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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange of 1934 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3236 SCOTT BLVD., SANTA CLARA, CA 95054
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(408) 986-5060
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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: [X] Yes [ ] No
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE: 7,269,956 SHARES AS OF OCTOBER 25, 1998
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CELERITEK, INC.
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE
----
<S> <C>
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets: 1
September 30, 1998 and March 31, 1998
Condensed Consolidated Statements of Operations: 2
Three and Six months ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows: 3
Six months ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 6 - 12
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 13
Item 6: Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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CELERITEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,713 $ 4,022
Short-term investments 4,000 7,500
Accounts receivable, net 12,141 15,816
Inventories 11,042 10,635
Prepaid expenses and other current assets 2,814 415
Deferred tax assets 1,927 1,927
------- -------
Total current assets 35,637 40,315
Property and equipment, net 7,844 8,042
Other assets 124 91
------- -------
Total assets $43,605 $48,448
======= =======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 722 $ 333
Current obligations under capital leases 73 70
Accounts payable 3,419 4,491
Accrued payroll 1,636 1,570
Accrued liabilities 2,889 4,065
------- -------
Total current liabilities 8,739 10,529
Long-term debt, less current portion 1,139 667
Non-current obligations under capital leases 198 239
Shareholders' equity 33,529 37,013
------- -------
Total liabilities and shareholders' equity $43,605 $48,448
======= =======
</TABLE>
Note: The balance sheet at March 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
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CELERITEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total net sales $ 10,829 $ 13,529 $ 21,025 $ 26,124
Cost of goods sold 8,189 8,591 19,655 16,814
-------- -------- -------- --------
Gross profit (loss) 2,640 4,938 1,370 9,310
Operating expenses:
Research and development 1,357 1,270 3,218 2,478
Selling, general and administrative 2,036 2,090 4,538 3,885
-------- -------- -------- --------
Total operating expenses 3,393 3,360 7,756 6,363
Income (loss) from operations (753) 1,578 (6,386) 2,947
Interest income (expense) and other, net (31) 121 (37) 269
-------- -------- -------- --------
Income (loss) before income tax (784) 1,699 (6,423) 3,216
Provision (benefit) for income taxes (298) 646 (2,441) 1,207
-------- -------- -------- --------
Net income (loss) ($ 486) $ 1,053 ($ 3,982) $ 2,009
======== ======== ======== ========
Basic earnings (loss) per share ($ 0.07) $ 0.15 ($ 0.55) $ 0.28
======== ======== ======== ========
Diluted earnings (loss) per share ($ 0.07) $ 0.14 ($ 0.55) $ 0.27
======== ======== ======== ========
Weighted average common shares outstanding 7,212 7,115 7,211 7,107
Common shares outstanding, assuming dilution 7,212 7,462 7,211 7,414
</TABLE>
See accompanying notes.
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CELERITEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------
September 30, September 30,
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($3,982) $ 2,009
Adjustment to reconcile net income (loss) to
net cash used in operating activities:
Depreciation, amortization and other 1,549 1,132
Changes in operating assets and liabilities (1,313) (4,143)
------- -------
Net cash used in operating activities (3,746) (1,002)
INVESTING ACTIVITIES
Purchase of property and equipment (1,351) (1,956)
Decrease (increase) in other assets (33) (48)
Purchases of short-term investments (1,000) (8,330)
Sales of short-term investments 4,500 7,780
------- -------
Net cash provided by (used in) investing activities 2,116 (2,554)
FINANCING ACTIVITIES
Payments on long-term debt (138) --
Borrowings on long-term debt 1,000 673
Payments on obligations under capital leases (39) --
Proceeds from issuance of common stock 498 223
------- -------
Net cash provided by financing activities 1,321 896
Increase (decrease) in cash and cash equivalents (309) (2,660)
Cash and cash equivalents at beginning of period 4,022 7,033
------- -------
Cash and cash equivalents at end of period $ 3,713 $ 4,373
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ 975 $ 1,228
Interest 175 4
</TABLE>
See accompanying notes.
