending on a given product's complexity and the
Company's experience in manufacturing the product. To the extent that the
Company does not maintain acceptable yields, its operating results could be
adversely affected. In addition, during periods of decreased demand, high fixed
wafer fabrication costs could have a material adverse effect on the Company's
operating results.
Certain components used by the Company in its existing products are only
available from single sources, and certain other components are presently
available or acquired only from a limited number of suppliers. In the event that
its single source suppliers are unable to fulfill the Company's requirements in
a timely manner, the Company may experience an interruption in production until
alternative sources of supply can be obtained, which could damage customer
relationships or have a material adverse effect on the Company's business,
operating results and financial condition.
COMPETITION
The Company's current and potential competitors include specialized
manufacturers of RF and microwave signal processing components, large,
vertically integrated systems producers that manufacture their own GaAs
components and independent suppliers of silicon and GaAs integrated circuits
that compete with the Company's GaAs devices. Furthermore, the Company currently
supplies components to large OEM customers that are continuously evaluating
whether to manufacture their own components or purchase them from outside
sources. The Company expects significantly increased competition both from
existing competitors and a number of companies that may enter the wireless
communications market. In the area of wireless subsystems products, the Company
competes primarily with Hewlett-Packard Co., Remec, Inc., Microwave Technology,
Inc. (Taiwan) and Mitsubishi Corporation. In the GaAs RF IC products, the
Company competes primarily with ANADIGICS, Inc. and TriQuint Semiconductor Inc.
In the military market, the Company competes primarily with CTT Inc. and Litton
Industries, Inc. Most of the Company's current and potential competitors have
significantly greater financial, technical, manufacturing and marketing
resources than the Company and have achieved market acceptance of their existing
technologies. The ability of the Company to compete successfully depends upon a
number of factors, including the rate at which customers incorporate the
Company's products into their systems, product quality and performance, price,
experienced sales and marketing personnel, rapid development of new products and
features, evolving industry standards and the number and nature of the Company's
competitors. There can be no assurance that the Company will be able to compete
successfully in the future.
11
<PAGE> 12
GOVERNMENT REGULATIONS
The Company's products are incorporated into wireless communications
systems which are subject to various FCC regulations. Regulatory changes,
including changes in the allocation of available frequency spectrum, could
significantly impact the Company's operations by restricting development efforts
by the Company's customers, obsoleting current products or increasing the
opportunity for additional competition. Changes in, or the failure by the
Company to comply with, applicable domestic and international regulations could
have an adverse effect on the Company's business, operating results and
financial condition. In addition, the increasing demand for wireless
communications has exerted pressure on regulatory bodies worldwide to adopt new
standards for such products and services, generally following extensive
investigation of and deliberation over competing technologies. The delays
inherent in this government approval process have in the past, and may in the
future, cause the cancellation, postponement or rescheduling of the installation
of communications systems by the Company's customers, which in turn may have a
material adverse effect on the sale of products by the Company to such
customers.
The Company is subject to a variety of federal, state and local laws,
rules and regulations related to the discharge and disposal of toxic, volatile
and other hazardous chemicals used in its manufacturing process. The failure to
comply with present or future regulations could result in fines being imposed on
the Company, suspension of production or a cessation of operations. Such
regulations could require the Company to acquire significant equipment or to
incur substantial other expenses in order to comply with environmental
regulations. Any past or future failure by the Company to control the use of, or
to restrict adequately the discharge of, hazardous substances could subject the
Company to future liabilities and could have a material adverse effect on the
Company's business, operating results and financial condition.
PROPRIETARY RIGHTS
The Company's ability to compete will depend, in part, on its ability to
obtain and enforce intellectual property protection for its technology in the
United States and internationally. Although the Company has three U.S. patents,
expiring from 2005 to 2008, the Company currently relies primarily on a
combination of trade secrets, copyrights, trademarks and contractual rights to
protect its intellectual property. None of the Company's patents are critical to
the Company's business. There can be no assurance that the steps taken by the
Company will be adequate to deter misappropriation or impede third party
development of its technology. In addition, the laws of certain foreign
countries in which the Company's products are or may be sold do not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States. The failure of the Company to protect its proprietary information
could have a material adverse effect on the Company's business, operating
results and financial condition.
From time to time, third parties, including competitors of the Company,
may assert exclusive patent, copyright and other intellectual property rights to
technologies that are important to the Company. There can be no assurance that
third parties will not assert infringement claims against the Company in the
future, that assertions by third parties will not result in costly litigation or
that the Company would prevail in such litigation or be able to license any
valid and infringed patents from third parties on commercially reasonable terms
or at all. Litigation, regardless of its outcome, could result in substantial
cost and diversion of resources of the Company. Any infringement claim or other
litigation against or by the Company could materially adversely affect the
Company's business, operating results and financial condition.
EMPLOYEES
As of March 31, 1997, the Company had a total of 370 employees including
14 in marketing, sales and related customer support services, 33 in research and
development, 310 in manufacturing and 13 in administration and finance. The
Company's future success depends in significant part upon the continued service
of its key technical and senior management personnel and its continuing ability
to attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is
12
<PAGE> 13
intense, and there can be no assurance that the Company can retain its key
managerial and technical employees or that it can attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. None of
the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees to
be good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, research and
development and manufacturing facility is located in an approximately 57,000
square foot building in Santa Clara, California which is leased through
September 30, 2000. In April, 1997, the Company leased an additional 25,000
square foot building in Santa Clara, California to house its wireless subsystems
manufacturing operation. The Company believes that its existing facilities are
adequate for its current needs and that additional space will be available as
needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not subject to any legal proceedings that, if adversely
determined, would cause a material adverse effect on the Company's business,
operating results and financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter ended March 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by this item is included under "Market for
Registrants' Common Stock" in the Company's 1997 Annual Report to Shareholders
and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under "Summary
Consolidated Financial Information" in the Company's 1997 Annual Report to
Shareholders and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's 1997 Annual Report to Shareholders and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included from the Company's
1997 Annual Report to Shareholders under the headings listed under Item 14(a)1,
of Part IV of this Report on Form 10-K and under "Unaudited Quarterly
Consolidated Financial Data" in the Company's 1997 Annual Report to Shareholders
and is incorporated herein by reference.
13
<PAGE> 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item relating to the Company's
directors and nominees is included under "Election of Directors" and "Section
16a Beneficial Reporting Requirements" in the Company's Proxy Statement to be
filed in connection with its 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
The information required by this item relating to the Company's
executive officers follows:
Executive Officers
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Tamer Husseini 54 Chairman of the Board, President and Chief Executive Officer
Margaret E. Smith 49 Vice President, Finance and Chief Financial Officer
Robert D. Jones 57 Senior Vice President, Marketing and Sales
William W. Hoppin 34 Vice President, Sales
Gary J. Policky 55 Vice President, Engineering and Chief Technical Officer
Richard G. Finney 47 Vice President, Manufacturing
</TABLE>
TAMER HUSSEINI, a founder of the Company, has served as its Chairman of
the Board, President and Chief Executive Officer since the Company's
organization in 1984. Prior to founding the Company, Mr. Husseini was employed
by Granger Associates, a telecommunications company, as Vice President from 1982
until 1984. Before joining Granger Associates, Mr. Husseini was employed by
Avantek, Inc. ("Avantek"), a manufacturer of integrated circuits and components
for wireless communications applications and now a subsidiary of Hewlett-Packard
Company, from 1972 until 1982, most recently as General Manager of the Microwave
Transistor Division.
MARGARET E. SMITH joined the Company in November 1989 as Controller and
has served as Vice President, Finance and Chief Financial Officer since January
1994. Prior to joining the Company, Mrs. Smith was employed by Avantek from 1980
until September 1989 where she served most recently as a Divisional Controller.
WILLIAM W. HOPPIN, joined the Company as a design engineer and has since
held various positions in the Company and was appointed Vice President, Sales in
April, 1997. Prior to joining the Company, Mr. Hoppin received his Bachelors of
Science in Electrical Engineering from Cornell University.
ROBERT D. JONES, a founder of the Company, has served as Vice President,
Marketing since the Company's organization in 1984. Prior to founding the
Company, Mr. Jones was employed by Avantek from 1968 until 1981 in Marketing and
Sales, where he served most recently as Director of Marketing, and worked from
1981 to 1984 as an Independent Marketing Consultant.
GARY J. POLICKY, a founder of the Company, has served as Vice President,
Signal Processing Operations since the Company's organization in 1984. Prior to
founding the Company in 1984, Mr. Policky was employed from 1969 until 1984 at
Avantek as Engineering Manager of Microwave Components and Amplifiers.
14
<PAGE> 15
RICHARD G. FINNEY joined the Company in 1985 as Director of
Manufacturing and has served as Vice President, Manufacturing since January
1996. Prior to joining the Company, Mr. Finney was employed by Loral, Western
Operations in 1984 as Director of Operations. Before joining Loral, Western
Operations, Mr. Finney was employed by Avantek from 1974 to 1984, most recently
as a manufacturing manager.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under "Executive
Compensation and Other Information" in the Company's Proxy Statement to be filed
in connection with its 1997 Annual Meeting of Shareholders and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement to be filed in connection with its 1997 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed in connection with its 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements and Report of Ernst & Young LLP, Independent
Auditors.
The following financial statements of the Registrant and Report of Ernst
& Young, LLP, Independent Auditors, are contained in the Company's 1997 Annual
Report to Shareholders and are incorporated by reference in Item 8 of Part II of
this Report on Form 10-K:
Consolidated Balance Sheets as of March 31, 1997 and 1996.
Consolidated Statements of Income for the years ended March 31, 1997,
1996 and 1995.
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flow for the years ended March 31, 1997,
1996, and 1995.
Notes to Consolidated Financial Statements.
Report of Ernst & Young, LLP, Independent Auditors.
2. Financial Statements Schedules
The following financial statement schedule is filed as part of the
Report on Form 10-K on page S-1 and is incorporated herein by reference.
15
<PAGE> 16
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes therein.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 (1) Restated Articles of Incorporation of Registrant.
3.3 (1) By laws of Registrant, as amended to date.
4.1 (1) Form of Registrant's Stock Certificate.
4.2 (1) Third Modification Agreement (including Registration Rights
Agreement) dated July 30, 1990, between the Registrant and
certain investors.
10.1 (1) 1985 Stock Incentive Program and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement.
10.2 (1) 1994 Stock Option Plan, as amended, and form of Stock Option
Agreement.
10.3 (1) Employee Qualified Stock Purchase Plan and form of Subscription
Agreement.
10.4 (1) Outside Director's Stock Option Plan and form of Stock Option
Agreement.
10.5 (1) Form of Directors' and Officers' Indemnification Agreement.
10.6 (1) Business Loan Agreement dated September 11, 1992 between the
Registrant and Silicon Valley Bank and Promissory Notes issued
thereunder.
10.9 (1) Lease Agreement dated April 1, 1993 between the Registrant and Berg &
Berg Development.
*10.11 (1) Purchase Order from Westinghouse Electric Corporation dated April 14,
1994, along with addenda and exhibits.
10.12 Lease agreement dated April 11, 1997 between the Registrant and
Spieker Properties, L.P.
10.13 Loan modification agreement dated August 14, 1996 between
Registrant and Silicon Valley Bank.
11 Statement regarding computation of earnings per share.
13 Annual Report to Shareholders for the year ended March 31, 1997.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial data schedules.
</TABLE>
*Confidential Treatment granted for portions of this Exhibit.
(1) Incorporated by reference to the identically numbered exhibits to the
Company's Registration Statement of Form S-1 (Commission File No. 33-98854),
which became effective on December 19, 1995.
b. Reports on Form 8-K
None during the quarter ended March 31, 1997.
16
<PAGE> 17
SCHEDULE II
CELERITEK, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS (1) OF PERIOD
- ----------------------------------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31, 1997 $519 $186 $185 $520
ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEAR ENDED MARCH 31, 1996 $491 $105 $ 77 $519
ALLOWANCE FOR DOUBTFUL ACCOUNTS
YEAR ENDED MARCH 31, 1995 $727 $$60 $296 $491
ALLOWANCE FOR DOUBTFUL ACCOUNTS
</TABLE>
- ----------------------------------------------------------
(1) DEDUCTIONS REPRESENT WRITE-OFFS OF UNCOLLECTABLE ACCOUNTS RECEIVABLE.
<PAGE> 18
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, thereupon duly authorized.
CELERITEK, INC.
Date: June 6, 1997 By: /s/ TAMER HUSSEINI
------------------
Tamer Husseini
Chairman of the Board, President,
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ TAMER HUSSEINI President, Chief Executive Officer June 6, 1997
- ------------------ and Chairman of the Board of
Tamer Husseini Directors (Principal Executive Officer)
/s/ MARGARET E. SMITH Vice President, Finance and Chief June 6, 1997
- --------------------- Financial Officer (Principal Financial
Margaret E. Smith and Accounting Officer)
/s/ WILLIAM H. YOUNGER JR. Director June 6, 1997
- --------------------------
William H. Younger, Jr.
/s/ CHARLES P. WATIE Director June 6, 1997
- --------------------
Charles P. Waite
/s/ WILLIAM D. RASDAL Director June 6, 1997
- ---------------------
William D. Rasdal
/s/ ROBERT MULLALEY Director June 6, 1997
- -------------------
Robert Mullaley
</TABLE>
<PAGE> 19
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 (1) Restated Articles of Incorporation of Registrant.
3.3 (1) By laws of Registrant, as amended to date.
4.1 (1) Form of Registrant's Stock Certificate.
4.2 (1) Third Modification Agreement (including Registration Rights Agreement)
dated July 30, 1990, between the Registrant and certain investors.
10.1 (1) 1985 Stock Incentive Program and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement.
10.2 (1) 1994 Stock Option Plan, as amended, and form of Stock Option Agreement.
10.3 (1) Employee Qualified Stock Purchase Plan and form of Subscription Agreement.
10.4 (1) Outside Director's Stock Option Plan and form of Stock Option Agreement.
10.5 (1) Form of Directors' and Officers' Indemnification Agreement.
10.6 (1) Business Loan Agreement dated September 11, 1992 between the Registrant
and Silicon Valley Bank and Promissory Notes issued thereunder.
10.9 (1) Lease Agreement dated April 1, 1993 between the Registrant and
Berg & Berg Development.
*10.11 (1) Purchase Order from Westinghouse Electric Corporation dated April 14, 1994,
along with addenda and exhibits.
10.12 Lease agreement dated April 11, 1997 between the Registrant and
Spieker Properties, L.P.
10.13 Loan modification agreement dated August 14, 1996 between Registrant
and Silicon Valley Bank.
11 Statement regarding computation of earnings per share.
13 Annual Report to Shareholders for the year ended March 31, 1997.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial data schedules.
</TABLE>
*Confidential Treatment granted for portions of this Exhibit.
(1) Incorporated by reference to the identically numbered exhibits to the
Company's Registration Statement of Form S-1 (Commission File No.
33-98854), which became effective on December 19, 1995.
<PAGE> 1
EXHIBIT 10.12
LEASE SUMMARY
George Reilly
CPS, The Commercial Property Services Company
1740 Technology Drive, Suite 180
San Jose, CA 95110
(408) 437-3439
APRIL 22, 1997
[CPS LOGO]
PREMISES: 2905/2909 Stender Way, Santa Clara
SQUARE FEET: 25,690 square feet
LEASE COMMENCEMENT: July 1, 1997
LEASE EXPIRATION: June 30, 2005
LANDLORD: Spieker Properties, L.P.
LANDLORD CONTACT NAME: Dave Wilbur
LANDLORD CONTACT NUMBER: (415) 856-5400
TERM OF LEASE: Eight (8) years
TENANT IMPROVEMENT ALLOWANCE: None
INITIAL RENT: $1.27 per square foot
RENT ADJUSTMENTS: $1.32, $1.37, $1.43, $1.486, $1.545, $1.607,
$1.67
SECURITY DEPOSIT: $48,000.00
OPTIONS: None
PRESENTED TO
PEGGY SMITH, CELERITEK
<PAGE> 2
BASIC LEASE INFORMATION
Lease Date: April 11, 1997
Tenant: Celeritek, Inc., a California corporation
Address of Tenant: 3236 Scott Boulevard, Santa Clara, California
Landlord: Spieker Properties, L.P., a California limited
partnership
Address of Landlord: 2180 Sand Hill Road, #200, Menlo Park, CA 94025
Project Description: That approximately 51,150 square foot concrete tilt-up
building and its related paving and landscaping
situated on 3.84 acres of land located at 2905/2909
Stender Way, Santa Clara, California, as outlined in
green on the attached Exhibit A.
Building Description: That approximately 51,150 square foot concrete tilt-up
building situated on 3.84 acres of land located at
2905/2909 Stender Way, Santa Clara, California, as
outlined in blue on the attached Exhibit A.
Premises: Approximately 25,690 square feet of that approximately
51,150 square foot concrete tilt-up building and its
related paving and landscaping situated on 3.84 acres of
land located at 2909 Stender Way, Santa Clara,
California, as outlined in red on the attached Exhibit
A.
Permitted Use: Research and development, manufacturing, assembly,
marketing, (non-retail) sales of electronic equipment
for the wireless communication industry, including
associated general office, storage, shipping and
receiving uses in compliance with all applicable laws
and ordinances of the City of Santa Clara.
Parking/
Occupancy Density: Parking and occupant density are not to exceed 3.6/1,000
square feet, on a non-assigned and, non-exclusive basis.
Scheduled Term
Commencement Date: July 1, 1997
Length of Term: Eight (8) Years, beginning from the first day of the
first full month of occupancy.
Rent:
Base Rent: see addendum 1 $_____________
Estimated First Year Basic
Operating Costs $3,043 per month
----------------
Security Deposit: Forty-eight thousand dollars ($48,000.00).
Tenant's
Proportionate Share: 50.22%
The foregoing Basic Lease information is incorporated into and made part of
this Lease. Each reference in this lease to any Basic Lease information shall
mean the respective information above and shall be construed to incorporate all
of the terms provided under the particular Lease paragraph pertaining to such
information. In the event of any conflict between the Basic Lease Information
and the lease, the latter shall control.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Basic Lease Information ............................................... 1
Table of Contents ..................................................... 2
1. Premises .............................................................. 3
2. Possession and Lease Commencement ..................................... 3
3. Term .................................................................. 3
4. Use ................................................................... 3
5. Rules and Regulations ................................................. 3
6. Rent .................................................................. 3
7. Basic Operating Cost .................................................. 4
8. Insurance and Indemnification ......................................... 5
9. Waiver of Subrogation ................................................. 5
10. Landlord's Repairs and Services ....................................... 5
11. Tenant's Repairs ...................................................... 5
12. Alterations ........................................................... 5
13. Signs ................................................................. 6
14. Inspection/Posting Notices ............................................ 6
15. Utilities ............................................................. 6
16. Subordination ......................................................... 6
17. Financial Statements .................................................. 6
18. Estoppel Certificate .................................................. 6
19. Security Deposit ...................................................... 6
20. Tenant's Remedies ..................................................... 6
21. Assignment and Subletting ............................................. 7
22. Quiet Enjoyment ....................................................... 7
23. Condemnation .......................................................... 7
24. Casualty Damage ....................................................... 7
25. Holding Over .......................................................... 8
26. Default ............................................................... 8
27. Liens ................................................................. 9
29. Transfers by Landlord ................................................. 9
30. Right of Landlord to Perform Tenant's Covenants ....................... 9
31. Waiver ................................................................ 9
32. Notices ............................................................... 9
33. Attorneys' Fees ....................................................... 9
34. Successors and Assigns ................................................ 9
35. Force Majeure ......................................................... 9
36. Miscellaneous ......................................................... 9
37. Additional Provisions ................................................. 10
EXHIBIT "A" ........................................Site Plan, Legal Description
EXHIBIT "B" .................................................Existing Floor Plan
EXHIBIT "C" ...............................................Exterior Improvements
EXHIBIT "D" .......................................Form of Termination Agreement
EXHIBIT "HM" ........................................List of Hazardous Materials
</TABLE>
<PAGE> 4
LEASE
THIS LEASE is made as of this 11th day of April, 1997, between Spieker
Properties, L.P., a California limited partnership (hereinafter called
"Landlord") and Celeritek, Inc., a California corporation (hereinafter called
"Tenant").
PREMISES
1. Landlord leases to Tenant leases from Landlord, upon the terms and
conditions hereinafter set forth, those premises (the "Premises")
outlined in red on Exhibit "A" and described in the Basic Lease
information. The Premises may be all or part of the building (the
"Building") or of the project (the "Project") which may consist of more
than one building. The Building and Project are outlined in blue and
green respectively on Exhibit "A".