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CELERITEK, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month period
ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended March 31, 1999. This financial
information should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the year ended March 31, 1998.
2. INVENTORIES
The components of inventory consist of the following:
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- ---------
(In Thousands)
<S> <C> <C>
Raw materials ............ $ 3,073 $ 3,405
Work-in-process .......... 7,969 7,230
------- -------
$11,042 $10,635
======= =======
</TABLE>
3. LINES OF CREDIT
The company has available two revolving lines of credit covered by a
Master Loan Agreement (the "Loan Agreement"), as amended, which expires
October 30, 1999. The first available line of credit is for $6,000,000
and will bear interest at the bank's reference rate (8.5% at September
30, 1998). The second line of credit has been converted to a term loan
of thirty-six months. Borrowings under the second line of credit and
term loan bears interest at the bank's reference rate plus 0.5%. As of
September 30, 1998, the Company had borrowings totaling $1,861,111
under the second line of credit, outstanding as a term loan of
thirty-six months, and no borrowings under the first line of credit.
The loan agreement
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contains certain covenants, including among others, covenants to
maintain certain financial ratios, profitability and liquidity levels,
a minimum tangible net worth of $32,500,000 up to and including
December 31, 1998 and $31,500,000 thereafter, and limits the payment of
dividends. Such credit facilities are secured by the Company's assets.
4. EARNINGS PER SHARE
In accordance with the Statement of Financial Accounting Standards No.
128, "Earnings per Share," basic earnings (loss) per common share is
computed using the weighted average common shares outstanding during
the period. Diluted earnings per common share incorporates the
incremental shares issuable upon the assumed exercise of stock options
when diluted.
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
----------------------- --------------------------
BASIC 1998 1997 1998 1997
------ ------ -------- -------
<S> <C> <C> <C> <C>
Net income (loss) ...................... ($486) $1,053 ($3,982) $2,009
====== ====== ======== ======
Weighted common shares outstanding ..... 7,212 7,115 7,211 7,107
====== ====== ======== ======
Basic earnings (loss) per common share.. ($0.07) $ 0.15 ($0.55) $ 0.28
====== ====== ======== ======
DILUTED
Net income ............................. ($486) $1,053 ($3,982) $2,009
====== ====== ======== ======
Weighted common shares outstanding ..... 7,212 7,115 7,211 7,107
Dilutive effect of stock options ....... -- 347 -- 307
------ ------ -------- ------
Weighted common shares outstanding,
assuming dilution .................... 7,212 7,462 7,211 7,414
====== ====== ======== ======
Diluted earnings per common share ...... ($0.07) $ 0.14 ($0.55) $ 0.27
====== ====== ======== ======
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q 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. These forward-looking statements
represent the Company's expectations or beliefs concerning future events and
include statements, among others, regarding the length and timing of delays, the
potential of the market sales volume and sales to significant customers and the
sufficiency of capital resources. Actual results could differ materially from
those projected in the forward-looking statements as a result of a variety of
factors, including those set forth under "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Risks, Trends, and
Uncertainties," and elsewhere in this report.
RESULT OF OPERATIONS - SECOND QUARTER OF FISCAL 1998 COMPARED TO SECOND QUARTER
OF FISCAL 1999:
Total net sales decreased 20% from $13.5 million for the second quarter
of fiscal 1998 to $10.8 million for the second quarter of fiscal 1999. Total net
sales to commercial customers decreased 24% from $7.4 million for the second
quarter of fiscal 1998 to $5.6 million for the second quarter of fiscal 1999,
primarily as a result of delayed contracts by several subsystem customers. The
Company expects the subsystems market, particularly the microwave radio segment,
to remain sluggish at least through the end of the fiscal year. Total net sales
to defense customers decreased 15% from $6.1 million in the second quarter of
fiscal 1998 to $5.2 million for the second quarter of fiscal 1999, as the
Company had expected. See "Risks, Trends, and Uncertainties -- Potential
Fluctuations in Quarterly Results."
Gross margin decreased from 36% of net sales in the second quarter of
fiscal 1998 to 24% of net sales in the second quarter of fiscal 1999. The
decrease in gross margin was primarily due to increased manufacturing overhead
to support an anticipated increase in sales volume. Gross margin, in the second
quarter of fiscal 1999, also benefited from the sales of previously written down
product. See "Risks, Trends, and Uncertainties -- Yields and the High Degree of
Fixed Costs in the Manufacturing Operation."
Research and development expenses increased 7% from $1.3 million, or 9%
of net sales, in the second quarter of fiscal 1998 to $1.4 million, or 13% of
net sales, in the second quarter of fiscal 1999 reflecting the Company's
continuing investment in commercial product development. The increase was
primarily due to an increase in personnel and related expenses from the new
design center in Ireland. See "Risks, Trends, and Uncertainties Dependence on
Key Personnel."
Selling, general and administrative expenses decreased from $2.1
million, or 15% of net sales, in the second quarter of fiscal 1998 to $2.0
million, or 19% of net sales, in the second quarter of fiscal 1999. The dollar
decrease was primarily due to lower selling costs related to the lower sales
volume.
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Interest income (expense) and other, net decreased 126% from $121,000
of interest income in the second quarter of fiscal 1998 to $31,000 of interest
expense in the second quarter of fiscal 1999. The decreased in interest income
was primarily due to lower average cash balances as a result of cash being used
for working capital. The increased interest expense was due to equipment
purchases financed through long-term debt and capital leases.
RESULT OF OPERATIONS - FIRST SIX MONTHS OF FISCAL 1998 COMPARED TO FIRST SIX
MONTHS OF FISCAL 1999:
Total net sales decreased 20% from $26.1 million for the first six
months of fiscal 1998 to $21.0 million for the first six months of fiscal 1999.
Total net sales to commercial customers decreased 22% from $13.9 million for the
first six months of fiscal 1998 to $10.9 million for the first six months of
fiscal 1999, primarily as a result of delayed contracts by several subsystem
customers. The Company expects the subsystems market, particularly the microwave
radio segment, to remain sluggish at least through the end of the fiscal year.
Total net sales to defense customers decreased 17% from $12.2 million in the
first six months of fiscal 1998 to $10.1 million for the first six months of
fiscal 1999, as the Company had expected. See "Risks, Trends, and Uncertainties
- -- Potential Fluctuations in Quarterly Results."
Gross margin decreased from 36% of net sales in the first six months of
fiscal 1998 to 7% of net sales in the first six months of fiscal 1999. The
decrease in gross margin was primarily due to an inventory write down related to
delayed or canceled contracts and to a lesser extent, increased manufacturing
overhead to support an anticipated increase in sales volume and idle capacity.
See "Risks, Trends, and Uncertainties -- Yields and the High Degree of Fixed
Costs in the Manufacturing Operation."
Research and development expenses increased 30% from $2.5 million, or
9% of net sales, in the first six months of fiscal 1998 to $3.2 million, or 15%
of net sales, in the first six months of fiscal 1999 reflecting the Company's
continuing investment in commercial product development. The increase was
primarily due to an increase in personnel and related expenses from the new
design center in Ireland. See "Risks, Trends, and Uncertainties -- Dependence on
Key Personnel."
Selling, general and administrative expenses increased from $3.9
million, or 15% of net sales, in the first six months of fiscal 1998 to $4.5
million, or 22% of net sales, in the first six months of fiscal 1999.
The increase was primarily due to increased head count and bad debt expense.
Interest income (expense) and other, net decreased 114% from $269,000
of interest income in the first six months of fiscal 1998 to $37,000 of interest
expense in the first six months of fiscal 1999. The decreased in interest income
was primarily due to lower average cash balances as a result of cash being used
for working capital. The increased interest expense was due to equipment
purchases financed through long-term debt and capital leases.
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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.
During the quarter ended September 30, 1998, the Company used cash for
working capital.
The company has available two revolving lines of credit covered by a
Master Loan Agreement (the "Loan Agreement"), as amended, which expires October
30, 1999. The first available line of credit is for $6,000,000 and will bear
interest at the bank's reference rate (8.5% at September 30, 1998). The second
line of credit has been converted to a term loan of thirty-six months.