POSSESSION AND LEASE COMMENCEMENT
2. A. In the event this Lease pertains to a Premises in which the
interior improvements have already been constructed (existing
improvements) the provisions of this subparagraph 2A shall apply and the
Term Commencement Date shall be the earlier of the date on which (1)
Tenant takes possession of some or all of the Premises or (2) Landlord
delivers the Premises to Tenant. If for any reason Landlord cannot
deliver possession of the Premises to Tenant on the Scheduled Term
Commencement Date, Landlord shall not be subject to any liability
therefore, nor shall Landlord be in default hereunder, and Tenant agrees
to accept possession of the Premises at such time as Landlord is able to
deliver the same, which date shall then be deemed the Term Commencement
Date. Tenant shall not be liable for any Rent for any period prior to
delivery of the Premises. Tenant acknowledges that it has inspected and
accepts the Premises in their present condition as suitable for the
purpose for which the Premises are leased. Tenant agrees that said
Premises and other improvements are in good and satisfactory condition
provided, however, Tenant shall have the right to notify Landlord if the
Premises are not in the materially the same condition prior to taking
possession of the Premises. Tenant further acknowledges that no
representations as to the condition or repair of the Premises nor
promises to alter, remodel or improve the Premises have been made by
Landlord, unless such are expressly set forth in this Lease. Tenant
shall, upon demand, execute and deliver to Landlord a letter of
acceptance of delivery of the Premises.
See Addendum 2
TERM
3. The Term of this Lease shall commence on the Term Commencement Date and
continue in full force and effect for the number of months specified as
the Length of Term in the Basic Lease information or until this Lease is
terminated as otherwise provided herein. If the Term Commencement Date
is a date other than the first day of the calendar month, the Term shall
be the number of months of the Length of Term in addition to the
remainder of the calendar month following the Term Commencement Date.
USE
4. A. Tenant shall use the Premises for the Permitted Use and for no
other use or purpose without prior written consent of Landlord. No
increase in the Occupant Density of the Premises shall be made without
the prior written consent of Landlord. Tenant and its employees,
customers, visitors, and licensees shall have the nonexclusive right to
use, in common with other parties occupying the Buildings or Project,
the parking areas and driveways of the project, subject to such
reasonable rules and regulations as Landlord may from time to time
prescribe.
B. Tenant shall not permit any odors, smoke, dust, gas, substance,
noise or vibrations to emanate from the Premises, nor take any action
which would constitute a nuisance or would disturb, obstruct or
endanger any other tenants of the Building or Project in which the
Premises are situated or unreasonably interfere with their use of their
respective premises. Tenant shall not receive, store or otherwise handle
any product, material or merchandise which is toxic, harmful, explosive,
highly inflammable or combustible in violation of applicable law.
Storage outside the Premises of materials, vehicles or any other items
Landlord deems objectionable is prohibited without Landlord's prior
written consent. Tenant shall not use or allow the Premises to be used
for any improper, immoral, unlawful or objectionable purpose, nor shall
Tenant cause or maintain or permit any nuisance in, on or about the
Premises. Tenant shall not commit or suffer the commission of any waste
in, on or about the Premises. Tenant shall not allow any sale by auction
upon the Premises, or place any loads upon the floors, walls or ceilings
which endanger the structure, or place any harmful liquids in the
drainage system of the Building or Project. No waste, materials or
refuse shall be dumped upon or permitted to remain outside the Premises
except in trash containers placed inside exterior enclosures designated
for that purpose by Landlord.
C. Tenant shall not use the Premises or permit anything to be done in
or about the Premises which will in any way conflict with any law,
statute, ordinance or governmental rule or regulation now in force or
which may hereafter be enacted or promulgated. Tenant shall at its sole
cost and expense obtain any and all licenses or permits necessary for
Tenant's use of the Premises. Tenant shall promptly comply with the
requirements of any board of fire underwriters or other similar body now
or hereafter constituted relating to or affecting the condition, use or
occupancy of the Premises. The judgement of any court of competent
jurisdiction or the admission of Tenant in any actions against Tenant,
whether Landlord be a party thereto or not, that Tenant has so violated
any such law, statute, ordinance, rule, regulation or requirement, shall
be conclusive of such violation as between Landlord and Tenant. Tenant
shall not do or permit anything to be done in, on, or about the
Premises or bring or keep anything which will in any way increase the
rate of any insurance upon the Premises, Building or Project, or upon
any contents therein or cause a cancellation of said insurance or
otherwise affect said insurance in any manner. Tenant shall indemnify
Landlord and hold Landlord harmless against any loss, expense, damage,
attorney's fees or liability arising out of the failure of Tenant to
comply with any applicable law or comply with the requirements as set
forth herein.
See Addendum 3
RULES AND REGULATIONS
5. Tenant and Tenant's agents, employees, and invitees shall faithfully
observe and comply with any reasonable rules and regulations Landlord
may from time to time prescribe in writing for the purpose of
maintaining the proper care, cleanliness, safety, traffic flow and
general order of the Premises or Project. Landlord shall not be
responsible to Tenant for the non-compliance by any other tenant or
occupant of the Building or Project with any of the rules and
regulations.
RENT
6. Tenant shall pay to Landlord, without demand throughout the Term, Rent
as specified in the Basic Lease information, payable in monthly
installments in advance on or before the first day of each calendar
month, in lawful money of the United States, without deduction or offset
whatsoever to Landlord at the address specified in the Basic Lease
information or to such other firm or to such other place as Landlord may
from time to time designate in writing. Rent for the first full month of
the Term shall be paid by Tenant upon Tenant's execution of this Lease.
If the obligation for payment of Rent commences on other than the first
day of a month, then Rent shall be prorated and that prorated
installment shall be paid on the first day of the calendar month next
succeeding the Term Commencement Date.
See Addendum 1
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<PAGE> 5
BASIC OPERATING COST
7. A. BASIC OPERATING COST. In addition to the Base Rent required to be
paid hereunder, Tenant shall pay as additional Rent, Tenant's
Proportionate Share, as defined in the Basic Lease Information, of Basic
Operating Cost in the manner set forth below. Basic Operating Cost shall
mean all expenses and costs of every kind and nature which Landlord
shall pay or become obligated to pay, or would be required to pay if the
Project were fully occupied, because of or in connection with the
management, maintenance, preservation and operation of the Project and
its supporting facilities servicing the Project (determined in
accordance with generally accepted accounting principles, consistently
applied) including but not limited to the following:
(1) All real estate taxes, possessory interest taxes, business or
license taxes or fees, service payment in lieu of such taxes or fees,
annual or periodic license or use fees, excises, transit charges,
housing fund assessments, open space charge, assessments, levies, fees
or charges, general and special, ordinary and extraordinary, unforeseen
as well as foreseen, of any kind (including fees "in-lieu" of any such
tax or assessment) which are assessed, levied, charged, confirmed, or
imposed by any public authority upon the Project, its operations or the
rent (or any portion or component thereof), except (a) inheritance or
estate taxes imposed upon or assessed against the Project, or any part
thereof or interest therein, and (b) taxes computed upon the basis of
the net income of Landlord or the owner of any interest therein.
(2) All insurance premiums and costs, including but not limited to, any
deductible amounts, premiums and cost of fire, casualty and liability
coverage, rental abatement and special hazard insurance applicable to
the Project and Landlord's personal property used in connection
therewith; provided, however, that Landlord may, but shall not be
obligated to, carry special hazard insurance covering losses caused by
casualty not insured under standard fire and extended coverage
insurance.
(3) Repairs, replacements and general maintenance for the Premises,
Building and Project (except for those repairs expressly the
responsibility of Landlord, those repairs paid for by proceeds of
insurance or by Tenant or other third parties, and alterations
attributable solely to tenants of the Project other than Tenant).
(4) All maintenance, janitorial and service agreements and costs of
supplies and equipment used in maintaining the Premises, Building and
Project and the equipment therein and the adjacent sidewalks, driveways,
parking and service areas, including, without limitation, alarm service,
window cleaning, elevator maintenance, Building exterior maintenance and
landscaping.
(5) Utilities which benefit all or a portion of the Premises.
(6) A management and accounting cost recovery equal to three percent
(3%) of Base Rent.
In the event that the building is not fully occupied during any fiscal
year of the Term as determined by Landlord, an adjustment shall be made
in computing the Basic Operating Cost for such year so that Basic
Operating Cost shall be computed as though the building had been one
hundred percent (100%) occupied; provided, however, that in no event
shall Landlord be entitled to collect in excess of one hundred percent
(100%) of the total Basic Operating Cost from all of the tenants in the
Building including Tenant.
All costs and expenses shall be determined in accordance with generally
accepted accounting principles which shall be consistently applied.
Basic Operating Cost shall not include specific costs incurred for the
account of, separately billed to and paid by specific tenants.
Notwithstanding anything herein to the contrary, any instance wherein
Landlord, at Landlord's sole discretion, deems Tenant to be responsible
for any amounts greater than its Proportionate Share, Landlord shall
have the right to allocate costs in any manner Landlord deems
appropriate.
See Addendum 4
B. PAYMENT OF ESTIMATED BASIC OPERATING COST. "Estimated Basic
Operating Cost" for any particular year shall mean Landlord's estimate
of the Basic Operating Cost for such fiscal year made prior to
commencement of such fiscal year as hereinafter provided. Landlord shall
have the right from time to time to revise its fiscal year and interim
accounting periods so long as the periods as so revised are reconciled
with prior periods in accordance with generally accepted accounting
principles applied in a consistent manner. During the last month of each
fiscal year during the Term, or as soon thereafter as practicable.
Landlord shall give Tenant written notice of the Estimated Basic
Operating Cost for the ensuing fiscal year. Tenant shall pay Tenant's
Proportionate Share of the Estimated Basic Operating Costs with
installments of Base Rent for the fiscal year to which the Estimated
Basic Operating Cost applies in monthly installments on the first day of
each calendar month during such year, in advance. If at any time during
the course of the fiscal year, Landlord determines that Basic Operating
Cost will apparently vary from the then Estimated Basic Operating Cost
by more than ten percent (10%), Landlord may, by written notice to
Tenant, revise the Estimated Basic Operating Cost for the balance of
such fiscal year and Tenant shall pay Tenant's Proportionate Share of
the Estimated Basic Operating Cost as so revised for the balance of the
then current fiscal year on the first of each calendar month thereafter.
C. COMPUTATION OF BASIC OPERATING COST ADJUSTMENT. "Basic Operating
Cost Adjustment" shall mean the difference between Estimated Basic
Operating Cost and Basic Operating Cost for any fiscal year determined
as hereinafter provided. Within one hundred twenty (120) days after the
end of each fiscal year, as determined by Landlord, or as soon
thereafter as practicable, Landlord shall deliver to Tenant a statement
of Basic Operating Cost for the fiscal year just ended accompanied by a
computation of Basic Operating Cost Adjustment. If such statement shows
that Tenant's payment based upon Estimated Basic Operating Cost is less
than Tenant's Proportionate Share of Basic Operating Cost, then Tenant
shall pay to Landlord the difference within twenty (20) days after
receipt of such statement. If such statement shows that Tenant's
payments of Estimated Basic Operating Cost exceed Tenant's Proportionate
Share of Basic Operating costs, then (provided that Tenant is not in
default under this Lease), Landlord shall pay to Tenant the difference
within twenty (20) days of such statement. If this Lease has been
terminated or the term hereof has expired prior to the date of such
statement, then the Basic Operating Cost Adjustment shall be paid by the
appropriate party within twenty (20) days after the date of delivery of
the statement. Should this Lease commence or terminate at any time other
than the first day of the fiscal year, Tenant's Proportionate Share of
the Basic Operating Cost adjustment shall be prorated by reference to
the exact number of calendar days during such fiscal year for which
Tenant is obligated to pay Base Rent.
D. NET LEASE. This shall be a net Lease and Base Rent shall be paid to
Landlord absolutely net of all costs and expenses except as herein
provided. The provisions for payment of Basic Operating Cost and the
Basic Operating Cost Adjustment are intended to pass on to Tenant and
reimburse Landlord for all costs and expenses of the nature described in
paragraph 7A incurred in connection with ownership and operation of the
Building or Project and such additional facilities now and in subsequent
years as may be determined by Landlord to be necessary to the Building
or Project.
E. TENANT AUDIT. Tenant shall have the right, at Tenant's expense and
upon not less than five (5) days prior written notice to Landlord, to
review at reasonable times, in Landlord's office, Landlord's books and
records applicable to Tenant's Lease for purposes of verifying
Landlord's calculation of the Basic Operating Cost and Basic Operating
Cost Adjustment.
In the event that Tenant shall dispute the amount set forth in any
statement provided by Landlord under paragraph 7B or 7C above, Tenant
shall have the right, not later than twenty (20) days following the
receipt of such statement and upon condition that Tenant shall first
deposit with Landlord the full amount in dispute, to cause Landlord's
books and records with respect to such fiscal year to be audited by
certified public accountants selected by Tenant and subject to
Landlord's reasonable right of approval. The Basic Operating Cost
Adjustment shall be appropriately adjusted on the basis of such audit.
If such audit discloses a liability for a refund in excess of ten
percent (10%) of Tenant's Proportionate Share of the Basic Operating
Cost Adjustment previously reported, the cost of such audit shall be
borne by Landlord; otherwise the cost of such audit shall be paid by
Tenant. If Tenant shall not request an audit in accordance with the
provisions of this paragraph 7E within twenty (20) days of receipt of
Landlord's statement provided pursuant to paragraph 7B or 7C, such
statement shall be final and binding for all purposes hereof.
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<PAGE> 6
INSURANCE AND INDEMNIFICATION
8. A. CASUALTY INSURANCE. Landlord agrees to maintain insurance insuring
the Buildings of the Project, of which the Premises are a part, against
fire, lightning, extended coverage, vandalism and malicious mischief in
an amount not less than one hundred percent (100%) of the replacement
cost thereof. Such insurance shall be for the sole benefit of Landlord
and under its sole control. Landlord shall not be obligated to insure
any furniture, equipment, machinery, goods or supplies not covered by
this Lease which Tenant may keep or maintain in the Premises or any
leasehold improvements, additions or alterations which Tenant may make
upon the Premises.
B. LIABILITY INSURANCE. Tenant shall purchase at its own expense and
keep in force during this Lease a policy or policies of comprehensive
liability insurance, including personal injury and property damage, in
the amount of not less than Five Hundred Thousand Dollars ($500,000.00)
for property damage and Two Million Dollars ($2,000,000.00) per
occurrence for personal injuries or deaths of persons occurring in or
about the Premises and Project. Said policies shall (1) name Landlord
and, if applicable, its agent, and any party holding an interest to
which this Lease may be subordinated as additional insureds, (2) be
issued by an insurance company acceptable to Landlord and licensed to do
business in the State of California, and (3) provide that said insurance
shall not be cancelled unless thirty (30) days prior written notice
shall have been given to Landlord. Said policy or policies or
certificates thereof shall be delivered to Landlord by Tenant upon
commencement of the lease and upon each renewal of said insurance.
C. INDEMNIFICATION. Landlord shall not be liable to Tenant for any
loss or damage to person or property caused by theft, fire, act of God,
acts of a public enemy, riot, strike, insurrection, war, court order,
requisition or order of governmental body or authority or for any damage
or inconvenience which may arise through repair or alteration of any
part of the Building or Project or failure to make any such repair
except as expressly otherwise provided in Paragraphs 10 and 12. Tenant
shall indemnify Landlord and hold Landlord harmless from any and all
loss, cost, damage, injury or expense arising out of or related to (1)
claims of injury to or death of persons or damage to property occurring
or resulting directly or indirectly from the use of occupancy of the
Premises, or from activities of Tenant, its agents, servants, employees,
(2) claims for work or labor performed, or for materials or supplies
furnished to or at the request of Tenant or in connection with
performance of any work done for the account of Tenant within the
Premises or Project, and (3) claims arising from any breach or default
on the part of Tenant in the performance of any covenant contained in
this Lease. Such indemnity shall include without limitation the
obligation to provide all costs of defense against any such claims
including any action or proceeding brought against Landlord. The
foregoing release and indemnity shall not be applicable to claims
arising from the active negligence or willful misconduct of Landlord or
Landlord's breach of its repair obligations under this Lease. The
provisions of this paragraph shall survive the expiration or termination
of this Lease with respect to any claims or liability occurring prior to
such expiration or termination.
WAIVER OF SUBROGATION
9. Notwithstanding anything to the contrary herein, to the extent
permitted by law and without affecting the coverage provided by
insurance required to be maintained hereunder, Landlord and Tenant each
waive any right to recover against the other (a) damages for injury to
or death of persons, (b) damages to property, (c) damages to the
premises or any part thereof, or (d) claims arising by reason of the
foregoing to the extent such claims would normally be insured against
under any insurance required to be maintained hereunder. This provision
is intended to waive fully, and for the benefit of each party, any
rights and/or claims which might give rise to a right of subrogation on
any insurance carrier. The coverage obtained by each party pursuant to
this Lease shall include, without limitation, a waiver of subrogation by
the carrier which conforms to the revisions of this paragraph.
LANDLORD'S REPAIRS AND SERVICES
10. Landlord shall at Landlord's expense maintain the structural soundness
of the roof, foundations and exterior walls of the Building in good
repair, reasonable wear and tear excepted. The term walls as used herein
shall not include windows, glass or plate glass, doors, special store
fronts or office entries. The term roof as used herein shall not include
skylights, smoke hatches or roof vents. Landlord shall perform on behalf
of Tenant and other tenants of the Project the maintenance of the public
and common areas of the Project including but not limited to the
landscaped areas, parking areas, driveways, the truck staging areas,
rail spur areas, fire sprinkler systems, sanitary and storm sewer lines,
utility services, electric and telephone equipment servicing the
Building(s), exterior lighting, and anything which affects the operation
and exterior appearance of the Project, which determination shall be at
Landlord's sole discretion. Tenant shall reimburse Landlord for all such
costs in accordance with Paragraph 7. Any damage caused by or repairs
necessitated by any act of Tenant may be repaired by Landlord at
Landlord's option and at Tenant's expense. Tenant shall immediately give
Landlord written notice of any defect or need of repairs after which
Landlord shall have reasonable opportunity to repair same. Landlord's
liability with respect to any defects, repairs, or maintenance for which
Landlord is responsible under any of the provisions of this Lease shall
be limited to the cost of such repairs or maintenance.
TENANT'S REPAIRS
11. Tenant shall at Tenant's expense maintain all parts of the Premises in
a good clean and secure condition promptly making all necessary repairs
and replacements including but not limited to all windows, glass, doors
and any special office entries, walls and wall finishes, floor covering,
heating, ventilating and air conditioning systems, truck doors, dock
bumpers, dock plates and levelers, roofing, plumbing work and fixtures,
skylights, smoke hatches and roof vents. Tenant shall at Tenant's
expense also perform necessary pest extermination and regular removal of
trash and debris. If required by the railroad company, Tenant agrees to
sign a joint maintenance agreement governing the use of the rail spur,
if any. Tenant shall, at its own expense, enter into a regularly
scheduled preventive maintenance/service contract with a maintenance
contractor for servicing all hot water, heating and air conditioning
systems and equipment within or serving the Premises. The maintenance
contractor and the contract must be approved by Landlord. The service
contract must include all services suggested by the equipment
manufacturer within the operation/maintenance manual and must become
effective and a copy thereof delivered to Landlord within thirty (30)
days of the Term Commencement Date. Tenant shall not damage any demising
wall or disturb the integrity and support provided by any demising wall
and shall, at its sole expense, immediately repair any damage to any
demising wall caused by Tenant or its employees, agents or invitees.
See Addendum 5.
ALTERATIONS
12. Tenant shall not make, or allow to be made, any alterations or
physical additions in, about or to the premises without obtaining the
prior written consent of Landlord which consent shall not be
unreasonably withheld with respect to proposed alterations and additions
which (a) comply with all applicable laws, ordinances, rules and
regulations, (b) are in Landlord's opinion compatible with the Project
and its mechanical, plumbing, electrical, and heating/ventilation/air
conditioning systems, and (c) in Landlord's opinion will not interfere
with the use and occupancy of any other portion of the Building or
Project by any other tenant or its invitees. Specifically, but without
limiting the generality of the foregoing, Landlord shall have the right
of consent for all plans and specifications for the proposed alterations
or additions, construction means and methods, any contractor or
subcontractor to be employed on the work of alteration or additions, and
the time for performance of such work. Tenant shall also supply to
Landlord any documents and information reasonably requested by Landlord
in connection with its consideration of a request for approval
hereunder. Tenant must have Landlord's written approval and all
appropriate permits and licenses prior to the commencement of said
alterations and additions. All alterations and additions permitted
hereunder shall be made and performed by Tenant without cost or expense
to Landlord including any costs or expenses which Landlord may incur in
electing to have an outside agency review said plans and specifications.