Borrowings under the second line of credit and term loan bears interest at the
bank's reference rate plus 0.5%. As of September 30, 1998, the Company had
borrowings totaling $1,861,111 under the second line of credit, outstanding as a
term loan of thirty-six months, and no borrowings under the first line of
credit. The loan agreement contains certain covenants, including among others,
covenants to maintain certain financial ratios, profitability and liquidity
levels, a minimum tangible net worth of $32,500,000 up to and including December
31, 1998 and $31,500,000 thereafter, and limits the payment of dividends. Such
credit facilities are secured by the Company's assets.
As of September 30, 1998, the Company had $3.7 million of cash and cash
equivalents, $4.0 million of short-term investments and $26.9 million of working
capital. The Company believes that the current capital resources combined with
cash generated from operations and borrowings available from its lines of credit
will be sufficient to meet its liquidity and capital expenditure requirements at
least through fiscal 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued a
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income." This statement established requirements for disclosure of
comprehensive income and becomes effective for the company for its fiscal year
1999, with reclassification of earlier financial statements for comparative
purposes. Comprehensive income generally represents all changes in stockholders'
equity except those resulting from investments or contributions by stockholders.
SFAS 130 requires unrealized gains or losses on the Company" available-for-sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. The Company has adopted
SFAS 130, however, the effects of the adoption were immaterial to all periods
presented.
IMPACT OF YEAR 2000
Many currently installed computer systems and software products are
coded to accept only two-digit entries in date code fields. Beginning in the
year 2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th
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century dates. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips and have not been upgraded to comply
with such "Year 2000" requirements may recognize a date using "00" as the year
1900 rather that the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
Based on a review of the Company's computer systems, the Company has
determined that it will be required to modify or replace significant portions of
its software so that those systems will properly utilize dates beyond December
31, 1999. The Company presently believes that with modifications or replacements
of existing software through its maintenance contracts with third party vendors,
such Year 2000 issues can be mitigated. However, if such modifications or
replacements are not made, or are not completed timely, or modifications or
replacements to software or hardware of the Company's vendors, suppliers,
financial institutions, and service providers are not made, or are not completed
timely, the Year 2000 issue could have a material adverse impact on the
operations of the Company.
Based on a review of the Company's product lines, the Company has
determined that the products it has sold and will continue to sell do not
require remediation to be Year 2000 compliant. Accordingly, the Company does not
believe that the Year 2000 issue presents a material exposure as it relates to
the Company's products.
To date, the Company has upgraded its major business systems to be Year
2000 compliant. The Company is currently in the process of assessing and testing
the equipment and software used to assemble and test its products to ensure
their Year 2000 compliance. The Company does not have any significant systems
that interface directly with third parties.
In addition, the Company is gathering information about the Year 2000
compliance status of its significant suppliers and subcontractors. To date, the
Company is not aware of any external agent with a Year 2000 issue that would
materially impact the Company's results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that external agents
will be Year 2000 compliant. The inability of external agents to complete their
Year 2000 compliance process in a timely fashion, could materially impact the
Company. The effect of non-compliance by external agents is not determinable.
The Company has determined that the costs associated with its Year 2000
compliance program are not material. The software upgrades are included with the
software maintenance contracts with third party vendors. To date, the Company
has not identified any hardware that needs to be upgraded or replaced to
mitigate the Year 2000 issue.
The Company believes it has an effective program in place to resolve
the Year 2000 issue in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 program. In the event that the
Company does not complete such modifications or replacements are not made, or
are not completed timely, or modifications or replacements to software or
hardware of the Company's vendors,
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suppliers, financial institutions, and service providers are not made, or are
not completed timely, or in the event that coding errors or other defects are
not discovered in a timely fashion, the Year 2000 issue could have a material
adverse impact on the operations of the Company.