Landlord shall have the right to require Tenant to remove any or all
alterations, additions, improvements and partitions made by Tenant and
restore the Premises to their original condition by the termination of
this Lease, by lapse of time or otherwise, all at Tenant's expense. All
such removals and restoration shall be accomplished in a good
workmanlike manner so as not to cause any damage to the Premises or
Project whatsoever. If Landlord so elects, such alterations, physical
additions or improvements shall become the property of Landlord and
surrendered to Landlord upon the termination of this Lease by lapse of
time or otherwise; provided, however that this clause shall not apply to
trade fixtures or furniture owned by Tenant. In addition to and wholly
apart from its obligation to pay Tenant's Proportionate Share of Basic
Operating Costs, Tenant shall be responsible for and shall
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<PAGE> 7
pay prior to delinquency any taxes or governmental service fees,
possessory interest taxes, fees or charges in lieu of any such taxes,
capital levies, or other charges imposed upon, levied with respect to or
assessed against its personal property, on the value of its alterations,
additions or improvements and on its interest pursuant to this Lease. To
the extent that any such taxes are not separately assessed or billed to
Tenant, Tenant shall pay the amount thereof as invoiced to Tenant by
Landlord.
See Addendum 6
SIGNS
13. All signs, notices and graphics of every kind or character, visible in
or from public view or corridors, the common areas or the exterior of
the Premises, shall be subject to Landlord's prior written approval,
which Landlord shall have the right to withhold in its reasonable
discretion. Tenant shall not place or maintain any banners whatsoever or
any window decor in or on any exterior window or window fronting upon
any common areas or service area or upon any truck doors or man doors
without Landlord's prior written approval which Landlord shall have the
right to grant or withhold in its reasonable discretion. Any
installation of signs or graphics on or about the Premises and Project
shall be subject to any applicable governmental laws, ordinances,
regulations and to any other requirements imposed by Landlord. Tenant
shall remove all such signs and graphics by the termination of this
Lease. Such installations and removals shall be made in such manner as
to avoid injury to or defacement of the Premises, Building or Project
and any other improvements contained therein, and Tenant shall repair
any injury or defacement including without limitation discoloration
caused by such installation or removal.
INSPECTION/POSTING NOTICES
14. After reasonable notice, except in emergencies where no such notice
shall be required, Landlord, its agents and representatives, shall have
the right to enter the Premises to inspect the same, to clean, to
perform such work as may be permitted or required hereunder, to make
repairs or alterations to the Premises or Project or to other tenant
spaces therein, to deal with emergencies, to post such notices as may be
permitted or required by law to prevent the perfection of liens against
Landlord's interest in the Project or to exhibit the Premises to
prospective tenants, purchasers, encumbrances or others, or for any
other purpose as Landlord may deem necessary or desirable; provided,
however, that Landlord shall not unreasonably interfere with Tenant's
business operations. Tenant shall not be entitled to any abatement of
Rent by reason of the exercise of any such right of entry. Five months
prior to the end of the lease, Landlord shall have the right to erect on
the Premises and/or Project a suitable sign indicating that the Premises
are available for lease. Tenant shall give written notice to Landlord at
least thirty (30) days prior to vacating the Premises and shall meet
with Landlord for a joint inspection of the Premises at the time of
vacating. In the event of Tenant's failure to give such notice or
participate in such joint inspection, Landlord's inspection at or after
Tenant's vacating the Premises shall conclusively be deemed correct for
purposes of determining Tenant's responsibility for repairs and
restoration. Any entry by Landlord shall comply with all of Tenant's
reasonable security measures.
UTILITIES
15. Tenant shall pay for all water, gas, heat, air conditioning, light,
power, telephone, sewer, sprinkler charges and other utilities and
services used on or from the Premises, together with any taxes,
penalties, surcharges or the like pertaining thereto, and maintenance
charges for utilities and shall furnish all electric light bulbs
ballasts and tubes. If any such services are not separately metered to
Tenant, Tenant shall pay a reasonable proportion, as determined by
Landlord, of all charges jointly serving other premises. Landlord shall
not be liable for any damages directly or indirectly resulting from nor
shall the Rent or any monies owed Landlord under this Lease herein
reserved be abated by reason of (a) the installation, use or
interruption of use of any equipment used in connection with the
furnishing of any of the foregoing utilities and services, (b) failure
to furnish or delay in furnishing any such utilities or services when
such failure or delay is caused by acts of God or the elements, labor
disturbances of any character, any other accidents or other conditions
beyond the reasonable control of Landlord, or (c) the limitation,
curtailment, rationing or restriction on use of water, electricity, gas
or any other form of energy or any other service or utility whatsoever
serving the Premises or Project. Landlord shall be entitled to cooperate
voluntarily and in a reasonable manner with the efforts of national,
state or local governmental agencies or utility suppliers in reducing
energy or other resource consumption. The obligation to make services
available hereunder shall be subject to the limitations of any such
voluntary, reasonable program.
SUBORDINATION
16. Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, this Lease shall be
subject and subordinate at all times to (a) all ground leases or
underlying leases which may now exist or hereafter be executed affecting
the Premises and/or the land upon which the Premises and Project are
situated, or both, and (b) any mortgage or deed of trust which may now
exist or be placed upon said Project, land, ground leases or underlying
leases, or Landlord's interest or estate in any of said items, which is
specified as security. Notwithstanding the foregoing, Landlord shall
have the right to subordinate or cause to be subordinated any such
ground leases or underlying leases or any such liens to this Lease. In
the event that any ground lease or underlying lease terminates for any
reason or any mortgage or deed of trust is foreclosed or a conveyance in
lieu of foreclosure is made for any reason, Tenant shall,
notwithstanding any subordination, attorn to and become the Tenant of
the successor in interest to Landlord at the option of such successor in
interest. Tenant shall execute and deliver, upon demand by Landlord and
in the form requested by Landlord, any additional documents evidencing
the priority of subordination of this Lease with respect to any such
ground leases or underlying leases or any such mortgage or deed of
trust.
See Addendum 7
FINANCIAL STATEMENTS
17. At the request of Landlord, Tenant shall provide to Landlord its
current financial statement or other information discussing financial
worth which Landlord shall use solely for purposes of this Lease and in
connection with the ownership, management and disposition of the
property subject hereto.
ESTOPPEL CERTIFICATE
18. Tenant agrees from time to time within ten (10) days after request of
Landlord, to deliver to Landlord, or Landlord's designee, an estoppel
certificate stating that this lease is in full force and effect, the
date to which Rent has been paid, the unexpired portion of this lease
and such other matters pertaining to this Lease as may be reasonably
requested by Landlord. Failure by Tenant to execute and deliver such
certificate shall constitute an acceptance of the Premises and
acknowledgement by Tenant that the statements included are true and
correct without exception. Landlord and Tenant intend that any statement
delivered pursuant to this paragraph may be relied upon by any
mortgagee, beneficiary, purchaser or prospective purchaser of the
Project or any interest therein. The parties agree that Tenant's
obligation to furnish such estoppel certificates in a timely fashion is
a material inducement for Landlord's execution of the Lease.
SECURITY DEPOSIT
19. Tenant agrees to deposit with Landlord upon execution of this Lease, a
Security Deposit as stated in the Basic Lease Information which sum
shall be held by Landlord, without obligation for interest, as security
for the performance of Tenant's covenants and obligations under this
Lease, it being expressly understood and agreed that such deposit is not
an advance rental deposit or a measure of damages incurred by Landlord
in case of Tenant's default. Upon the occurrence of any event of default
by Tenant, Landlord may, from time to time, without prejudice to any
other remedy provided herein or provided by law, use such fund to the
extent necessary to make good any arrears of Rent or other payments due
to Landlord hereunder, and any other damage, injury, expense or
liability caused by such event of default, and Tenant shall pay to
Landlord, on demand, the amount so applied in order to restore the
Security Deposit to its original amount. Although the Security Deposit
shall be deemed the property of Landlord, any remaining balance of such
deposit shall be returned by Landlord to Tenant at such time after
termination of this Lease that all of the Tenant's obligations under
this Lease have been fulfilled.
TENANT'S REMEDIES
20. Tenant shall look solely to Landlord's interest in the Project for
recovery of any judgement from Landlord. Landlord, or if Landlord is a
partnership, its partners whether general or limited, or if it is a
corporation, its directors, officers or shareholders, shall never be
personally liable for any such judgement. Any lien obtained to enforce
any such judgement and any levy of execution thereon shall be subject
and subordinate to any lien, mortgage or deed of trust on the Project.
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<PAGE> 8
ASSIGNMENT AND SUBLETTING
21. A. Tenant shall not assign or sublet the Premises or any part thereof
without Landlord's prior written approval except as provided herein. If
Tenant desires to assign this Lease or sublet any or all of the
Premises, Tenant shall give Landlord written notice forty-five (45) days
prior to the anticipated effective date of the assignment or sublease.
Landlord shall then have a period of fifteen (15) days following receipt
of such notice to notify Tenant in writing that Landlord elects either
(1) to terminate this Lease as to the space so affected as of the date
so requested by Tenant, or (2) to permit Tenant to assign this Lease or
sublet such space subject, however, to Landlord's prior written
approval of the proposed assignee or subtenant and of any related
documents or agreements associated with the assignment or sublease, such
consent not to be unreasonably withheld so long as the use of the
Premises by such proposed assignee or subtenant would be a Permitted Use
and would not in Landlord's opinion increase Occupant Density of the
Project, the proposed assignee or subtenant is of sound financial
condition, and the proposed assignment or sublease would not be likely
to result in any decrease in Rent. If Landlord should fail to notify
Tenant in writing of such election within said period, Landlord shall be
deemed to have waived option (1) above, but written approval by Landlord
of the proposed assignee or subtenant shall be required. Failure by
Landlord to approve a proposed assignee or subtenant shall not cause a
termination of this Lease.
B. Any Rent or other consideration realized by Tenant under any such
sublease or assignment in excess of the Rent payable hereunder, after
amortization of (1) the reasonable cost of any improvements which Tenant
has made for the purpose of assigning or subletting all or part of the
Premises and (2) reasonable subletting and assignment costs, shall be
divided and paid fifty percent (50%) to Tenant, fifty percent (50%) to
Landlord.
C. In any subletting or assignment undertaken by Tenant, Tenant shall
diligently seek to obtain the maximum rental amount available in the
marketplace for such subletting or assignment.
See Addendum 8
E. If Tenant is a partnership, joint venture or other unincorporated
business form, a transfer of the interest of persons, firms or entities
responsible for managerial control of Tenant by sale, assignment,
bequest, inheritance, operation of law or other disposition, so as to
result in a change in the present control of said entity and/or a change
in the identity of the persons responsible for the general credit
obligations of said entity shall constitute an assignment for all
purposes of this paragraph.
F. No assignment or subletting by Tenant shall relieve Tenant of any
obligation under this Lease. Any assignment or subletting which
conflicts with the provisions hereof shall be void.
QUIET ENJOYMENT
22. Landlord represents that it has full right and authority to enter
into this Lease and that Tenant, upon paying the Rent and performing its
other covenants and agreements herein set forth, shall peaceably and
quietly have, hold and enjoy the Premises for the Term hereof without
hindrance or molestation from Landlord, subject to the terms and
provisions of this Lease.
CONDEMNATION
23. A. If the whole or any substantial portion of the Project of which the
Premises are a part should be taken or condemned for any public use
under governmental law ordinance or regulation, or by right of eminent
domain, or by private purchase in lieu thereof, and the taking would
prevent or materially interfere with the Permitted Use of the Premises,
this lease shall terminate and the Rent shall be abated during the
unexpired portion of this Lease, effective when the physical taking of
said Premises shall have occurred.
B. If a portion of the Project of which the Premises are a part should
be taken or condemned for any public use under any governmental law,
ordinance or regulation, or by right of eminent domain, or by private
purchase in lieu thereof, and this Lease is not terminated as provided
in the subparagraph 23A above, this Lease shall not terminate, but the
Rent payable hereunder during the unexpired portion of the Lease shall
be reduced to such extent as may be fair and reasonable under all of the
circumstances.
C. Landlord shall be entitled to any and all payment, income, rent,
award, or any interest therein whatsoever which may be paid or made in
connection with such taking or conveyance and Tenant shall have no claim
against Landlord or otherwise for the value of any unexpired portion of
this Lease. Notwithstanding the foregoing paragraph, any compensation
specifically awarded Tenant for loss of business, Tenant's personal
property, moving costs or loss of goodwill, shall be and remain the
property of Tenant.
CASUALTY DAMAGE
24. A. If the Premises should be damaged or destroyed by fire, tornado or
other casualty, Tenant shall give immediate written notice thereof to
Landlord. Within thirty (30) days of such notice, Landlord shall notify
Tenant whether in Landlord's opinion such repairs can be made either (1)
within ninety (90) days, (2) in more than ninety (90) days but in less
than one hundred eighty (180) days, or (3) in more than one hundred
eighty (180) days from the date of such notice; Lanlord's determination
shall be binding on Tenant.
B. If the Premises should be damaged by fire, tornado or other casualty
but only to such extent that rebuilding or repairs can in Landlord's
estimation be completed within ninety (90) days after the date upon
which Landlord is notified by Tenant of such damage, this Lease shall
not terminate, and Landlord shall at its sole cost and expense thereupon
proceed with reasonable diligence to rebuild and repair the Premises to
substantially the condition in which they existed prior to such damage,
except that Landlord shall not be required to rebuild, repair or replace
any part of the partitions, fixtures, additions and other improvements
which may have been placed in, on or about the Premises by Tenant. If
the Premises are untenantable in whole or in part following such damage,
the Rent payable hereunder during the period in which they are
untenantable shall be reduced to such extent as may be fair and
reasonable under all of the circumstances.
See Addendum 9
C. If the Premises should be damaged by fire, tornado or other casualty
but only to such extent that rebuilding or repairs can in Landlord's
estimation be completed in more than ninety (90) days but in less than
one hundred eighty (180) days, then Landlord shall have the option of
either (1) terminating the Lease effective upon the date of the
occurrence of such damage, in which event the Rent shall be abated
during the unexpired portion of the Lease, or (2) electing to rebuild or
repair the Premises to substantially the condition in which they existed
prior to such damage except that Landlord shall not be required to
rebuild, repair or replace any part of the partitions, fixtures,
additions and other improvements which may have been placed in, or about
the Premises by Tenant. If the Premises are untenantable in whole or in
part following such damage, the Rent payable hereunder during the period
in which they are untenantable shall be reduced to such extent as may be
fair and reasonable under all of the circumstances. In the event that
Landlord should fail to complete such repairs and rebuilding within one
hundred eighty (180) days after the date upon which Landlord is notified
by Tenant of such damage, such period of time to be extended for delays
caused by the fault or neglect of Tenant for no more than ninety (90)
additional days or because of acts of God, acts of public agencies,
labor disputes, strikes, fires, freight embargos, rainy or stormy
weather, inability to obtain materials, supplies or fuels, or delay of
the contractors or subcontractors due to such causes or other
contingencies beyond the reasonable control of Landlord, Tenant may at
its option terminate this Lease by delivering thirty (30) days prior
written notice of termination to Landlord as Tenant's exclusive remedy,
whereupon all rights and obligations hereunder shall cease and
terminate.
D. If the Premises should be so damaged by fire, tornado, or other
casualty that rebuilding or repairs cannot in Landlord's estimation be
completed within one hundred eighty (180) days after the date upon which
Landlord is notified by Tenant of such damage, this Lease shall
terminate and the Rent shall be abated during the unexpired portion of
this Lease, effective upon the date of the occurrence of such damage.
E. Notwithstanding anything herein to the contrary, in the event that
holder of any indebtedness secured by a mortgage or deed of trust
covering the Premises requires that the insurance proceeds be applied to
such indebtedness, then Landlord shall have the right to terminate this
Lease by delivering written notice of termination to Tenant within
fifteen (15) days after such requirement is made by any such holder,
whereupon all rights and obligations hereunder shall cease and
terminate.
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<PAGE> 9
F. The provision of Section 1942, Subdivision 2, and Section 1933,
Subdivision 4, of the Civil Code of California is superseded by the
foregoing.
HOLDING OVER
25. If Tenant shall retain possession of the Premises or any portion thereof
without Landlord's consent following the expiration of the Lease or
sooner termination for any reason, then Tenant shall pay to Landlord
for each day of such retention one hundred fifty percent (150%) the
amount of the daily rental for the last month prior to the date of
expiration or termination. Tenant shall also indemnify and hold Landlord
harmless from any loss or liability resulting from delay by Tenant in
surrendering the Premises, including, without limitation, any claims
made by any succeeding tenant founded on such delay. Acceptance of Rent
by Landlord following expiration or termination shall not constitute a
renewal of this Lease, and nothing contained in this paragraph shall
waive Landlord's right of reentry or any other right. Tenant shall be
only a Tenant at sufferance, whether or not Landlord accepts any Rent
from Tenant is holding over without Landlord's written consent.
Additionally, in the event that upon termination of the Lease, Tenant
has not fulfilled its obligation with respect to repairs and cleanup of
the Premises or any other Tenant obligations as set forth in this Lease,
then Landlord shall have the right to perform any such obligations as
its deems necessary at Tenant's sole cost and expense, and any time
required by Landlord to complete such obligations shall be considered a
period of holding over and the terms of this paragraph shall supply.
DEFAULT
26. A. EVENTS OF DEFAULT: The occurrence of any of the following shall
constitute an event of default on the part of Tenant:
(1) ABANDONMENT. Vacation or abandonment of the Premises for a
continuous period in excess of five (5) days while Tenant is otherwise
in default hereunder. Tenant waives any right to notice Tenant may have
under Section 1951.3 of the Civil Code of the State of California, the
terms of this subparagraph 26A being deemed such notice to Tenant as
required by said Section 1951.3.
(2) NONPAYMENT OF RENT. Failure to pay any installment of Rent or any
other amount due and payable hereunder upon the date when said payment
is due, such failure continuing without cure by payment of the
delinquent Rent and late charge or other obligations for a period of
five (5) days after written notice and demand; provided, however, that
except as expressly otherwise provided herein, Landlord shall not be
required to provide such notice more than Once during each year of the
Term, the second such non-payment constituting default for all purposes
hereof without requirements of notice.
(3) OTHER OBLIGATIONS. Failure to perform any obligations, agreement
or covenant under this Lease other than those matters specified in
subparagraphs (1) and (2) of this subparagraph 26A, such failure
continuing for fifteen (15) days after written notice of such failure,
or such longer period as reasonably necessary to remedy such default,
provided that Tenant shall continuously and diligently pursue such
remedy at all times until such default is cured.
(4) GENERAL ASSIGNMENT. A general assignment by Tenant for the
Benefit of creditors.
(5) BANKRUPTCY. The filing of any voluntary petition in bankruptcy by
Tenant, or the filing of an involuntary petition by Tenant's creditors,
which involuntary petition remains undischarged for a period of thirty
(30) days. In the event that under applicable law the trustee in
bankruptcy or Tenant has the right to affirm this Lease and continue to
perform the obligation of Tenant hereunder, such trustee or Tenant
shall, in such time period as may be permitted by the bankruptcy court
having jurisdiction, cure all defaults of Tenant hereunder outstanding
as of the date of the affirmance of this Lease and provide to Landlord
such adequate assurances as may be necessary to ensure Landlord of the
continued performance of Tenant's obligations under this Lease.
(6) RECEIVERSHIP. The employment of a receiver to take possession of
substantially all of Tenant's assets or the premises, if such attachment
or other seizure remains undismissed or undischarged for a period of ten
(10) days after the levy thereof.
(7) ATTACHMENT. The attachment, execution or other judicial seizure
of all or substantially all of Tenant's assets of the Premises, if
such attachment or other seizure remains undismissed or undischarged
for a period of ten (10) days after the levy thereof.
B. REMEDIES UPON DEFAULT.
(1) RENT. All failures to pay any monetary obligation to be paid by
Tenant under this Lease shall be construed as obligations for payment
of Rent.
(2) TERMINATION. In the event of the occurrence of any event of
default, Landlord shall have the right, with or without notice or
demand, to immediately terminate this Lease, and at any time thereafter
recover possession of the Premises or any part thereof and expel and
remove therefrom Tenant and any other person occupying the same, by and
lawful means, and again repossess and enjoy the Premises without
prejudice to any of the remedies that Landlord may have under this
Lease, or at law or equity by reason of Tenant's default or of such
termination.
(3) CONTINUATION AFTER DEFAULT. Even though Tenant has breached this
Lease and/or abandoned the Premises, this Lease shall continue in
effect for so long as Landlord does not terminate Tenant's right to
possession under paragraph 26B(2) hereof, and Landlord may enforce all
its rights and remedies under this Lease, including but without
limitation, the right to recover Rent as it becomes due, and Landlord,
without terminating this Lease, may exercise all of the rights and
remedies of a Landlord under Section 1951.4 of the Civil Code of the
State of California or any successor code section. Acts of maintenance
preservation or efforts to lease the Premises or the appointment of a
receiver upon application of Landlord to protect Landlord's interest
under this Lease shall not constitute an election to terminate Tenant's
right to possession.
C. DAMAGES UPON TERMINATION. Should Landlord terminate this Lease
pursuant to the provisions of paragraph 26B(2) hereof, Landlord shall
have all the rights and remedies of a Landlord provided by Section
1951.2 of the Civil Code of the State of California, or successor code
sections. Upon such termination, in addition to any other rights and
remedies to which Landlord may be entitled under applicable law,
Landlord shall be entitled to recover from Tenant: (1) the worth at the
time of award of the unpaid Rent and other amounts which had been earned
at the time of termination, (2) the worth at the time of award of the
amount by which the unpaid Rent which would have been earned after
termination until the time of award exceeds the amount of such Rent loss
that the Tenant proves could have been reasonably avoided, (3) the worth
at the time of award of the amount by which the unpaid Rent for the
Balance of the Term after the time of award exceeds the amount of such
Rent loss that the Tenant proves could be reasonably avoided, and (4)
any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under
this Lease or which, in the ordinary course of things, would be likely
to result therefrom. The "worth at the time of award" of the amounts
referred to in (1) and (2), above shall be computed with interest at the
maximum rate allowed by law. The "worth at the time of award" of the
amount referred to in (3) above shall be computed by discounting such
amount at the Federal Discount Rate of the Federal Reserve Bank of San
Francisco at the time of the award plus one percent (1%).
D. LATE CHARGE. In addition to its other remedies, Landlord shall
have the right without notice or demand to add to the amount of any
payment required to be made by Tenant hereunder, and which is not paid
on or before the date the same is due, an amount equal to five percent
(5%) of the delinquency for each month or portion thereof that the
delinquency remains outstanding to compensate Landlord for the loss of
the use of the amount not paid and the administrative costs caused by
the delinquency, the parties agreeing that Landlord's damage by virtue
of such delinquencies would be difficult to compute and the amount
stated herein represents a reasonable estimate thereof.
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<PAGE> 10
E. REMEDIES CUMULATIVE. All rights, privileges and elections or
remedies of the parties are cumulative and not alternative to the extent
permitted by law and except as otherwise provided herein.
LIENS
27. Tenant shall keep the Premises free from liens arising out of or
related to work performed, materials or supplies furnished or
obligations incurred by Tenant or in connection with work made, suffered
or done by Tenant in or on the Premises or Project. In the event that
Tenant shall not, within ten (10) days following the imposition of any
such lien, cause the same to be released of record by payment or posting
of a proper bond, Landlord shall have, in addition to all other remedies
provided herein and by law, the right, but not the obligation, to cause
the same to be released by such means as it shall deem proper, including
payment of the claim giving rise to such lien. All sums paid by Landlord
on behalf of Tenant and all expenses incurred by Landlord in connection
therefore shall be payable to Landlord by Tenant on demand with interest
at the maximum rate allowable by law. Landlord shall have the right at
all times to post and keep posted on the Premises any notices permitted
or required by law, or which Landlord shall deem proper, for the
protection of Landlord, the Premises, the Project and any other party
having an interest therein, from mechanics' and materialmen's liens, and
Tenant shall give Landlord not less than ten (10) business days prior
written notice of the commencement of any work in the Premises or
Project which could lawfully give rise to a claim for mechanics' or
materialmen's lien.
SUBSTITUTION
TRANSFERS BY LANDLORD
29. In the event of a sale or conveyance by Landlord of the Building, the
same shall operate to release Landlord from any future liability upon
any of the covenants or conditions, expressed or implied, herein
contained in favor of Tenant that accrue after the date of such
conveyance and in such event Tenant agrees to look solely to the
responsibility of the successor in interest of Landlord in and to this
Lease. This Lease shall not be affected by any such sale and Tenant
agrees to attorn to the purchaser or assignee.
RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS
30. All covenants and agreements to be performed by Tenant under any of
the terms of this Lease shall be performed by Tenant at Tenant's sole
cost and expense and without any abatement of Rent. If Tenant shall fail
to pay any sum of money, other than Rent, required to be paid by it
hereunder or shall fail to perform any other act on its part to be
performed hereunder, and such failure shall continue for five (5) days
after notice thereof by Landlord, Landlord may, but shall not be
obligated to do so, and without waiving or releasing Tenant from any
obligations of the Tenant, make any such payment or perform any such act
on the Tenant's part to be made or performed. All sums so paid by
Landlord and all necessary incidental costs together with interest
thereon at the maximum rate permitted by law from the date of such
payment by the Landlord shall be payable to Landlord on demand, and
Tenant covenants to pay such sums, and Landlord shall have, in addition
to any other right or remedy of Landlord, the same right and remedies in
the event of the non-payment thereof by Tenant as in the case of default
by Tenant in the payment of the Rent.
WAIVER
31. If either Landlord or Tenant waives the performance of any term,
covenant or condition contained in this Lease, such waiver shall not be
deemed to be a waiver of any subsequent breach of the same or any other
term, covenant or condition contained herein. The acceptance of Rent by
Landlord shall not constitute a waiver of any preceding breach by Tenant
of any term, covenant or condition of this Lease, regardless of
Landlord's knowledge of such preceding breach at the time Landlord
accepted such Rent. Failure by Landlord to enforce any of the terms,
covenants or conditions of this Lease for any length of time shall not
be deemed to waive or to decrease the right of Landlord to insist
thereafter upon strict performance by Tenant. Waiver by Landlord of any
term, covenant or condition contained in this Lease may only be made by
a written document signed by Landlord.
NOTICES
32. Each provision of this Lease or of any applicable governmental laws,
ordinances, regulations and other requirements with reference to the
sending, mailing or delivery of any notice or the making of any payment
by Landlord or Tenant to the other shall be deemed to be complied with
when and if the following steps are taken:
A. All Rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address set forth
in the Basic Lease information, or at such other address as Landlord may
specify from time to time by written notice delivered in accordance
herewith. Tenant's obligation to pay Rent and any other amounts to
Landlord under the terms of this Lease shall not be deemed satisfied
until such Rent and other amounts have been actually received by
Landlord.
B. All notices, demands, consents and approvals which may or are
required to be given by either party to the other hereunder shall be in
writing and shall be deemed to have been fully given one (1) business
day after being deposited with a reliable overnight courier addressed to
the party to be notified at the address for such party specified in the
Basic Lease information or to such other place as the party to be
notified may from time to time designate by at least fifteen (15) days
notice to the notifying party. Tenant appoints as its agent to receive
the service of all default notices and notice of commencement of
unlawful detainer proceedings the person in charge of or apparently in
charge or occupying the Premises at the time.
ATTORNEYS' FEES
33. In the event either party places the enforcement of this Lease, or any
part thereof, or the collection of any Rent due, or to become due
hereunder, or recovery of the possession of the Premises in the hands of
an attorney or files suit upon the same, the prevailing party shall
recover its reasonable attorneys' fees and court costs.
SUCCESSORS AND ASSIGNS
34. This Lease shall be binding upon and inure to the benefit of Landlord,
its successors and assigns, and shall be binding upon and inure to the
benefit of Tenant, its successors, and to the extent assignment may be
approved by Landlord hereunder, Tenant's assigns.
FORCE MAJEURE
35. Whenever a period of time is herein prescribed for action to be taken
by Landlord or Tenant, Landlord or Tenant shall not be liable or
responsible for, and there shall be excluded from the computation for
any such period of time, any delays due to strikes, riots, acts of God,
shortages of labor or materials, war, governmental laws, regulations or
restrictions or any other causes of any kind whatsoever which are beyond
the control of Landlord or Tenant.
MISCELLANEOUS
36. A. The term "Tenant" or any pronoun used in place thereof shall
indicate and include the masculine or feminine, the singular or plural
number, individuals, firms or corporations, and their and each of their
respective successors, executors, administrators and permitted assigns,
according to the context hereof.
B. Time is of the essence regarding this Lease and all of its
provisions.
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<PAGE> 11
C. This Lease shall in all respects be governed by the laws of the
State of California.
D. This Lease, together with its exhibits, contains all the agreements
of the parties hereto and supersedes any previous negotiations.
E. There have been no representations made by the Landlord or
understandings made between the parties other than those set forth in
this Lease and its exhibits.
F. This Lease may not be modified except by a written instrument by the
parties hereto.
G. If, for any reason whatsoever, any of the provisions hereof shall be
unenforceable or ineffective, all of the other provisions shall be and
remain in full force and effect.
ADDITIONAL PROVISIONS
37. Additional Paragraphs 38 and 39, Addendum 1, 2, 3, 4, 5, 6, 7, 8, and 9,
Exhibits A, B, C, D, and HM attached hereto and made a part hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day
and year first above written.
"LANDLORD"
Spieker Properties, L.P., a California limited partnership
By: Spieker Properties, Inc., a Maryland corporation
-----------------------------------------------------------
Its General Partner
Date: 4/14/97 By /s/ JOSEPH D. RUSSELL, JR.
------- --------------------------------------------------------
Joseph D. Russell, Jr.
Its
--------------------------------------------------------
Senior Vice President
"TENANT"
Date: 4/11/97 Celeritek, Inc., a California corporation
------- -----------------------------------------------------------
By /s/ MARGARET SMITH
--------------------------------------------------------
Its CFO
--------------------------------------------------------
<PAGE> 12
ADDITIONAL PARAGRAPHS TO LEASE AGREEMENT DATED APRIL 11, 1997, BETWEEN SPIEKER
PROPERTIES, L.P., A CALIFORNIA LIMITED PARTNERSHIP, AS LANDLORD, AND CELERITEK,
INC., A CALIFORNIA CORPORATION, AS TENANT, FOR THAT APPROXIMATELY 25,690 SQUARE
FOOT PREMISES LOCATED AT 2909 STENDER WAY, SANTA CLARA, CALIFORNIA.
38. TENANT IMPROVEMENTS
-------------------
Tenant agrees to accept the Premises in "as-is" condition.
Landlord acknowledges that Tenant desires to alter the space plan to
accommodate Tenant's manufacturing operations and Landlord consents to
preliminary space plan provided on February 25, 1997. However, parties
acknowledge that said preliminary space plan does not provide sufficient
information for Landlord to grant approval. Any and all alterations
shall be subject to Landlord's review and approval, which approval shall
not be unreasonably withheld. Any alterations shall be at Tenant's sole
cost and expense, including all space planning, permits and
construction, and shall be subject to future restoration at Landlord's
discretion per Paragraph 12 of this Lease. Tenant shall contract
directly with a licensed contractor and space planner, subject to
Landlord's reasonable review and approval. Improvements shall be
constructed in compliance with all codes, legal requirements and
insurance requirements.
See Addendum 10
39. HAZARDOUS WASTES
As used in this Lease, "Hazardous Materials" shall include, but not be
limited to, hazardous, toxic and radioactive materials and those
substances defined as "hazardous substances," "Hazardous materials,"
"hazardous wastes," "toxic substances," or other similar designations in
any federal, state, or local law, regulation, or ordinance. Tenant shall
not cause, or allow any of Tenant's Parties to cause, any Hazardous
Materials to be used, generated, stored or disposed of on or about the
Premises, the Building or the Project in violation of law. Tenant must
obtain Landlord's written consent prior to the introduction of any
Hazardous Materials onto the Project. Notwithstanding the foregoing,
Tenant may handle, store, use or dispose of products containing small
quantities of Hazardous Materials for "general office purposes" (such as
toner for copiers) to the extent customary and necessary for the use of
the Premises; provided that Tenant shall always handle, store, use, and
dispose of any such Hazardous Materials in a safe and lawful manner and
never allow such Hazardous Materials to contaminate the Premises,
Building, and surrounding land or the environment. Landlord shall have
the right at all reasonable times to inspect the Premises and to conduct
tests and investigations to determine whether Tenant is in compliance
with the foregoing provisions, the cost of all inspections, tests, and
investigations to be borne by Tenant. Tenant shall indemnify, defend,
protect, and hold Landlord harmless from and against all liabilities,
losses, costs and expenses, demands, cause of action, claims or
judgments directly or indirectly arising out of the use, generation,
storage or disposal of Hazardous Materials by Tenant or any of Tenant's
Parties, which indemnity shall include, without limitation, the costs of
any repair, cleanup or detoxification, and the preparation of any
closure or other required plans, whether such action is required or
necessary prior to or following the termination of this Lease. Neither
the consent by Landlord to the use, generation, storage or disposal of
Hazardous Materials nor the strict compliance by Tenant with all laws
pertaining to Hazardous Materials shall excuse Tenant from the Tenant's
obligation of indemnification pursuant to this Paragraph 4.D. Tenant's
obligations pursuant to the foregoing indemnity shall survive the
termination of this Lease.
See Addendum 11
Prior to execution of this Lease, Tenant shall provide Landlord with a
complete list on Exhibit "HM" attached of all Hazardous Materials and
their approximate quantities and uses which Tenant would like to bring
onto the Project; Tenant shall update this list prior to bringing any
new Hazardous Materials onto the Project or prior to substantially
increasing the listed quantities.
See Addendum 12
<PAGE> 13
ADDENDA TO LEASE AGREEMENT DATED APRIL 11, 1997, BETWEEN SPIEKER PROPERTIES,
L.P., A CALIFORNIA CORPORATION, AS LANDLORD, AND CELERITEK, INC., A CALIFORNIA
CORPORATION, AS TENANT, FOR APPROXIMATELY 25,690 SQUARE FOOT PREMISES LOCATED
AT 2909 STENDER WAY, SANTA CLARA, CALIFORNIA.
ADDENDUM 1, PARAGRAPH 6, RENT
Rent for the Premises shall be as follows:
Months 1-12: The base rental of $32,626.00 per month plus operating
expenses per Paragraph 7 of this Lease Agreement. Basic
operating expenses for the calendar year are estimated
to be $3,043.00 per month. Basic operating expenses are
estimated a year in advance and collected on a monthly
basis. Any adjustment necessary (up or down) will be
made at the end of each operating year.
Months 13-24 The base rental of $33,931.00 per month plus operating
expenses per Paragraph 7 of this Lease Agreement. Basic
operating expenses are estimated a year in advance and
collected on a monthly basis. Any adjustment necessary
(up or down) will be made at the end of each operating
year.
Months 25-36 The base rental of $35,289.00 per month plus operating
expenses per Paragraph 7 of this Lease Agreement. Basic
operating expenses are estimated a year in advance and
collected on a monthly basis. Any adjustment necessary
(up or down) will be made at the end of each operating
year.
Months 37-48 The base rental of $36,700.00 per month plus operating
expenses per Paragraph 7 of this Lease Agreement. Basic
operating expenses are estimated a year in advance and
collected on a monthly basis. Any adjustment necessary
(up or down) will be made at the end of each operating
year.
Months 49-60 The base rental of $38,168.00 per month plus operating
expenses per Paragraph 7 of this Lease Agreement. Basic
operating expenses are estimated a year in advance and
collected on a monthly basis. Any adjustment necessary
(up or down) will be made at the end of each operating
year.
Months 61-72 The base rental of $39,695.00 per month plus operating
expenses per Paragraph 7 of this Lease Agreement. Basic
operating expenses are estimated a year in advance and
collected on a monthly basis. Any adjustment necessary
(up or down) will be made at the end of each operating
year.
Months 73-84 The base rental of $41,283.00 per month plus operating
expenses per Paragraph 7 of this Lease Agreement. Basic
operating expenses are estimated a year in advance and
collected on a monthly basis. Any adjustment necessary
(up or down) will be made at the end of each operating
year.
Months 85-96 The base rental of $42,934.00 per month plus operating
expenses per Paragraph 7 of this Lease Agreement. Basic
operating expenses are estimated a year in advance and
collected on a monthly basis. Any adjustment necessary
(up or down) will be made at the end of each operating
year.
<PAGE> 14
ADDENDA TO LEASE AGREEMENT DATED APRIL 11, 1997, BETWEEN SPIEKER PROPERTIES,
L.P., A CALIFORNIA CORPORATION, AS LANDLORD, AND CELERITEK, INC., A CALIFORNIA
CORPORATION, AS TENANT, FOR APPROXIMATELY 25,690 SQUARE FOOT PREMISES LOCATED
AT 2909 STENDER WAY, SANTA CLARA, CALIFORNIA.
ADDENDUM 2, PARAGRAPH 2, POSSESSION
A. Notwithstanding anything to the contrary in the Lease, the Term
Commencement Date shall not occur until the later of July 1, 1997, and the date
by which all of the following have occurred: (a) Landlord has effectively
terminated its lease of the Premises with Microbar, Inc. ("Microbar") and
Microbar has vacated the Premises; and (b) Landlord has delivered possession of
the Premises to Tenant in the condition required herein. If the Term
Commencement Date has not occurred for any reason other than Tenant caused
delays on or before July 1, 1997, then the date Tenant is obligated to commence
payment of rent shall be delayed by one day for each day that the Term
Commencement Date is delayed beyond such date. If the Term Commencement Date
has not occurred for any reason whatsoever on or before August 15, 1997, then
Tenant may terminate the Lease by written notice to Landlord whereupon any
monies previously paid by Tenant to Landlord shall be reimbursed to Tenant.
B. The Lease shall be contingent upon Landlord's execution of a Termination
Agreement with the tenant currently in possession of the Premises, Microbar,
Inc. within fifteen days of Tenant's execution of Lease. Landlord shall
promptly upon execution of the Lease endeavor to terminate its lease of the
Premises with Microbar in a similar form to that attached hereto as Exhibit
"D" to be effective on or before June 30, 1997, and shall use commercially
reasonable efforts to cause Microbar to vacate the Premises on or before such
date and to deliver the Premises to Tenant.
ADDENDUM 3, PARAGRAPH 4, USE
Notwithstanding anything to the contrary in the Lease, Tenant shall not be
required to cause the Premises to comply with any laws, rules or regulations
requiring alterations or improvements to the Premises unless the compliance is
necessitated due to Tenant's use or alteration of the Premises; provided,
however, that Tenant shall pay for the cost to cause the Premises to comply
with laws not due to Tenant's use or alteration of the Premises to the extent
properly included in Base Operating Cost.
ADDENDUM 4, PARAGRAPH 7, BASIC OPERATING COST
Notwithstanding anything to the contrary in the Lease, "Basic Operating Cost"
shall not include and Tenant shall in no event have any obligation to perform
or to pay directly, or to reimburse Landlord for, all or any portion of the
following repairs, improvements, replacements, premiums, claims, losses, fees
and expenses (collectively, "Costs"): (a) Costs occasioned by fire or other
casualties or by the exercise of the power of eminent domain (except for
deductibles and except for premiums for insurance carried by Landlord); (b)
costs related to hazardous materials that migrate onto the property or are
caused by the other tenant in the project; (c) expense reserves (except
reserves for real property taxes and assessments); (d) Costs which could
properly be capitalized under generally accepted accounting principles, except
to the extent amortized over the useful life of the capital item in question;
and (e) assessments in excess of the amount which would be payable if such
assessment expense were paid in installments over the normally scheduled term
(provided, however, that Basic Operating Cost may include in any calendar year
the full amount of a single assessment in the amount of $10,000 or less).
ADDENDUM 5, PARAGRAPH 11, TENANT'S REPAIRS
Notwithstanding anything to the contrary in the Lease, Landlord shall perform
and construct, and Tenant shall have no responsibility to perform or construct,
any repair, maintenance or improvements (a) necessitated by the acts or
omissions of Landlord or any other occupant of the Building, or their
respective agents, employees or contractors, (b) occasioned by casualty or by
the exercise of the power of eminent domain (which is addressed in Sections 23
and 24 of the Lease), or (c) electrical and plumbing systems outside the
demising walls of the Premises. Notwithstanding the foregoing, Tenant shall be
responsible for the costs of the repairs described in subsection (c) to the
extent properly included in Basic Operating Cost.