The Company currently has no contingency plans in place in the event it
does not complete such modifications or replacements are not made, or are not
completed timely, or modifications or replacements to software or hardware of
the Company's vendors, suppliers, financial institutions, and service providers
are not made, or are not completed timely. The Company plans to evaluate the
status of completion in December 1998 and determine whether such a plan is
necessary.
RISKS, TRENDS, AND UNCERTAINTIES
The following risk factors should be carefully reviewed in addition to the other
information contained in this Quarterly Report on Form 10-Q.
Potential Fluctuations in Quarterly Results. The Company's quarterly
results have fluctuated in the past, and may continue to fluctuate in the
future, due to a number of factors, including: the timing, cancellation or delay
of customer orders; the mix of products sold; changes in manufacturing capacity
and variations in the utilization of this capacity; 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 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. For example, in the first quarter of
fiscal 1999, a number of contracts were either terminated or delayed by both
commercial and defense customers. There can be no assurance that additional
contracts will not be cancelled or delayed or that customers will ever reinstate
orders under contracts which have been delayed. There can be no assurance that
the Company will be able to maintain quarterly profitability in the future. See
"Risks, Trends, and Uncertainties - Dependence on Limited Number of OEM
Customers."
Continued Penetration of Commercial Markets; New Product Introductions.
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
materially 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.
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Yields and the High Degree of Fixed Costs in the Manufacturing
Operation. 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
business, operating results, and financial condition could be materially
adversely affected. In addition, the Company's fixed costs, which consist
primarily of investments in manufacturing equipment, repair, maintenance, and
depreciation costs of such equipment and fixed labor costs related to
manufacturing and process engineering, are high and during periods of decreased
demand, the high fixed costs could have a material adverse effect on the
Company's business, operating results, and financial condition.
In addition, the Company has completed its new facility to house its
wireless subsystems manufacturing operations and has begun manufacturing
operations in the new facility during the third quarter of fiscal 1998. Even
though the Company has increased overall capacity, there can be no assurance
that the Company will be successful in its efforts to generate orders to utilize
the additional capacity, or that net sales and gross margin will increase.
Dependence on a Limited Number of OEM Customers. A relatively limited
number of OEM customers historically have accounted for a substantial portion of
the Company's sales. In fiscal 1998 and the six months ended September 30, 1998,
sales to the Company's top ten customers accounted for approximately 63% and 67%
of total net sales, respectively. In the six months ended September 30, 1998,
one customer accounted for approximately 12% 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, although sales to any single customer are subject to significant
variability from quarter to quarter. Such fluctuations or a complete loss of one
or more of these customers, could have a material adverse effect on the
Company's business, operating results and financial condition.
No Assurance of Product Performance and Reliability. 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.
Rapid Technological Change. 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
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material adverse effect on the Company's business, operating results and
financial condition.
Competition. The markets in which the Company competes are intensely
competitive and the Company expects competition to increase. 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, which would have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on Key Suppliers. 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.
In addition, the Company contracts with a third party vendor in Asia to
assemble certain of its subsystem division components to reduce manufacturing
labor costs. Additionally, the Company contracts with several third party
vendors in Asia to assemble its GaAs chips into integrated circuit packages.
Although the Company strives to maintain more than one vendor for each assembly
process, it is not always possible due to volume and quality issues. To the
extent that any of the assembly vendors are not able to provide a sufficient
level of service with an acceptable quality level, the Company could have
difficulty meeting its delivery commitments which could materially adversely
impact the Company's financial, operating and financial results
Dependence on Key Personnel. 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. In particular, the Company in the
past has experienced difficulty attracting and retaining qualified engineers and
thin-film microwave technicians. Competition for these kinds of experienced
personnel is intense, and there can be no assurance that the Company can retain
its key technical and managerial employees or that it can attract, assimilate or
retain other highly qualified technical and managerial personnel in the future.
The failure to attract, assimilate or retain key personnel could have a material
adverse effect on the Company's business, operating results and financial
condition.
Page 12
<PAGE> 15
PART 2 - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on July 30, 1998.
The results of the voting were as follows:
Proposal 1: Election of the Board of Directors of the Company.