Landlord shall amortize any individual capital repair to the Premises, due to
normal wear and tear, in excess of fifteen thousand dollars ($15,000.00), over
the useful life of the repair, according to generally accepted accounting
principles using straight-line amortization at an interest rate equal to ten
percent (10%). Landlord shall also perform such repair. If the need for such
repair is caused by abnormal use or abuse by Tenant or its employees, agents or
invitees, Tenant shall be responsible for such repair.
<PAGE> 15
ADDENDA TO LEASE AGREEMENT DATED APRIL 11, 1997, BETWEEN SPIEKER PROPERTIES,
L.P., A CALIFORNIA CORPORATION, AS LANDLORD, AND CELERITEK, INC., A CALIFORNIA
CORPORATION, AS TENANT, FOR APPROXIMATELY 25,690 SQUARE FOOT PREMISES LOCATED
AT 2909 STENDER WAY, SANTA CLARA, CALIFORNIA.
ADDENDUM 6, PARAGRAPH 12, ALTERATIONS
Notwithstanding anything to the contrary in the Lease, Landlord shall advise
Tenant in writing at the time Landlord approves of any alteration whether such
alteration must be removed upon the termination of the Lease.
ADDENDUM 7, PARAGRAPH 16, SUBORDINATION
Landlord will use commercially reasonable efforts to obtain from the holder of
any deed of trust or mortgage a reasonably acceptable nondisturbance agreement
which provides that Tenant will not be disturbed by the superior lienholder so
long as Tenant is in compliance with the terms of this Lease. Tenant agrees to
pay Landlord all expenses incurred by Landlord in connection with Landlord
obtaining a nondisturbance agreement, including, without limitation, legal
fees, processing costs, and any other administrative expenses billed to
Landlord. Such expenses shall constitute Additional Rent and shall be due upon
Landlord's demand.
ADDENDUM 8, PARAGRAPH 21, ASSIGNMENT AND SUBLETTING
Notwithstanding anything to the contrary in the Lease, Tenant may, without
Landlord's prior written consent and without being subject to the termination
right or profit sharing provisions in Paragraph 21 of the Lease, sublet the
Premises or assign the Lease to (a) a subsidiary, affiliate, division or
corporation controlling, controlled by or under common control with Tenant,
(b) a successor corporation related to Tenant by merger, consolidation,
nonbankruptcy reorganization, or government action, or (c) a purchaser of
substantially all of Tenant's assets located in the Premises. A sale or
transfer of Tenant's capital stock shall not be deemed an assignment,
subletting or any other transfer of the Lease or the Premises.
ADDENDUM 9, PARAGRAPH 24, CASUALTY DAMAGE
Notwithstanding anything to the contrary in the Lease (including the provisions
of Paragraph 24 of the Lease), Landlord shall not have the right to terminate
the Lease following casualty damage to the Premises if the damage to the
Premises is relatively minor (e.g., repair or restoration would take less than
one hundred twenty (120) days to perform or cost less than ten percent (10%) of
the replacement cost of the Premises).
ADDENDUM 10, PARAGRAPH 38, TENANT IMPROVEMENTS
A. Notwithstanding anything to the contrary in the Lease, Landlord shall
deliver the Premises to Tenant in good, broom clean and vacant condition, with
all building systems in good working order and the roof water-tight, and
otherwise in the same condition as on the date hereof.
B. Landlord hereby consents, subject to its review and approval of final
plans, to Tenant's construction of the following improvements on a portion of
the Project adjacent to but outside the boundaries of the Premises as more
particularly described on Exhibit C attached hereto (the "Exterior
Improvements"): a nitrogen tank (which shall not be taller than the Building),
including an approximately 15 square foot pad and connecting pipes leading into
the Premises; a small gasification system; a small vacuum pump on a 3 square
foot pad; a clean dry air system; and a small chiller. Tenant shall have the
right to use the Exterior Improvements at all times during the term of the
Lease.
ADDENDUM 11, PARAGRAPH 39, HAZARDOUS WASTES
Landlord shall indemnify, defend and hold Tenant, its affiliates, their
respective directors, officers, employees and agents harmless from and against
any and all claims, judgments, damages, penalties, fines, costs, liabilities or
losses and attorneys' fees arising out of any Hazardous Material in, on or
about the Project or the Premises immediately prior to Tenant's first occupancy
or which was created, handled, placed, stored, used, transported or disported
or disposed of by Landlord, excluding, however, any Hazardous Material whose
presence was caused by Tenant or its affiliates or their respective agents.
<PAGE> 16
ADDENDA TO LEASE AGREEMENT DATED APRIL 11, 1997, BETWEEN SPIEKER PROPERTIES,
L.P., A CALIFORNIA CORPORATION, AS LANDLORD, AND CELERITEK, INC., A CALIFORNIA
CORPORATION, AS TENANT, FOR APPROXIMATELY 25,690 SQUARE FOOT PREMISES LOCATED
AT 2909 STENDER WAY, SANTA CLARA, CALIFORNIA.
ADDENDUM 12, REASONABLE CONSENTS
Notwithstanding anything to the contrary in the Lease, whenever the Lease
requires an approval, consent, designation, determination, selection or
judgment by either Landlord or Tenant, unless another standard is expressly set
forth, such approval, consent, designation, determination, selection or
judgment and any conditions imposed thereby shall be reasonable and shall not
be unreasonably withheld or delayed and, in exercising any right or remedy
hereunder, each party shall at all times act reasonably and in good faith.
<PAGE> 17
EXHIBIT "A"
[FLOOR PLAN]
SITE PLAN
<PAGE> 18
EXHIBIT "A"
LEGAL DESCRIPTION
PARCEL ONE:
- -----------
A PORTION OF THAT certain 12.263 acre parcel shown on the Record of Survey
entitled, "LANDS PROPOSED FOR STREET PURPOSES WITH THE CITY OF SANTA CLARA",
recorded April 27, 1973 in Book 322 of Maps, pages 13 and 14, Santa Clara
County Records, said portion being more particularly described as follows:
COMMENCING at the Southeast corner of said 12.263 acre parcel, being an iron
pipe set in the Southwesterly corner of that certain 15 foot strip of land
designated "Pcl, C-2" on said Record of Survey Map; thence along a Southerly
boundary of said 12.263 acre parcel, North 86 degrees 3' 50" West 170.25 feet to
an iron pipe set; thence North 89 degrees 46' 30" West 149.44 feet to an iron
pipe set 12.00 feet Northerly, measured at right angles, from Northerly line of
Central Expressway, as shown on said Record of Survey Map; thence on a tangent
curve deflecting to the right, with a radius of 40.00 feet, through a central
angle of 90 degrees 47' 17", an arc distance of 63.38 feet to an iron pipe set
in the Easterly line of Stender Way, as said Way is shown on said Record of
Survey Map; thence on and along the Easterly boundary of said Stender Way; North
1 degree 00' 47" East 230.00 feet; thence at right angles to Stender Way, South
88 degrees 59' 13" East 360.00 feet to a point in the Westerly boundary of said
15 foot strip designated "Pcl. C-2"; thence South 1 degree 00' 47" West along
said Westerly line of said 15 foot strip 276.62 feet to the point of
commencement, and being a portion of the Southeast quarter of Section 28,
Township 6 South, Range 1 West, Mount Diablo Base and Meridian, and also being a
portion of Parcel "A" as shown on the Parcel Map entitled, "PT'N LANDS OF CROW
SPIEKER #11, ALL OF 12.263 AC. PCL., R/S Santa Clara County Records.
PARCEL TWO:
- -----------
A PORTION of that certain "12.263 AC." parcel of land shown as bounded on the
West by Stender Way and on the East by "Pcl, C-2" on Record of Survey Map filed
April 27, 1973 in Book 322 of Maps, at pages 13 and 14, Santa Clara County
Records, said portion being more particularly described as follows:
BEGINNING at the Southwesterly corner of said "Pcl, C-2". Thence, along the
Westerly boundary of said "Pcl. C-2", North 1 degree 00' 47" East 276.62 feet to
the TRUE POINT OF COMMENCEMENT, thence, from said TRUE POINT OF COMMENCEMENT,
along the Westerly boundary of said "Pcl. C-2", North 1 degree 00' 47" East
195.00 feet, thence Westerly, at right angles to last said course, North 88
degrees 59' 13" West 360.00 feet to the Easterly line of Stender Way as shown on
aforesaid Map, thence South 1 degree 00' 47" West along last said Easterly line
of Stender Way, 195.00 feet, thence Easterly, at right angels to last said
course, 360.00 feet to THE TRUE POINT OF COMMENCEMENT, also being a portion of
Parcel "A" as shown on the Parcel Map entitled, "PT'N LANDS OF CROW-SPIEKER #11,
ALL OF 12.263 AC. PCL., R/S 322/14", recorded April 22, 1974 in Book 338 of
Maps, page 40, Santa Clara County Records.
<PAGE> 19
EXHIBIT "B"
EXISTING FLOOR PLAN
[CHART OF EXISTING FLOOR PLAN]
<PAGE> 20
EXHIBIT "C"
EXTERIOR IMPROVEMENTS
[CHART OF EXTERIOR IMPROVEMENTS]
<PAGE> 21
EXHIBIT "D"
FORM OF TERMINATION AGREEMENT
(DRAFT)
TERMINATION AGREEMENT
REGARDING 2909 STENDER WAY
THIS TERMINATION AGREEMENT ("Agreement") is dated April __, 1997, by
and between Spieker Properties, L.P., a California limited partnership,
successor in interest to Spieker #11, a California general partnership,
("Spieker"), and Microbar, Inc., a California corporation, ("Microbar").
RECITALS
A. Spieker is the owner of the Premises located at 2909 Stender Way,
Santa Clara, California (the "Premises"). The Premises are currently leased and
occupied by Microbar per the terms of that separate lease agreement between
Landlord and Tenant, dated October 4, 1994, ("Lease").
B. Microbar intends to relocate its business operations to its newly
leased property located at 1252 Orleans Drive, Sunnyvale, California and wishes
to relinquish its possession of the Premises and terminate its obligations
under the Lease, effective June 30, 1997.
C. Spieker has received a letter of interest from Celeritek, Inc., a
California Corporation, ("Celeritek") whereby Celeritek would lease the Premises
from Spieker, commencing July 1, 1997. Spieker is agreeable to terminating the
Lease with Microbar contingent upon Spieker entering into an acceptable new
lease for the Premises with Celeritek and on other conditions contained herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the terms set
forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Celeritek and Microbar hereby
agree as follows:
Occupancy and Microbar agrees that on or before 5:00 P.M. June 30, 1997, it
Surrender: shall have vacated the Premises completely, including the
removal of all items permitted or required to be removed under
the terms of the Lease, with all building systems in good
working order. Microbar will provide Spieker reasonable
opportunities to enter into the Premises to conduct inspections
of the Premises and building systems during Microbar's last
month of occupancy.
Contingencies: This Agreement shall be contingent on the following events:
(a) that Microbar has paid all amounts owing under the
Lease through June 30, 1997 (including and without
limitation rent, late fees, operating costs, etc.);
(b) that Microbar has surrendered the premises as provided
herein and required by the Lease; and
(c) that the new and separate lease agreement contemplated
by Spieker and Celeritek is in full force and effect.
If any of the above considerations have not been fulfilled,
Spieker shall have the option to render this agreement null
and void by providing Microbar written notice on or before
July 31, 1997.
Lease Termination: Provided that all contingencies have been fulfilled, the
Lease shall terminate effective June 30, 1997 and neither
party shall have any further obligation to the other except
as provided herein or as specified in the Lease as a
provision surviving the termination or expiration of the
Lease.
Security Deposit: Spieker agrees to refund Microbar's original security
deposit of sixteen thousand seven hundred seventy dollars
($16,770), less any outstanding charges (including, but not
limited to outstanding rent, late fees, prorated Basic
Operating Costs Adjustments, restoration costs, etc.),
within ninety (90) days after the effective termination.
IN WITNESS WHEREOF, the parties hereto have entered into this Amendment
as evidenced by their signatures below.
"LANDLORD" "TENANT"
Spieker Properties, L.P., Microbar, Inc.,
a California limited partnership a California corporation
By: Spieker Properties, Inc.,
a Maryland corporation
Its: General Partner
By: By:
-------------------------- ---------------------------
Its: Its:
------------------------- --------------------------
Date: Date:
------------------------ -------------------------
<PAGE> 22
EXHIBIT "HM"
LIST OF HAZARDOUS MATERIALS:
<TABLE>
<CAPTION>
Quantity Used
Chemical Name Purpose Quantity Stored on Weekly Basis
------------- ------- --------------- ---------------
<S> <C> <C> <C>
Liquid Nitro 3000 gal tank
Wiping Alcohol minimal
No clean Soder flux minimal
Forming Gas 1 bottle
Misc. Oils for Vac pumps
</TABLE>
<PAGE> 1
EXHIBIT 10.13
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of August 14, 1996,
by and between Celeritek, Inc. ("Borrower") whose address is 3236 Scott
Boulevard, Santa Clara, CA 95054, and Silicon Valley Bank ("Lender") whose
address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Lender, Borrower is indebted to Lender pursuant to,
among other documents, a Promissory Note, dated September 11, 1992, in the
original principal amount of Five Million and 00/100 Dollars ($5,000,000.00)
(the "Note"). The Note has been amended pursuant to Loan Modification Agreements
dated August 15, 1993, August 15, 1994, pursuant to which, among other things,
the principal amount of the Note was increased to Six Million and 00/100 Dollars
($6,000,000.00) and August 15, 1995. The Note, together with other promissory
notes from Borrower to Lender, is governed by the terms of a Business Loan
Agreement, dated September 11, 1992, as such agreement may be amended from time
to time, between Borrower and Lender (the "Loan Agreement"). Defined terms used
but not otherwise defined herein shall have the same meanings as in the Loan
Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness".
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness
is secured by a Commercial Security Agreement, dated September 11, 1992 (the
"Security Agreement"). Concurrently herewith, Lender shall agree to release its
security interest in the Collateral described in the Security Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Note.
1. Payable in one payment of all outstanding principal plus
all accrued unpaid interest on August 13, 1997. In
addition, Borrower will pay regular monthly payments of
all accrued unpaid interest due as of each payment date
beginning September 13, 1996, and all subsequent
interest payments are due on the same day of each month
thereafter.
2. The interest rate to be applied to the unpaid principal
balance of the Note is hereby decreased, effective as of
this date to a rate equal to the Lender's current Index
(as defined therein).
3. The principal amount of the Note is hereby decreased to
Four Million and 00/100 Dollars ($4,000,000.00).
B. Modification(s) to Loan Agreement.
1. The paragraph entitled "Borrowing Base Formula" is
hereby deleted in its entirety.
2. The paragraph entitled "Accounts Receivable and Accounts
Payable" is hereby deleted in its entirety.
1
<PAGE> 2
3. The paragraph entitled "Financial Covenants" is hereby
amended in its entirety, to read as follows:
Borrower shall maintain, on a quarterly basis, beginning
with the quarter ending June 30, 1996, a minimum quick
ratio of 2.00 to 1.00; a minimum tangible net worth of
$25,000,000.00; and a maximum total debt to tangible net
worth ratio of 0.60 to 1.00.
4. The paragraph entitled "Financial Statements" is hereby
amended in its entirety, to read as follows:
Furnish Lender with, as soon as available, but in no
event later than five (5) days after filing with the
Securities Exchange Commission (SEC), Borrower's forms
10K and 10Q together with a Compliance Certificate. All
financial reports required to be provided under this
Agreement shall be prepared in accordance with generally
accepted accounting principles, applied on a consistent
basis, and certified by Borrower as being true and
correct.
5. The paragraph entitled "Foreign Exchange Sublimit" is
hereby amended to allow Borrower to utilize up to
$4,000,000.00 for spot and future foreign exchange
contracts.
6. The paragraph entitled "Letter of Credit Sublimit" is
hereby amended to reduce the aggregate face amount of
standby and commercial letters of credit to an amount
not to exceed $4,000,000.00.
C. Release of Security Agreement.
1. As an accommodation to Borrower and for good and
valuable consideration, Lender, with this Loan
Modification Agreement, has agreed to release its
security interest granted under the Security Agreement
and the related UCC financing statements provided that
no Event of Default has occurred and is continuing.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Lender a fee in the amount
of Ten Thousand and 00/100 Dollars ($10,000.00) (the "Loan Fee") plus all
out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that it has no defenses against the obligations to pay
any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and agreements,
as set forth in the Existing Loan Documents. Except as expressly modified
pursuant to this Loan Modification Agreement, the terms of the Existing Loan
Documents remain unchanged and in full force and effect. Lender's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Lender to make any future modifications to
the Indebtedness. Nothing in this Loan Modification Agreement shall constitute
a satisfaction of the Indebtedness. It is the intention of Lender and Borrower
to retain as liable parties all makers and endorsers of Existing Loan
Documents, unless the party is expressly released by Lender in writing. No
maker, endorser, or guarantor will be released by virtue of this Loan
Modification Agreement. The terms of this
2
<PAGE> 3
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement
is conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first
written above.
.
BORROWER LENDER
CELERITEK, INC. SILICON VALLEY BANK
By: /s/ MARGARET SMITH By: /s/ MARY J. TOOMEY
---------------------------------- ---------------------------------
Name: Margaret Smith Name: Mary J. Toomey
---------------------------------- ---------------------------------
Title: CFO, Asst. Secretary Title: Vice President
---------------------------------- ---------------------------------
3
<PAGE> 1
Exhibit 11
CELERITEK, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal year ended March 31,
----------------------------------------------
PRIMARY 1997 1996 1995
- --------- ---------- --------- ---------
<S> <C> <C> <C>
Net income ..................................................................... $3,656 $2,276 $ 284
Add accretion of redeemable common stock, net of income tax affect ............. - - 29
------ ------ ------
Total .................................................................. $3,656 $2,276 $ 313
====== ====== ======
Common and common equivalent shares outstanding:
Common stock ............................................................... 7,017 5,505 1,627
Redeemable common stock .................................................... - - 50
Convertible preferred stock ............................................... - - 3,201
Options .................................................................... 335 305 308
Common and common stock equivalent shares related to stock and option issuances
in accordance with SAB No. 55, 64, and 83 ................................. - 149 258
------ ------ ------
Common and common equivalent shares used in computing per share amounts ........ 7,352 5,959 5,444
====== ====== ======
Net income per share ........................................................... $ 0.50 $ 0.38 $ 0.06
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended March 31,
----------------------------------------------
FULLY DILUTED 1997 1996 1995
- ------------- ---------- ---------- ---------
<S> <C> <C> <C>
Net income ................................................................... $3,656 $2,276 $ 284
Add accretion of redeemable common stock, net of income tax affect ........... - - 29
------ ------ ------
Total ................................................................ $3,656 $2,276 $ 313
====== ====== ======
Common and common equivalent shares outstanding:
Common stock ............................................................. 7,017 5,505 1,627
Redeemable common stock .................................................. - - 50
Convertible preferred stock ............................................. - - 3,201
Options .................................................................. 335 437 308
Common and common stock equivalent shares related to stock and option issuances
in accordance with SAB No. 55, 64, and 83 ............................... - 149 258
------ ------ ------
Common and common equivalent shares used in computing per share amounts ...... 7,352 6,091 5,444
====== ====== ======
Net income per share ......................................................... $ 0.50 $ 0.37 $ 0.06
====== ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 13
[GRAPHIC OF ARROW]
CELERITEK, INC. ANNUAL REPORT 1997
<PAGE> 2
Celeritek, Inc. is an industry leader in providing gallium arsenide
radio-frequency integrated circuits (GaAs RF ICs) and high-frequency radio
transceiver subsystems and components designed to meet the new and demanding
specifications of wireless communications customers in four markets: microwave
radios, cellular telephone systems and personal communications services (PCS),
satellite-based communications, and defense electronics.
Having developed strong expertise in GaAs process technology and microwave
signal processing to meet defense-related needs for accurate, clear wireless
transmission, Celeritek now leverages that expertise to provide commercial
customers with application-specific products. These products -- which enable
core transmit-and-receive functions in PCS, local loop, telephony, and data
communications networks worldwide -- are designed to help Celeritek's customers
achieve cost savings and faster time to market.
<PAGE> 3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales:
------------------------------------------------------------------------------------
Commercial $27,632 $28,021 $10,854 $ 6,274 $ 2,411
Defense 17,714 9,703 21,813 29,755 28,340
------------------------------------------------------------------------------------
Total net sales 45,346 37,724 32,667 36,029 30,751
Gross profit 16,428 13,840 11,922 17,653 14,667
Income from operations 5,374 3,953 895 3,681 3,630
Net income 3,656 2,276 $ 284 $ 1,925 $ 1,836
------------------------------------------------------------------------------------
Net income per share $ 0.50 $ 0.38 $ 0.06 $ 0.36 $ 0.36
Shares used in per share calculations 7,352 5,959 5,444 5,520 5,265
------------------------------------------------------------------------------------
</TABLE>
The Annual Report to Shareholders contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
factors set forth below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Operating
Results."
1
<PAGE> 4
[PHOTOGRAPH OF
1996 Annual Report
Letter to our Shareholders]
TO OUR SHAREHOLDERS
Fiscal 1997 was another good year for Celeritek. We continued the implementation
of our strategy by expanding our product lines and customer base. We received
new orders of approximately $58 million -- a 36% increase from last year -- and
revenues increased 20% to $45 million. Profits after tax were up 61%, to $3.7
million.
In the wireless subsystems division, which focuses on the microwave radio,
satellite communications, and personal communication services (PCS) base station
markets, we were able to significantly expand our business with two of our major
customers, P-Com and Hughes Network Systems. We also added a major very small
aperture terminal (VSAT) system supplier and a microwave radio supplier to our
list of market-leading customers and won significant design-ins for the Personal
Handy-Phone System (PHS) and PCS base station markets.
Our semiconductor division developed a new product family of gallium arsenide
radio-frequency integrated circuits (GaAs RF ICs), called the Triniti DX(TM) for
use in PCS and cellular phones. We have been designed into handsets and base
stations at Lucent, Motorola, and Ericsson, as well as a number of other
manufacturers. These design-ins are strong endorsements of Celeritek's
technology.
Our designs are unique in that they provide highly efficient, linear, power
amplification for use in phones. Development of the next generation of products
is underway. These products will be designed for greater efficiency to allow for
handsets with smaller batteries and longer talk time.
In the defense division, we enjoyed increased market share and received the
first orders for amplifier products for the satellite communications market.
THE CELERITEK ADVANTAGE
Celeritek is a semiconductor company with deep roots in microwave signal
processing. It is also a microwave company with deep knowledge of GaAs
technology. This unique combination of skills results in semiconductor products
that are designed with total system needs clearly in mind and well understood.
In addition, having our own foundry for GaAs semiconductors offers our
subsystems designers the customized chips they need. This advantage results in
optimized subsystem performance and rapid design and delivery.
The experience and technology in RF and microwave signal processing Celeritek
developed for the defense industry has proved to be a valuable asset and is
becoming more valuable as wireless applications move to higher frequency bands.
There is a developing need for dual frequency bands (i.e. cellular and PCS) in
the same phone so that consumers are able to use either network with the same
handset. This "broad band" technology was first utilized in defense
2
<PAGE> 5
systems; Celeritek has designed and manufactured this type of product for
several years. The Company is now developing dual frequency band RF ICs based on
our previous experience. In addition to the dual frequency development, dual
mode RF ICs are now available. These products can be used in phones that use
either code division multiple access (CDMA) or time division multiple access
(TDMA) digital processing technologies.
Celeritek is today an established leader in RF and microwave signal processing,
as demonstrated by our products ranging from discrete transistors to a fully
integrated supervisory control and data acquisition (SCADA) system used in a
satellite communications network. We believe that the breadth of our product
lines and customer base provides us with a distinct competitive advantage.
STRENGTHENING OUR BASE
During the past year we have made significant changes that strengthen our
business infrastructure. In April 1997, we negotiated a long-term lease on
25,000 square feet of additional manufacturing space. This new area will house
our wireless subsystems operations. When this move is completed in late summer,
we will dedicate the present facility to our semiconductor product business. In
FY98 we expect to invest substantially in our semiconductor assembly and test
operations to meet increasing volume demands. In our subsystem manufacturing
area, we are enhancing our automated test equipment to meet the demand for
higher volume and increasingly complex products.
Along with our investment in plant and equipment we are also investing in
people. Our total employee head count increased by approximately 30% compared to
the prior year and includes design, assembly, and test engineers. We also
strengthened our management team by recruiting Ramesh Ramchandani to be director
of wireless semiconductor sales. He brings experience and vigor to his position.
Mr. Ramchandani replaces Bill Hoppin, who was promoted to vice president of
sales.
Celeritek is now preparing to become ISO9001 certified and expects to be
certified by year end. Of course, since its inception, the Company has had the
required military quality system MIL Q-9858A, a program very similar to ISO9001.
Our decision to add the new certification reflects our continuous emphasis on
this growing commercial market.
FY97 was our first full year as a public company. I want to thank our
shareholders who bought our stock during the IPO for their confidence then and
throughout the year. I also want to welcome the new shareholders. My goal is to
continue to increase the value of your company. Our 1997 annual report will show
you how executing the plan we described last year puts Celeritek in a better
position than ever to become an integral part of the growing wireless
communications industry.
[SIG]
Tamer Husseini
Chairman, President and Chief Executive Officer
[PHOTOGRAPH OF
TAMER HUSSEINI]
3
<PAGE> 6
[PHOTOGRAPH OF
1996 Annual Report
Letter to our Shareholders]
Having identified opportunities in the PCS, digital cellular telephony, and
wireless local loop (WLL) segments of the wireless market, in fiscal 1997
Celeritek built relationships with several leading players including Lucent,
Ericsson, and Motorola. Ericsson announced it will use Celeritek's Triniti
DX(TM) GaAs power amplifiers in PCS handsets and base stations. Design-ins at
Lucent and Motorola for PCS and cellular, as well as in dual-mode/dual-band
phones, are strong endorsements of the technology. Kyocera has issued
development contracts to Celeritek for power amplifiers used in its PHS base
stations in Japan, and Qualcomm -- which pioneered the CDMA digital
communications standard on which PCS is based -- intends to use the Company's
amplifiers in its PCS base stations.
Celeritek has long been an established supplier of microwave radio transceivers
and out-door units, VSAT transmitters, and other core equipment for wireless
communications applications. As a result, the Company has gained considerable
expertise in microwave and RF signal processing and GaAs RF IC process design.
Now, one of the Company's primary goals is to continue its penetration of
emerging high-growth industry segments by building strong relationships with
additional original equipment manufacturer (OEM) leaders in these segments.
THE NEW WORLD OF WIRELESS
Fueled by advances in technology, reductions in cost, deregulation, and the
growth of the global economy, the demand for wireless communications equipment
is increasing rapidly. In developing countries, wireless is the technology of
choice for basic telephone services due to faster, cheaper installation than
wired networks. In developed countries, demand for clear, secure cellular phone
service and two-way data transmission applications such as credit-card
validation and reservation confirmation is stronger than ever. At the same time,
consumers increasingly require technology that supports high-performance voice,
data, and multimedia applications such as PCS and wireless Internet access.
PCS: THE NEXT GENERATION IN PERSONAL COMMUNICATIONS
Cellular communications are taken for granted as a standard feature of business
in developed countries across the globe. Now digital PCS networks -- which
require more cells (base stations) but are much cheaper to install than cellular
ones -- are stimulating competition from cellular providers as they overhaul
their analog networks to compete with the clarity, security, and capacity of
digital processing. As a result, domestic markets for wireless communication
equipment are expected to grow as service providers invest in new PCS and
digital cellular infrastructure.
4
<PAGE> 7
[PHOTOGRAPH OF
1996 Annual Report
Letter to our Shareholders]
Industry analysts expect that as many as 50,000 new PCS cells will be deployed
in the U.S. within five years, each of which will require transceivers and other
components. In Japan, PHS -- a PCS system introduced in 1996 -- became the first
Japanese consumer product in history to sell one million units in the first year
of release.
PCS is a category of digital systems and services that let users send and
transmit voice messages, e-mail, faxes, and other data with a cordless handset
device. PCS technology is also used for wireless private branch exchange (PBX)
office-based systems. In such a system, digital cordless phones have the same
functionality as extensions, ringing when an office number is dialed regardless
of the user's location.
As PCS becomes more popular, there will be increasing need for
dual-band/dual-mode phones that can communicate in either cellular or PCS
networks while supporting both CDMA and TDMA digital processing standards.
Celeritek believes that with its experience in multi-band, dual-mode RF ICs it
is well positioned to address the needs of PCS system providers.
OPPORTUNITIES IN WIRELESS LOCAL LOOP
The demand abroad for wireless devices is expected to be similarly strong as
more developing countries avoid the time and expense of installing conventional
land-based wireline by installing WLL networks for basic telephone service.
Domestically, some service providers are also exploiting the cost-efficiencies
of WLL to quickly upgrade basic services for their customers and to provide
"last mile" connections to hard-to-reach rural areas.
Celeritek is working to expand its penetration of this market through its
relationships with Ericsson, Lucent, Motorola, and Hughes Network Systems. The
Company provides cost-effective GaAs IC solutions for these customers that are
critical in WLL applications.
5
<PAGE> 8
[Photo of GaAs RF ICS]
[Photo of manufacturing]
6
<PAGE> 9
[PHOTOGRAPH OF
Cellular Phone]
CELERITEK IS ALREADY AN ESTABLISHED LEADER IN GAAS TECHNOLOGY AND MICROWAVE
SIGNAL PROCESSING. NOW THE COMPANY IS LEVERAGING THIS EXPERTISE TO MEET THE
SPECIFIC NEEDS OF CUSTOMERS IN THE HIGH-GROWTH DIGITAL CELLULAR, PERSONAL
COMMUNICATIONS SERVICES (PCS), AND WIRELESS LOCAL LOOP (WLL) MARKETS.
AS A MANUFACTURER OF GAAS RF ICS WITH EXTENSIVE EXPERIENCE IN MICROWAVE SIGNAL
PROCESSING, CELERITEK BELIEVES IT IS WELL POSITIONED IN THE WIRELESS
MARKETPLACE. THE COMPANY USES ITS PROPRIETARY EXPERTISE TO TAILOR GAAS
SEMICONDUCTORS FOR THE SPECIFIC WIRELESS APPLICATIONS OF ITS CUSTOMERS.
CELERITEK MAINTAINS CONTROL OVER PRODUCT QUALITY AND DELIVERY OF RF ICS THROUGH
INTEGRATED, RESPONSIVE MANUFACTURING OPERATIONS. THE COMPANY'S IN-HOUSE 10,000
SQUARE-FOOT GAAS FOUNDRY ENSURES THAT ITS SUBSYSTEM DESIGNERS HAVE THE SPECIFIC
CHIPS THAT THEY NEED, WHEN THEY NEED THEM.
7
<PAGE> 10
[PHOTOGRAPH OF
1996 Annual Report
Letter to our Shareholders]
Celeritek -- a leading manufacturer of GaAs RF ICs -- believes that it is well
positioned in the GaAs marketplace due to its proprietary knowledge for
tailoring GaAs semiconductors in order to optimize the microwave signal for
specific commercial applications. This expertise is evidenced by the recent
adoption of the Company's Triniti DX(TM) GaAs power amplifier by Ericsson,
Lucent, and Motorola for use in phones and base stations. Celeritek GaAs RF ICs
are also used in digital base stations and subscriber terminals designed for WLL
applications.
Celeritek is a microwave signal processing company with extensive GaAs
experience as well as a GaAs semiconductor company with significant knowledge of
microwave signal processing. This unique combination of competitive advantages
enables the Company to provide a broad range of solutions tailored to the
specific needs of customers.
In fiscal 1997, the Company increased its design-ins -- the adoption of
application-specific products by leading OEMs -- by working closely with
customers to determine ways in which GaAs/microwave signal processing expertise
can be applied to meet their requirements.
THE GROWING GaAs COMPONENT MARKET
As the traditional commercial frequencies become increasingly congested,
providers are expanding into the higher microwave frequencies previously
reserved for defense and space agencies. The demand is climbing in developed
countries for wireless Internet access and other high data capacity
applications. And as providers migrate their analog customer base to digital
processing standards for PCS phones, there's a clear need for technology that
supports multiple modulation schemes to ensure seamless phone coverage for phone
users.
Based on these needs, technologies that enable and optimize high-frequency, high
data capacity applications while supporting multiple modulation schemes are an
increasingly common requirement of wireless device manufacturers. Only fully
mature, leading-edge expertise can make these technologies possible.
Gallium arsenide -- which has five times the mobility of silicon and maintains
performance at low voltage -- is the material of choice for RF microwave
semiconductors designed to meet these requirements due to its inherently lower
noise, greater efficiency, and higher capacity. PCS handsets and cellular
telephones utilizing GaAs power amplifiers consume less power and operate at
lower voltages, which translates into smaller, lighter designs with longer
battery life. Celeritek is currently a leader in providing components that make
the lowest operational voltage for handsets possible. These power amplifiers
also support high-quality transmission and dual-mode/dual-band (analog and
digital cellular and PCS) telephony.
8
<PAGE> 11
[PHOTOGRAPH OF
1996 Annual Report
Letter to our Shareholders]
GaAs RF ICs, which have traditionally been used for high-frequency
defense-related radar and communications purposes, are now joining silicon
semiconductors as a primary component in commercial wireless applications.
According to analysts, the GaAs analog chip market was worth $290 million in
1995 and will average 37% annual growth through 2000.
KEEPING THE EDGE
Maintaining this technical edge in microwave technology and GaAs process and
design is Celeritek's top priority. To that end, in fiscal 1997 the Company made
significant investments in its current facility. Specifically, Celeritek
expanded its GaAs RF IC capacity by adding new test, assembly, and automation
capabilities that will enable improved production levels and faster turnaround
should the anticipated rise in demand for GaAs RF ICs occur. The Company is also
in the process of obtaining ISO9001 certification, which it hopes to achieve by
the end of fiscal 1998.
Celeritek's sales and engineering teams work closely with customers, from design
through prototype and into manufacturing, to help develop system-wide solutions
to their wireless transmission needs. The Company's customer engineering support
team uses their expertise in components, subsystems, and system architecture to
develop application-specific wireless transmission solutions for its customers'
products. And vertically integrated manufacturing operations -- comprising an
in-house foundry and microwave IC and surface-mount process technologies --
enable the Company to be responsive to customer needs in terms of performance,
size, and cost.
Celeritek intends to continue to leverage its leadership in GaAs technology and
RF/microwave signal processing in new and different ways. The Company places a
high priority on working with customers to develop innovative solutions like the
Triniti DX (TM) as applications emerge in this dynamic, growing market.
9
<PAGE> 12
[PHOTOGRAPH OF MANUFACTURING]
[PHOTOGRAPH OF OUT-DOOR UNITS]
10
<PAGE> 13
IN FISCAL 1997, CELERITEK UPGRADED THE AUTOMATED TEST EQUIPMENT IN ITS SUBSYSTEM
MANUFACTURING AREA TO MEET INCREASED VOLUME DEMANDS. THE COMPANY IS ALSO SEEKING
ISO9001 CERTIFICATION (EXPECTED IN FISCAL 1998).
OVER YEARS OF EXPERIENCE, CELERITEK HAS DEVELOPED A LIBRARY OF PROVEN
SIGNAL-PROCESSING FUNCTIONS THAT CAN BE QUICKLY AND COST-EFFECTIVELY INTEGRATED
INTO HIGHER-LEVEL SYSTEMS LIKE TRANSMITTERS, OUT-DOOR UNITS, AND RADIO
ASSEMBLIES.
WIRELESS NETWORKS DEPEND ON HIGH-QUALITY TRANSCEIVERS TO COMPLETE A CLEAR,
ACCURATE COMMUNICATIONS LINK. CELERITEK ASSEMBLIES, SUBSYSTEMS, AND RADIOS MAKE
THESE HIGH-QUALITY LINKS POSSIBLE BY ENABLING CRITICAL RF AND MICROWAVE
TRANSMIT-AND-RECEIVE FUNCTIONS IN THESE NETWORKS.
[PHOTOGRAPH OF ANTENNAS]
11
<PAGE> 14
[PHOTOGRAPH OF
1996 Annual Report
Letter to our Shareholders]
Wireless networks are universally dependent on high-quality transceivers to
complete a communications link of any kind. Celeritek transmitter/receiver
subsystems make these high-quality links possible by providing core
transmit-and-receive functions.
The Company is a leading supplier to manufacturers of point-to-point microwave
radios that serve as the digital links between ground stations and switched
networks. Celeritek also manufactures and sells C- and Ku-band transmitters and
C- and Ku-band out-door units (ODUs) for use in very small aperture terminals
(VSATs) and supervisory control and data acquisition (SCADA) systems that
support fixed-site ground-based satellite communications.
The Company believes that its transceiver products, which enable cost-effective
delivery of voice and data across broad geographic areas, will play an
ever-increasing role in the new world of wireless as the demand for wireless
telephony and interactive high data rate applications continues to climb.
Celeritek's product line is specifically designed for fast, efficient
integration into OEM networks. Leading manufacturers like P-Com, Hughes Network
Systems, and AT&T use the Company's microwave transceivers and ODUs in their
high-volume radio, cellular and satellite data and voice transmission systems.
And in fiscal 1997, Celeritek agreed to supply Ku-band transmitters for a major
VSAT network provider, enhancing the Company's presence in the high-level,
integrated product area even further.
The Company has many years of experience in designing and manufacturing RF and
microwave devices for use in high-volume communications applications. As a
result of this experience, Celeritek now maintains an extensive library of
proven signal-processing circuits that can be quickly and efficiently integrated
into higher-level systems. This modular approach to the engineering process
helps the Company's customers bring their products to market faster and at a
lower cost.
GROWTH IN VSAT NETWORKS
Despite competition from fiber-optic networks, the market for geostationary
(fixed) satellite services is strong. These services are expected to be
increasingly critical in domestic and global communications networks.
VSATs are ground-based stations in a satellite service designed to carry
interactive voice and data traffic. Advancing technology has reduced the cost of
VSATs so they are particularly well-suited for high-volume urban applications.
12
<PAGE> 15
[PHOTOGRAPH OF
1996 Annual Report
Letter to our Shareholders]
In developed countries, VSATs are commonly used to link gas stations, hotels,
and a growing number of mobile workers to data networks for credit-card
validation, remote monitoring, and inventory processing. But with the surge in
demand for wireless Internet access services, VSATs will also increasingly serve
as a cost-effective tool for voice and data transmission.
VSATs have traditionally been used primarily for data applications. Now, as
developing countries increasingly turn to wireless as a cost-effective
alternative to building expensive telecom infrastructure, VSAT networks are
being used to provide reliable, cost-effective telephone services across broad
geographical areas. These systems are used as essential links in a public
switched voice network, and provide expanded services more simply and cheaply
than laying new trunk lines of copper wiring.
Although the Company has no current mobile satellite business, it is
investigating future opportunities in low earth-orbiting (LEO) satellite
communications systems, which will cost-effectively deliver voice, fax, Global
Positioning System (GPS), and data services to any point on the globe.
Furthermore, as the need develops to transmit increasing amounts of multimedia
data, Celeritek expects that local multipoint distributions service, or LMDS,
will become a low-cost alternative to fiber-optic lines.
MAINTAINING MARKET SHARE IN DEFENSE
Although defense budgets are declining, electronic countermeasures, missile
guidance systems, radar, and other electronics remain a top priority. As always,
state-of-the-art microwave devices like those manufactured by Celeritek are
critical in these systems.
The Company has a long history of providing amplifiers and transceiver
components used in these applications. Celeritek has demonstrated expertise in
designing microwave components and subsystems used in missile guidance and
electronic countermeasures, as well as in satellite-based communications. As a
result, the Company has continued to supply defense contractors with products.
In fiscal 1997, reduced competition and the addition of satellite-based
communications business from Lockheed-Martin and ITT Aerospace translated in
larger defense market share for Celeritek. Although the Company will continue to
supply its defense customers with products as orders are received, the Company
intends to continue to focus on selected high-growth commercial opportunities.
13
<PAGE> 16
[PHOTOGRAPH OF OUT-DOOR UNIT]
[PHOTOGRAPH OF MANUFACTURING]
14
<PAGE> 17
[PHOTOGRAPH OF ANTENNA]
CELERITEK MANUFACTURES MICROWAVE ASSEMBLIES AND OUT-DOOR UNITS (ODUS) SUPPORTING
FIXED-SITE GROUND-BASED SATELLITE COMMUNICATIONS. THE COMPANY HAS RELATIONSHIPS
WITH LEADING OEMS IN THIS AREA SUCH AS HUGHES NETWORK SYSTEMS AND AT&T.