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C>
Tamer Husseini 5,082,495 19,955
Thomas W. Hubbs 5,079,495 22,955
Robert C. Mullaley 5,082,995 19,455
William D. Rasdal 5,082,995 19,455
Charles P. Waite 5,082,995 19,455
William H. Younger, Jr. 5,082,995 19,455
</TABLE>
Proposal 2: Approval of 250,000 share increase to employee qualified
stock purchase plan.
<TABLE>
<S> <C>
Votes For: 4,183,612
Votes Against: 914,806
Votes Abstaining: 4,032
</TABLE>
Proposal 3: Ratification of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending March 31, 1999.
<TABLE>
<S> <C>
Votes For: 5,087,583
Votes Against: 9,100
Votes Abstaining: 5,767
</TABLE>
Page 13
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
The following exhibit is included herein:
Exhibit 10.15 Loan modification agreement dated October 30, 1998 between
Registrant and Silicon Valley Bank.
No reports on Form 8-K were filed during the three months ended September 30,
1998.
Page 14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Celeritek, Inc.
(Registrant)
Date: November 13, 1998 /s/ MARGARET E. SMITH
-----------------------------------------
Margaret E. Smith, Vice President,
Chief Financial Officer and Assistant
Secretary
Page 15
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.15 Loan modification agreement dated October 30, 1998 between
Registrant and Silicon Valley Bank.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.15
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of October 30, 1998, by
and between Celeritek, Inc. ("Borrower") and Silicon Valley Bank ("Bank") 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 Bank, Borrower is indebted to Bank pursuant to, among other
documents, an Amended and Restated Loan and Security Agreement, dated September
23, 1997, as may be amended from time to time, (the "Loan Agreement"). The Loan
Agreement provided for, among other things, a Committed Revolving Line in the
original principal amount of Four Million ($4,000,000) and a Committed Equipment
Line in the original principal amount of One Million Dollars ($1,000,000). The
Equipment Line has been modified pursuant to among other documents, a Loan
Modification Agreement dated May 29, 1998, pursuant to, which, among other
things, the principal amount of Equipment Line was increased to One Million Nine
Hundred Forty Four Thousand Four Hundred Forty Four and 44/100 ($1,944,444.44).
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 Bank shall be referred to as
the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents, 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 Loan Agreement.
1. The defined terms as set forth in section 13.1 entitled
"Definitions" are hereby amended and/or incorporated to read as
follows:
"Borrowing Base" is 80% of Eligible Accounts as determined by
Bank from Borrower's most recent Borrowing Base Certificate for
all Advances in excess of $4,000,000 in the aggregate. All
Advances up to an Aggregate amount of $4,000,000 shall not be
subject to the margin requirement of the Borrowing Base. At such
times as Advances exceed $4,000,000, all outstanding Advances
under the Committed Revolving Line shall be subject to the
Borrowing Base at all times thereafter.
"Collateral" is the property described on Exhibit A (attached
hereto).
"Committed Revolving Line" is a Credit Extension of up to
$6,000,000.
"Credit Extension" is each Advance, Equipment Advance, Letter of
Credit, Term Loan, Exchange Contract or any other extension of
credit by Bank for Borrower's benefit.
"Debt Service Coverage" is hereby deleted in its entirety.
"Eligible Accounts" are Accounts in the ordinary course of
Borrower's business that meet all Borrower's representations and
warranties in Section 5.2, but Bank may change eligibility
standards by giving Borrower notice. Unless Bank agrees otherwise
in writing, Eligible Accounts will not include:
<PAGE> 2
(a) Accounts that the account debtor has not paid within 90 says
of invoice date;
(b) Accounts for an account debtor, 50% or more of whose
Accounts have not been paid within 90 days of invoice date;
(c) Credit balances over 90 days from invoice date;
(d) Accounts for an account debtor, including Affiliates, whose
total obligations to Borrower exceed 25% of all Accounts for
the amounts that exceed that percentage, unless Bank
approves in writing.