CELERITEK HAS LONG BEEN A SUPPLIER OF PRODUCTS FOR VSAT NETWORKS. TRADITIONALLY
USED FOR DATA APPLICATIONS, THESE NETWORKS ARE NOW BEING INCREASINGLY USED TO
PROVIDE RELIABLE, COST-EFFECTIVE BASIC TELEPHONE SERVICES ACROSS WIDE AREAS.
C- AND KU-BAND PRODUCT ASSEMBLY AND TEST ARE PERFORMED IN THE COMPANY'S 28,000
SQUARE-FOOT MANUFACTURING AREA.
15
<PAGE> 18
FINANCIAL REVIEW
[REVENUE GRAPH]
[NET INCOME GRAPH]
<TABLE>
<S> <C>
Management's Discussion of Analysis of Financial 17
Conditions and Results of Operations
Consolidated Balance Sheets 20
Consolidated Statements of Income 21
Consolidated Statements of Shareholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24
Report of Independent Auditors 32
</TABLE>
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
OVERVIEW
The Company was incorporated in December 1984 to design, develop, manufacture
and market high frequency radio products that provide core transmit and receive
functions for wireless communications systems. The Company's products are
primarily utilized in four market segments: microwave radios, cellular telephone
systems and personal communications services, satellite-based communications and
defense electronics. During fiscal 1995, 1996 and 1997, commercial wireless
communications sales accounted for $10.9 million, $28.0 million and $27.6
million of total net sales, respectively. The commercial sales level in fiscal
1997 is the result of the receipt of several key orders later in the fiscal year
than expected. Sales in fiscal 1997 to the defense electronics markets increased
as a result of reduced competition and the addition of defense-related satellite
communications business. The Company does not expect defense sales to increase
in the future. However, the Company will continue to selectively pursue sales to
certain defense customers.
A relatively limited number of OEM customers have historically accounted for a
substantial portion of the Company's sales. In fiscal 1996 and 1997, sales to
the top ten such customers accounted for approximately 74% and 66%,
respectively, of total net sales. In fiscal 1997, two of the Company's OEM
customers accounted for 20% and 11% of total net sales. The Company expects that
sales of its products to a limited number of OEM customers will continue to
account for a high percentage of its sales for the foreseeable future, however,
the specific customers will likely change from year to year. Of the Company's
current backlog, approximately 28% is attributable to orders received from one
OEM customer. If the Company were to lose a major OEM customer, or if orders by
a major OEM customer were to otherwise decrease or be delayed, including
reductions due to market or competitive conditions in the wireless
communications markets or decreases in government defense spending, the
Company's business, operating results and financial condition would be
materially adversely affected.
Historically, gross margins experienced by the Company on sales to certain
commercial customers have been lower than gross margins experienced by the
Company on sales to defense customers. The Company's gross margins in any period
are affected by a number of different factors. Gross margins for certain of the
Company's products, primarily its semiconductor products, are strongly impacted
by production volume. Gross margins for commercial products also depend on
pricing pressure and market demand for lower cost products in commercial
markets. Because of the different gross margins on various products, changes in
product mix can impact gross margins in any particular time period. In addition,
in the event that the Company is not able to adequately respond to pricing
pressures, the Company's current customers may decrease, postpone or cancel
current or planned orders, and the Company might not be able to secure new
customers. As a result, the Company may not be able to achieve desired
production volumes or gross margins.
In addition, average selling prices for the Company's products generally
fluctuate from period to period due to a number of factors, including product
mix, competition and unit volumes. The average selling prices of a specific
product also tend to decrease over that product's life. To offset such
decreases, the Company relies primarily on obtaining design and yield
improvements and corresponding cost reductions in the manufacture of existing
products and on introducing new products that incorporate advanced features and
therefore can be sold at a higher average selling price.
FISCAL 1997 COMPARED TO FISCAL 1996
The Company's total net sales increased 20% from $37.7 million in fiscal 1996 to
$45.3 million in fiscal 1997. The increase in sales between fiscal 1996 and
fiscal 1997 was a result of significantly increased sales to defense customers.
Commercial sales were $28.0 million in fiscal 1996 and $27.6 million in fiscal
1997. A decline in sales to the satellite-based communications segment in fiscal
1997 was offset by increased sales to the terrestrial-based microwave radio
segment. Defense sales increased by 82% from $9.7 million in fiscal 1996 to
$17.7 million in fiscal 1997. The Company believes the increased sales to the
defense market are the result of the Company achieving greater market share due
to a decrease in the number of competitors, as opposed to market growth. The
Company does not expect defense sales to increase in the future. However, the
Company intends to continue to selectively pursue sales to certain defense
customers.
Gross margin was relatively constant between fiscal 1996 and 1997 at 37% and
36%, respectively, of total net sales.
The Company's gross margin improved due to increased sales to the defense market
of products with higher gross 17 margins than products sold to the commercial
market. This improvement in margin was offset by an expense related to the
cancellation of a commercial contract for satellite-based communications
equipment. Excluding this expense from cost of sales for fiscal 1997, gross
margin would have been 38%.
Research and development expenses increased from $3.8 million, or 10% of total
net sales in fiscal 1996, to $4.3 million, or 9% of total net sales in fiscal
1997, reflecting the Company's continuing investment in commercial product
development. The Company had more design engineers in fiscal 1997 than fiscal
1996 for commercial products and expects the dollar amount of research and
development expenses to continue to increase in future periods.
17
<PAGE> 20
Selling, general and administrative expenses increased from $6.1 million, or 16%
of total net sales in fiscal 1996, to $6.8 million, or 15% of total net sales in
fiscal 1997. The dollar increase was due to personnel costs and increased
administrative and selling costs.
Interest income and expense and other income, net, was $244,000 of net expense
in fiscal 1996 compared to $525,000 of income in fiscal 1997. The change is due
to increased interest income on increased cash and investment balances as a
result of proceeds from the initial public offering and the elimination of
interest expense as a result of no outstanding borrowings in fiscal 1997.
FISCAL 1996 COMPARED TO FISCAL 1995
The Company's total net sales increased 15% from $32.7 million in fiscal 1995 to
$37.7 million in fiscal 1996. The increase in net sales between fiscal 1995 and
fiscal 1996 was the result of significantly increased sales to commercial
customers, offset by declining sales to defense customers. Commercial net sales
increased 157% from $10.9 million in fiscal 1995 to $28.0 million in fiscal
1996, the result of a substantial increase in net sales to the satellite-based
voice and data communications market. To a lesser extent, sales to the
terrestrial-based voice and data communications market also increased. Sales to
the defense electronics market declined 56% from $21.8 million to $9.7 million
due to a decline in the market for defense electronics products as well as an
increased focus by the Company on commercial customers. The Company intends to
continue to selectively pursue sales to certain defense customers. International
sales declined from 30% of total net sales in fiscal 1995 to 12% of total net
sales in fiscal 1996 as the result of decreased demand from international
defense customers.
Gross margin was relatively constant between fiscal 1995 and fiscal 1996 at 36%
and 37%, respectively, of total net sales.
Research and development expenses decreased from $5.3 million or 16% of total
net sales in fiscal 1995 to $3.8 million or 10% of total net sales in fiscal
1996 reflecting the Company's decreasing emphasis and a reduction of the number
of engineers focused on developing defense electronics products. The Company's
defense electronics products tend to have a higher development component than
its commercial products, and accordingly, the research and development expenses
of defense electronics products per sales dollar is generally higher. The
Company expects the dollar amount of research and development expenses to
increase, although it expects that such expenses as a percentage of net sales
will likely remain relatively constant.
Selling, general and administrative expenses increased from $5.7 million in
fiscal 1995 to $6.1 million in fiscal 1996 and decreased as a percentage of
total net sales from 18% in fiscal 1995 to 16% in fiscal 1996.
Interest income and expense and other income, net, decreased from an expense of
$482,000 in fiscal 1995 to an expense of $244,000 in fiscal 1996. The decrease
was due to lower overall interest expense and increased interest income due to
the completion of the Company's initial public offering in December, 1995.
The provision for income taxes as percentage of income before taxes was 31% and
39% in fiscal 1995 and fiscal 1996, respectively. The lower rate in fiscal 1995
was primarily due to the recognition of the benefit of state investment tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash flows from
operations and sales of equity securities including the initial public offering
of common stock completed in December 1995 and January 1996, which generated net
proceeds of approximately $12.1 million.
Net cash provided by operating activities was $783,000, $1.8 million and $6.9
million in fiscal 1995, 1996 and 1997, respectively. The increase in cash
provided by operating activities in fiscal 1996 was due to higher net income and
increased accounts payable created by larger inventory purchases and increased
accrued liabilities due mainly to increased income tax accruals. This increase
in net operating cash was partially offset by increased accounts receivable as a
result of increased sales and, to a lesser degree, by increased inventory levels
needed to support higher shipment rates. The increase in cash provided by
operating activities in fiscal 1997 was due to higher net income, a lower
increase in accounts receivable and increased accounts payable created by larger
inventory purchases. Increased accrued liabilities due to higher income tax
accruals also contributed to the increase in cash generated by operations.
Net cash used in investing activities was $568,000, $8.1 million and $3.7
million during fiscal 1995, 1996 and 1997. The net cash used for investing for
all periods relates primarily to purchases of equipment and the purchase and
sale of securities. In fiscal 1995, the Company's expenditures for property and
equipment were partially offset by $808,000 in proceeds from the sale of
securities. In fiscal 1996, the net cash used in investing activities was
primarily due to the purchase of short-term investments. In fiscal 1997, the net
cash used was primarily for the purchase of equipment.
In fiscal 1995, the Company also used $1.0 million of cash to purchase its
redeemable common stock. In fiscal 1996, the Company used $4.5 million of cash
to repay indebtedness, including the bank line of credit and various equipment
leases and notes related to equipment financing.
18
<PAGE> 21
As of March 31, 1997, the Company had $7.0 million of cash and cash equivalents,
$8.2 million of short-term investments and $26.4 million of working capital. The
Company believes that the current capital resources combined with cash generated
from operations will be sufficient to meet its liquidity and capital expenditure
requirements at least through fiscal 1998.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The following factors should be carefully reviewed in addition to the other
information contained in this Annual Report to Shareholders.
The Company's annual and quarterly results have fluctuated in the past, and may
continue to fluctuate in the future, due to a number of factors, including: the
ability of the Company to complete its move to the new manufacturing facility on
time; the risks involved in the start up of a new facility; the timing,
cancellation or delay of customer orders; the mix of products sold; the timing
of new product introductions by the Company or its competitors; the long sales
cycle associated with the Company's application-specific products; market
acceptance of the Company's and its customers' products; variations in average
selling prices of semiconductors; variations in manufacturing yields; changes in
inventory levels; and changes in manufacturing capacity and variations in the
utilization of this capacity and other competitive factors. Any unfavorable
changes in the factors listed above or others could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to maintain annual or
quarterly profitability in the future.
The Company's ability to grow will depend substantially on its ability to
continue to apply its radio-frequency ("RF") and microwave signal processing
expertise and GaAs semiconductor technologies to existing and emerging
commercial wireless communications markets. If the Company is unable to design,
manufacture and market new products for existing or emerging commercial markets
successfully, its business, operating results and financial condition will be
adversely affected. Furthermore, if the markets for the Company's products in
the commercial wireless communications area fail to grow, or grow more slowly
than anticipated, the Company's business, operating results and financial
condition could be materially adversely affected.
The markets in which the Company competes are intensely competitive and the
Company expects competition to increase. There can be no assurance that the
Company will be able to compete successfully in the future. Furthermore, the
markets in which the Company competes are characterized by rapidly changing
technologies, evolving industry standards and continuous improvements in
products and services. There can be no assurance that the Company will be able
to respond to technological advances, changes in customer requirements or
changes in regulatory requirements or industry standards, and any significant
delays in development, introduction or shipment of products could have a
material adverse effect on the Company's business, operating results and
financial condition.
The Company's customers establish demanding specifications for performance and
reliability. There can be no assurance that problems will not occur in the
future with respect to performance and reliability of the Company's products. If
such problems occur, the Company could experience increased costs, delays in or
reductions, cancellations or rescheduling of orders and shipments, product
returns and discounts, and product redesigns, any of which would have a material
adverse effect on the Company's business, operating results and financial
condition.
Certain components used by the Company in its existing products are only
available from single sources, and certain other components are presently
available or acquired only from a limited number of suppliers. In the event that
its single source suppliers are unable to fulfill the Company's requirements in
a timely manner, the Company may experience an interruption in production until
alternative sources of supply can be obtained, which could damage customer
relationships or have a material adverse effect on the Company's business,
operating results and financial condition.
The Company is currently in the process of completing a new facility to house
its wireless subsystems manufacturing operations, and expects to begin
manufacturing operations in the new facility by the end of the second quarter of
fiscal 1998. There can be no assurance that this facility will be completed when
planned. In the event that the new facility is not completed on a timely basis,
the Company could be subject to production capacity constraints at its other
manufacturing facility. Such constraints could have a material adverse effect on
the Company's business, operating results or financial condition.
19
<PAGE> 22
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, 1997 March 31,1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,033 $ 3,311
Short-term investments 8,200 7,500
Accounts receivable, net of allowance for doubtful accounts of
$520 and $519 at March 31, 1997 and 1996, respectively 10,111 9,675
Inventories 7,318 6,398
Prepaid expenses and other current assets 270 126
Deferred tax assets 2,144 1,703
-------------------------
Total current assets 35,076 28,713
Net property and equipment 6,038 5,121
Other assets 43 43
-------------------------
Total assets $41,157 $33,877
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,889 $ 2,145
Accrued payroll 1,190 1,156
Accrued liabilities 3,594 2,657
-------------------------
Total current liabilities 8,673 5,958
Shareholders' equity:
Preferred stock, no par value:
Authorized shares-2,000,000
Issued and outstanding shares-none - -
Common stock, no par value:
Authorized shares-20,000,000
Issued and outstanding shares-7,096,126, at March 31, 1997
and 6,890,997 at March 31, 1996 23,676 22,767
Retained earnings 8,808 5,152
-------------------------
Total shareholders' equity 32,484 27,919
-------------------------
Total liabilities and shareholders' equity $41,157 $33,877
-------------------------
</TABLE>
See accompanying notes.
20
<PAGE> 23
CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
1997 1996 1995
--------------------------------------------------------
<S> <C> <C> <C>
Net sales $45,346 $37,724 $32,667
Cost of goods sold 28,918 23,884 20,745
--------------------------------------------------------
Gross profit 16,428 13,840 11,922
Operating expenses:
Research and development 4,252 3,772 5,289
Selling, general, and administrative 6,802 6,115 5,738
--------------------------------------------------------
Total operating expenses 11,054 9,887 11,027
--------------------------------------------------------
Income from operations 5,374 3,953 895
Interest income and other 525 210 68
Interest expense - (454) (550)
--------------------------------------------------------
Income before income taxes 5,899 3,709 413
Provision for income taxes 2,243 1,433 129
--------------------------------------------------------
Net income $3,656 $2,276 $284
--------------------------------------------------------
Net income per share $0.50 $0.38 $0.06
--------------------------------------------------------
Shares used in per share calculation 7,352 5,959 5,444
--------------------------------------------------------
</TABLE>
See accompanying notes.
21
<PAGE> 24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
<TABLE>
<CAPTION>
Convertible
Preferred Common Unrealized Total
Stock Stock Gains Share-
------------------------------------------ (Losses) On Retained holders'
Shares Amount Shares Amount Investments Earnings Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994 2,134 $9,866 1,546 $ 346 $ (9) $ 2,592 $12,795
Issuance of common stock
on exercise of options
under stock option plan,
net of repurchases - - 110 28 - - 28
Exercise of common
stock warrants - - 76 350 - - 350
Change in unrealized gains
(losses) - - - - 9 - 9
Net income - - - - - 284 284
-----------------------------------------------------------------------------
Balance at March 31, 1995 2,134 9,866 1,732 724 - 2,876 13,466
Issuance of common stock
on exercise of options
under stock option plan,
net of repurchases - - 118 125 - - 125
Conversion of preferred
stock to common stock (2,134) (9,866) 3,201 9,866 - - -
Issuance of common stock
in public offering, net of
issuance costs - - 1,840 12,052 - - 12,052
Net income - - - - - 2,276 2,276
-----------------------------------------------------------------------------
Balance at March 31, 1996 - - 6,891 22,767 - 5,152 27,919
Issuance of common stock
on exercise of options
under stock option plan,
net of repurchases - - 161 279 - - 279
Issuance of common stock
under employee stock
purchase plan - - 44 323 - - 323
Tax benefit of stock option
exercises - - - 307 - 307
Net income - - - - - 3,656 3,656
-----------------------------------------------------------------------------
Balance at March 31, 1997 - $ - 7,096 $23,676 $ - $8,808 $32,484
-----------------------------------------------------------------------------
</TABLE>
See accompanying notes.
22
<PAGE> 25
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $3,656 $2,276 $ 284
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,119 1,880 1,862
Loss on disposal of property and equipment 7 56 12
Deferred income taxes (603) (152) 129
Accretion of redeemable common stock - - 42
Changes in operating assets and liabilities:
Accounts receivable (436) (2,104) 452
Inventories (920) (1,279) (855)
Prepaid expenses and other current assets (144) (65) 121
Accounts payable, accrued payroll and
accrued liabilities 3,184 1,186 (1,264)
--------------------------------------------------
Net cash provided by operating activities 6,863 1,798 783
INVESTING ACTIVITIES
Purchases of property and equipment (3,043) (628) (1,376)
Purchase of short-term investments (14,525) (23,500) -
Proceeds from maturities and sales of
short-term investments 13,825 16,000 808
--------------------------------------------------
Net cash used in investing activities (3,743) (8,128) (568)
FINANCING ACTIVITIES
Payments on lines of credit - (3,750) (500)
Borrowings under lines of credit - 2,250 1,500
Payments on long-term debt - (2,815) (1,057)
Borrowings on long-term debt - 286 1,541
Payments on obligations under capital leases - (701) (402)
Payments for redeemable common stock - - (1,000)
Net proceeds from issuance of common stock 602 12,177 378
--------------------------------------------------
Net cash provided by financing activities 602 7,447 460
--------------------------------------------------
Increase in cash and cash equivalents 3,722 1,117 675
Cash and cash equivalents at beginning of period 3,311 2,194 1,519
--------------------------------------------------
Cash and cash equivalents at end of period $7,033 $ 3,311 $ 2,194
--------------------------------------------------
</TABLE>
See accompanying notes.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES
Celeritek, Inc. (the "Company") was incorporated on December 28, 1984. The
Company designs, develops, manufactures, and markets high frequency radio
products that provide core transmit and receive functions for wireless
communications systems. The Company's products are primarily utilized in four
markets: microwave radios, cellular telephone systems and personal
communications services, satellite-based communications and defense electronics.
The Company's products include components and systems for satellite telephony
and very small aperture terminal applications, for point-to-point radios and for
personal communications services and cellular base stations. The Company's
transceiver component products include gallium arsenide radio-frequency
integrated circuits (GaAs RF IC's) for PCS and cellular telephones, PCS and
cellular base stations and wireless local loop. The Company's defense electronic
products are for applications such as missile guidance and electronic
countermeasures.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. Intercompany accounts and transactions have been
eliminated. The Company's reporting period consists of a fifty-two week period
ending on the Sunday closest to the calendar month end. Fiscal years 1995, 1996
and 1997 ended on April 2, March 31, and March 30, respectively. For
convenience, the accompanying financial statements have been shown as ending on
the last day of the calendar month.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers highly liquid investments with maturities of less than
three months when purchased to be cash equivalents.
Short-term investments consist of marketable securities. Other than U.S.
government treasury instruments, the Company's investment policy limits the
amounts invested in any one institution or in any single type of instrument.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to original equipment manufacturers in
the communications industry and government contractors. Credit is extended based
on an evaluation of a customer's financial condition and, generally, collateral
is not required. Actual credit losses may differ from management's estimates. To
date, credit losses have been within management's expectations, and the Company
believes that an adequate allowance for doubtful accounts has been provided.
INVENTORIES AND COST OF GOODS SOLD
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over their respective estimated useful lives (generally
five years).
Leasehold improvements are amortized by the straight-line method over their
respective estimated useful lives of seven years or the lease term, whichever is
less.
REVENUE RECOGNITION AND WARRANTIES
Revenue from product sales is recognized upon shipment. Provisions are made for
estimated doubtful accounts and customer returns based on experience and a
review of specific accounts. The Company also provides for estimated normal
warranty costs to repair or replace products for a period of twelve months from
the time of sale. Actual warranty costs may differ from management's estimates.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as incurred.
STOCK-BASED COMPENSATION
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123) which establishes a fair
value method of accounting for stock based compensation plans, and requires
additional disclosures for those companies who elect not to adopt the new method
of accounting. The Company has elected to continue to measure compensation costs
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 and to comply with the pro forma disclosure requirements of SFAS
123.
24
<PAGE> 27
NET INCOME PER SHARE
Net income per share is based upon the weighted average number of outstanding
shares of common and redeemable common stock, dilutive common equivalent shares
from convertible preferred stock (using the if-converted method), and dilutive
common equivalent shares from stock options and warrants (using the treasury
stock method). Pursuant to Securities and Exchange Commission's Staff Accounting
Bulletins, common and common equivalent shares issued during the twelve-month
period prior to the initial public offering are included in the calculations as
if they were outstanding for all periods through September 30, 1995 (using the
treasury stock method at the public offering price). The difference between
primary and fully diluted net income per share is not material for any period
presented.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share", which the Company is required to adopt on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and restate all prior periods.
Under the new requirements for calculating basic net income per share, the
dilutive effect of stock options will be excluded. Basic net income per share
computed in accordance with the new statement would have been $.02 and $.03
greater than the net income per share as reported for the fiscal years ended
March 31, 1997 and 1996, respectively. Diluted net income per share computed in
accordance with the new statement approximates net income per share as reported.
NOTE 2. SHORT-TERM INVESTMENTS
Marketable equity and all debt securities are classified as held-to-maturity,
available-for-sale, or trading. Management determines the appropriate
classification of marketable equity and debt securities at the time of purchase
and reevaluates such designation as of each balance sheet date. Management has
determined that, as of March 31, 1997 and 1996, all short-term investments were
available-for-sale securities.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of taxes, reported in a separate component of
shareholders' equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in income. Realized gains and losses and declines
in value judged to be other-than-temporary on available-for-sale securities are
included in income. Interest and dividends on securities classified as
available-for-sale are included in income.
The following is a summary of available-for-sale securities at fair value, which
approximates cost:
<TABLE>
<CAPTION>
(In Thousands) March 31, 1997 March 31, 1996
- ------------- --------------- --------------
<S> <C> <C>
Municipal bond money market preferred $ 8,200 $ 7,500
------- ---------
</TABLE>
The gross realized gains and losses of available-for-sale securities for the
fiscal years ended March 31, 1997 and 1996 were not material.
NOTE 3. INVENTORIES
<TABLE>
<CAPTION>
(In Thousands) March 31,1997 March 31, 1996
- -------------- ------------- --------------
<S> <C> <C>
Raw materials $ 2,751 $2,107
Work-in-process 4,567 4,291
------- ------
$ 7,318 $6,398
------- ------
</TABLE>
25
<PAGE> 28
NOTE 4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
(In Thousands) March 31, 1997 March 31, 1996
- ------------- -------------- --------------
<S> <C> <C>
Equipment $16,982 $14,078
Furniture and fixtures 483 477
Leasehold improvements 3,931 3,835
-------- -------
21,396 18,390
Accumulated depreciation
and amortization 15,358 13,269
-------- --------
Net property and equipment $ 6,038 $ 5,121
-------- --------
</TABLE>
NOTE 5. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
(In Thousands) March 31, 1997 March 31, 1996
- ------------- -------------- --------------
<S> <C> <C>
Accrued commission $ 722 $ 572
Warranty accrual 357 345
Income taxes payable 1,914 870
Other 601 870
-------- -------
$3,594 $ 2,657
-------- -------
</TABLE>
NOTE 6. LEASES
The Company leases certain facilities used in operations under non-cancelable
operating leases.
Future minimum payments under non-cancelable operating leases with initial terms
of one year or more consisted of the following at March 31, 1997:
<TABLE>
<CAPTION>
(In Thousands) Fiscal Year Ended March 31, 1997
- ------------- --------------------------------
<S> <C>
1998 $1,598
1999 1,353
2000 1,178
2001 814
2002 454
Thereafter 1,601
------
$6,998
------
</TABLE>
Rent expense was approximately $1,584,000, $1,472,000, and $1,420,000 for the
years ended March 31, 1997, 1996, and 1995, respectively.
NOTE 7. LINE OF CREDIT
The Company has available a revolving line of credit covered by a Master Loan
Agreement (the "Loan Agreement"), as amended, which expires August 13, 1997 and
which is unsecured. The available line of credit is for $ 4,000,000. Borrowings
under the line of credit bear interest at the bank's reference rate (8.5% at
March 31, 1997). The Loan Agreement requires the Company to maintain certain
financial ratios, profitability levels, a minimum net worth of $25,000,000, and
limits the payment of dividends. As of March 31, 1997, the Company had no
borrowings under the line of credit.
26
<PAGE> 29
NOTE 8. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
1997 1996 1995
------- ------- -----
<S> <C> <C> <C>
Current:
Federal $ 2,468 $ 1,387 $ -
State 378 198 -
------- ------- -----
Total current 2,846 1,585 -
Deferred:
Federal (506) (184) 141
State (97) 32 (12)
------- ------- -----
Total deferred (603) (152) 129
------- ------- -----
Provision for income taxes $ 2,243 $ 1,433 $ 129
------- ------- -----
</TABLE>
The reconciliation of the provision for income taxes computed at the U.S.
federal statutory tax rate to the effective tax rate is as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
1997 1996 1995
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
At U.S. statutory rate $2,005 34.0% $1,261 34.0% $ 140 34.0%
State income tax, net of federal tax benefit 186 3.1 152 4.1 (8) (2.0)
Other 52 1.0 20 .5 (3) (.8)
------ ------- ------ ------- ------ ----------
$2,243 38.1% $1,433 38.6% $ 129 31.2%
------ ------- ------ ------- ------ ----------
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of financial statement depreciation $ 20 $ 132
Other - 50
------- -------
Total deferred tax liabilities 20 182
Deferred tax assets:
Inventory valuation 1,265 965
Accruals and reserves not deductible for tax purposes 755 738
Other 124 -
------- -------
Total deferred tax assets 2,144 1,703
------- -------
Net deferred tax assets $ 2,124 $ 1,521
------- -------
</TABLE>
NOTE 9. SALARY DEFERRAL PLAN
The Salary Deferral Plan (the "Plan") is qualified under Section 401(k) of the
Internal Revenue Code and allows all eligible employees to defer a percentage of
their earnings on a pretax basis through contributions to the Plan. The Plan
provides for employer contributions at the discretion of the Board of Directors.
Company contributions to the plan were $57,000 in fiscal 1997. No contributions
were made in fiscal 1996 and 1995. Administrative expenses relating to the Plan
are insignificant.
27
<PAGE> 30
NOTE 10. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
In December 1995, the Company completed an initial public offering of 1,600,000
shares of common stock. An additional 400,000 shares of outstanding common stock
were offered by certain selling shareholders. The Company received net proceeds
of approximately $10.4 million after deducting expenses and underwriting
discounts. Upon closing of the offering, all shares of preferred stock
outstanding converted into 3,200,720 shares of common stock. In January, 1996,
the underwriters exercised their over-allotment option related to the Company's
initial public offering. Accordingly approximately 240,000 shares of common
stock were sold by the Company. An additional 60,000 shares of outstanding
common stock were sold by certain selling shareholders. The Company received net
proceeds of approximately $1.7 million, after deducting expenses and
underwriting discounts.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
Shareholders, to issue up to 2,000,000 shares of preferred stock in one or more
series and to fix the designations, powers, preferences, privileges, and
relative participation, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the common stock.
STOCK OPTION PLANS
The Company has an incentive stock plan under which shares of common stock are
reserved for issuance to certain employees and consultants. Under the 1994 Stock
Option Plan (the "Plan"), which was approved in April 1994 and expires ten years
from adoption, the Company may grant either incentive stock options or
nonstatutory stock options, as designated by the Board of Directors. The 1994
Plan is intended as a successor equity incentive program to the earlier 1985
Stock Option Plan, which expired in 1994. All outstanding stock options under
the predecessor plan were incorporated into the 1994 Plan but will continue to
be governed by the terms and conditions of the specific instruments evidencing
those options. On October 30, 1995, the Board of Directors approved an increase
in the number of shares available for issuance under the 1994 Stock Option Plan
to 500,000 shares.
The 1994 Plan provides that (i) the exercise of an incentive stock option will
be no less than the fair market value of the Company's common stock at the date
of grant, (ii) the exercise price of a nonstatutory stock option will be no less
than 85% of the fair market value, and (iii) the exercise price to an optionee
who possesses more than 10% of the total combined voting power of all classes of
stock will be no less than 110% of the fair market value. The plan administrator
has the authority to set exercise dates (no longer than ten years from the date
of grant or five years for an optionee who meets the 10% criteria), payment
terms, and other provisions for each grant. Unexercised options are canceled
upon termination of employment and become available under the 1994 Plan.
Activity under the Plan with respect to stock options and stock purchase rights
is set forth below:
<TABLE>
<CAPTION>
Shares Outstanding Options
Available --------------------------------- Weighted Average
for Grant Number of Shares Price Per Share Total Exercise Price
--------- ---------------- --------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994 10,559 542,615 $ .50 - $7.00 $ 1,239,465
Additional shares authorized for 1994 Plan 489,416 -- -- --
Options granted (405,006) 405,006 3.00 1,215,018
Options exercised -- (114,476) .50 - 1.50 (62,040)
Options canceled 163,063 (163,063) .50 - 7.00 (811,911)
--------- ------------ ------------- ------------ ----------
Balance at March 31, 1995 258,032 670,082 .50 - 3.00 1,580,532
Additional shares authorized for 1994 Plan 262,466 -- -- --
Options granted (221,500) 221,500 3.00 - 10.00 1,842,750
Options exercised -- (130,338) .50 - 3.00 (165,349)
Options canceled 69,409 (71,808) 1.50 - 3.00 (200,572)
--------- ------------ ------------- ------------ ----------
Balance at March 31, 1996 368,407 689,436 1.50 - 10.00 3,057,352
Options granted (303,500) 303,500 9.50 - 14.00 3,602,000 $ 11.87
Options exercised -- (169,039) 1.50 - 10.00 (347,798) 2.06
Options canceled 54,773 (54,773) 1.50 - 13.88 (336,863) 6.15
--------- ------------ ------------- ------------ ----------
Balance at March 31, 1997 119,680 769,124 1.50 - 14.00 $ 5,974,691 $ 7.77
--------- ------------ ------------- ------------ ----------
</TABLE>
At March 31, 1997, outstanding options covering 252,883 shares were exercisable.
28
<PAGE> 31
In March 1995, the Company offered to all optionees holding options with an
exercise price higher than the prevailing fair value of such options the right
to exchange their options for new options exercisable at such fair market value.
Options on 110,256 shares were exchanged and are reflected in the table above.
The options issued in the exchange were not exercisable until September 1995 and
expire in March 2005.
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------- ----------------------------------
Weighted-Average Weighted Number Weighted
Range of Number Outstanding Remaining Average Exercisable at Average
Exercise Price at March 31, 1997 Contracted Life Exercise Price March 31, 1997 Exercise Price
- --------------- ------------------ ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.50 - $ 3.00 311,271 7.35 years $ 2.97 199,145 $ 2.96
7.50 - 10.00 198,353 8.96 years 9.67 49,177 9.58
10.75 - 14.00 259,500 9.78 years 12.07 4,561 12.87
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its stock options since, as discussed below, the alternative
fair market value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (FAS 123), requires use of option
valuation models that were not developed for use in valuing stock options. Under
APB 25, if the exercise price of the Company's stock options is equal to the
market price of the underlying stock on the date of grant, no expense is
recognized.
Pro forma information regarding net income and net income per share is required
by FAS 123, which also requires that the information be determined as if the
Company had accounted for its stock options granted subsequent to March 31, 1995
under the fair value method. The fair market value for options granted prior to
December 1995, the date of the initial public offering of the Company's common
stock, was estimated at the date of grant using the Minimum Value Method. The
fair market value for options granted subsequent to December 1995 was estimated
at the date of grant using the Black-Scholes option pricing model. The Company
valued its options using the following weighted-average assumptions for fiscal
years ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
Fiscal years ended March 31,
1997 1996
------- -------
<S> <C> <C>
Risk-free interest rate 6.4% 5.9%
Dividend yield 0.0 0.0
Volatility 72.1 50.1
Expected life of option 5 years 5 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair market value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair market value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
measure of the fair market value of its options.
29
<PAGE> 32
For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the options vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net income $ 3,141 $ 2,215
Net income per share $ 0.43 $ 0.37
</TABLE>
The weighted average grant date fair value of options granted during the fiscal
years ended March 31, 1997 and 1996 was $7.43 and $4.59, respectively.
OUTSIDE DIRECTOR'S STOCK OPTION PLAN
On October 30, 1995, the Board of Directors approved, and on November 22, 1995,
shareholders approved the Outside Directors' Stock Option Plan (the "Directors'
Plan") whereby 75,000 shares of common stock were reserved for issuance under
the Directors' Plan. Options are granted automatically under the Directors' Plan
at periodic intervals to nonemployee members of the Board of Directors at an
exercise price equal to 100% of the fair market value of the option shares on
the date of grant. Such options have a maximum term of 10 years. New directors
are automatically granted an option to purchase 6,000 shares at their date of
election or appointment to the Board. During the fiscal year ended March 31,
1997, no options were granted. At March 31, 1997, options to purchase 24,000
shares of common stock were outstanding of which 8,500 options were exercisable.
As a result of FAS 123 only being applicable to options granted subsequent to
March 31, 1995, its pro forma effect will not be fully reflected until future
years.
EMPLOYEE STOCK PURCHASE PLAN
On October 30, 1995, the Board of Directors approved the implementation of an
Employee Qualified Stock Purchase Plan (the "ESPP"). Under the ESPP, 250,000
shares of common stock have been reserved for issuance to employees of the
Company. The ESPP became effective on the closing of the public offering,
December 20, 1995. During the fiscal year ended March 31, 1997, 44,365 shares of
common stock were purchased under the ESPP.
NOTE 11. SIGNIFICANT CUSTOMERS AND EXPORT SALES
In fiscal 1997, two customers accounted for 20% and 11% of net sales. In fiscal
1996, two customers accounted for 29% and 19% of net sales. In fiscal 1995, no
customer accounted for more than 10% of net sales. A summary of export sales is
as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
(In Thousands) 1997 1996 1995
- -------------- ------- ------- -------
<S> <C> <C> <C>
United States $36,306 $33,159 $22,998
Europe 4,720 2,990 7,880
Japan 2,998 1,345 1,731
Other 1,322 230 58
------- ------- -------
$45,346 $37,724 $32,667
======= ======= =======
</TABLE>
30
<PAGE> 33
NOTE 12. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
(In Thousands) 1997 1996 1995
- -------------- ---------- ---------- ----------
<S> <C> <C> <C>
Cash paid for interest $ -- $ 454 $ 508
Cash paid (refunded) for income taxes $ 1,495 $ 1,063 $ (7)
Capital lease obligations incurred to acquire equipment $ -- $ 255 $ 29
</TABLE>
CONDENSED CONSOLIDATED QUARTERLY RESULTS
Unaudited (In Thousands except per share data)
<TABLE>
<CAPTION>
Quarter Ended
1997 June 30 Sept. 30 Dec. 31 March 31
- ---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 11,518 $ 11,657 $ 10,565 $ 11,606
Gross profit 4,266 4,302 3,552 4,308
Income from operations 1,316 1,547 1,007 1,504
Net income 905 1,026 712 1,013
Net income per share $ 0.12 $ 0.14 $ 0.10 $ 0.14
======== ======== ======== ========
Quarter Ended
1996 June 30 Sept. 30 Dec. 31 March 31
- ---- -------- -------- -------- --------
Net sales $ 8,003 $ 8,731 $ 10,150 $ 10,840
Gross profit 2,834 3,161 3,670 4,175
Income from operations 410 799 1,152 1,592
Net income 179 420 633 1,044
Net income per share $ 0.03 $ 0.08 $ 0.11 $ 0.14
======== ======== ======== ========
</TABLE>
MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol CLTK. The following table sets forth the range of high and low closing
sale prices as reported on the Nasdaq National Market System.
<TABLE>
<CAPTION>
Quarter ended
FISCAL 1997 HIGH LOW
- ----------- ------ -----
<S> <C> <C>
June 30, 1996 $16.00 $9.50
September 30, 1996 14.75 9.75
December 31, 1996 16.25 9.75
March 31, 1997 14.75 9.25
FISCAL 1996
- ----------- ------ -----
December 31, 1995 $10.63 $8.00
March 31, 1996 11.25 7.88
</TABLE>
At April 25, 1997, there were approximately 287 shareholders of record. To date,
the Company has neither declared nor paid cash dividends on shares of its Common
Stock. The Company currently intends to retain all future earnings for its
business and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. In addition, the Company's line of credit prohibits
payment of cash dividends without prior bank approval.
31
<PAGE> 34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Celeritek, Inc.
We have audited the accompanying consolidated balance sheets of Celeritek, Inc.
as of March 31, 1997 and 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended March 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Celeritek, Inc. at
March 31, 1997 and 1996, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended March 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
April 25, 1997
32
<PAGE> 35
INVESTOR INFORMATION
<TABLE>
<S> <C> <C>
BOARD OF DIRECTORS CORPORATE HEADQUARTERS CORPORATE AND INVESTOR INFORMATION
William H. Younger, Jr. 3236 Scott Boulevard A copy of the Company's Annual Report
General Partner Santa Clara, CA 95054 and Form 10-K are available upon written
Sutter Hill Ventures (408) 986-5060 request from:
Charles P. Waite INDEPENDENT ACCOUNTANTS INVESTOR RELATIONS
General Partner Ernst & Young LLP Celeritek, Inc.
Greylock Ventures Limited Partnership 55 Almaden Boulevard 3236 Scott Boulevard
San Jose, CA 95113 Santa Clara, CA 95054
William D. Rasdal
Chairman of the Board ATTORNEYS
and Chief Executive Officer Wilson, Sonsini, Goodrich & Rosati, PC
SymmetriCom, Inc. 650 Page Mill Road
Palo Alto, CA 94304
Robert C. Mullaley
Consultant and Private Investor TRANSFER AGENT AND REGISTRAR
Bank of Boston
Tamer Husseini c/o Boston EquiServe, LP
Chairman of the Board PO Box 8040
President and Chief Executive Officer Boston, MA 02266-8040
Celeritek, Inc.
ANNUAL STOCKHOLDERS' MEETING
OFFICERS August 13, 1996
Tamer Husseini 9:00 am
Chairman of the Board Corporate Headquarters
President and Chief Executive Officer
STOCK MARKET INFORMATION
Robert D. Jones The common stock is traded on
Senior Vice President, Marketing and Sales The Nasdaq Stock Market Symbol (CLTK)
Gary J. Policky
Vice President, Engineering
and Chief Technical Officer
Richard Finney
Vice President, Manufacturing Operations
Margaret E. Smith
Vice President, Finance
and Chief Financial Officer
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Celeritek, Inc. of our report dated April 25, 1997 included in the 1997
Annual Report to Shareholders of Celeritek, Inc.
Our audits also include the financial statement schedule of Celeritek, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-2886) pertaining to the 1985 Stock Incentive Program, 1994
Stock Option Plan, Outside Directors' Stock Option Plan and Employee Qualified
Stock Purchase Plan of Celeritek, Inc. of our report dated April 25, 1997, with
respect to the consolidated financial statements and schedule of Celeritek, Inc.
incorporated herein by reference in the Annual Report (Form 10-K) for the year
ended March 31, 1997.
/s/Ernst & Young LLP
San Jose, California
June 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-30-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-30-1997
<CASH> 7,033
<SECURITIES> 8,200
<RECEIVABLES> 10,631
<ALLOWANCES> 520
<INVENTORY> 7,318
<CURRENT-ASSETS> 35,076
<PP&E> 21,396
<DEPRECIATION> 15,358
<TOTAL-ASSETS> 41,157
<CURRENT-LIABILITIES> 8,673
<BONDS> 0
0
0
<COMMON> 23,676
<OTHER-SE> 8,808
<TOTAL-LIABILITY-AND-EQUITY> 41,157
<SALES> 45,346
<TOTAL-REVENUES> 45,346
<CGS> 28,918
<TOTAL-COSTS> 28,918
<OTHER-EXPENSES> 11,054
<LOSS-PROVISION> 520
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,899
<INCOME-TAX> 2,243
<INCOME-CONTINUING> 3,656
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,656
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>