(e) Accounts for which the account debtor does not have its
principal place of business in the United States;
(f) Accounts for which the account debtor is a federal, state,
or local government entity or any department, agency, or
instrumentality;
(g) Accounts for which Borrower owes the account debtor, but
only up to the amount owed (sometimes called "contra"
accounts payable, customer deposits or credit accounts);
(h) Accounts for demonstration or promotional equipment, or in
which goods are consigned, sales guaranteed, sale or return,
sale on approval, bill and hold, or other terms if account
debtor's payment may be conditional;
(i) Accounts for which the account debtor is Borrower's
Affiliate, officer, employee, or agent;
(j) Accounts in which the account debtor disputes liability or
makes any claim and Bank believes there may be a basis for
dispute (but only up to the disputed or claimed amount), or
if the Account Debtor is subject to any Insolvency
Proceeding, or becomes insolvent, or goes out of business;
(k) Accounts for which Bank reasonably determines collection to
be doubtful.
"Permitted Liens" are"
(a) Liens existing on the Closing Date and shown on the Schedule
or arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees assessments or other government
charges or levies either not delinquent or being contested
in good faith and for which Borrower maintains adequate
reserves on its Books, if they have no priority over any of
Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by
Borrower or its Subsidiaries incurred for financing the
acquisition of Equipment, or (ii) existing on equipment when
acquired, if the Lien is confined to the property and
improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in
the ordinary course of Borrower's business and any interest
or title of a lessor, licensor or under
2
<PAGE> 3
any lease or
license, if the leases, subleases, licenses and sublicenses
permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of
the indebtedness secured by Liens described in (a) through
(c), but any extension, renewal or replacement of Lien must
be limited to the property encumbered by the existing Lien
and the principal amount of the indebtedness may not
increase.
"Revolving Maturity Date" is October 30, 1999.
2. Section 2.1 entitled "Advances" is hereby amended in part to
delete the word "Advances" and replace with the word "Credit
Extensions".
3. Sub-section (a) of Section 2.1.1 entitled "Revolving Advances" is
hereby amended in its entirety to read as follows:
Bank will make Advances not exceeding the (i) Committed Revolving
Line or the Borrowing Base, whichever is less, minus (ii) the
amount of all outstanding Letters of Credit (including drawn but
unreimbursed Letters of Credit). Advances of up to $4,000,000
outstanding in the aggregate may be made without regard to any
limitation under the Borrowing Base. Amounts borrowed under this
Section may be repaid and reborrowed during the term of this
Agreement.
4. Section 4.1 entitled "Grant of Security Interest" is hereby
amended in its entirety to read as follows:
Borrower grants to Bank a continuing security interest in all
presently existing and later acquired Collateral to secure all
Obligations and performance of each of Borrower's duties under
the Loan Documents. Except for Permitted Liens, any security
interest will be a first priority security interest in the
Collateral. If this Agreement is terminated, Bank's lien and
security interest in the Collateral will continue until Borrower
fully satisfies its Obligations.
5. Section 5.2 entitled "Collateral" is hereby amended in its
entirety to read as follows:
Borrower has good title to the Collateral, free of Liens except
Permitted Liens. The Eligible Accounts are bona fide, existing
obligations, and the service or property has been performed or
delivered to the account debtor or its agent for immediate
shipment to and unconditional acceptance by the account debtor.
Borrower has no notice of any actual or imminent Insolvency
Proceeding of any account debtor whose accounts are an Eligible
Account in any Borrowing Base Certificate. All Inventory is in
all material respects of good and marketable quality, free from
material defects.
6. Sub-section (c) of Section 6.2 entitled "Financial Statements,
Reports, Certificates" is hereby incorporated into the Loan
Agreement to read as follows:
At such times as Advances are subject to the Borrowing Base,
within 20 days after the last day of each month, Borrower will
deliver to Bank a Borrowing Base Certificate signed by a
Responsible Officer, with aged listings of accounts receivable
and accounts payable.
Sub-section (d) of Section 6.2 entitled Financial Statements,
Reports, Certificates" is hereby incorporated into the Loan
Agreement to read as follows:
3
<PAGE> 4
Bank has the right to audit Borrower's Collateral at Borrower's
expense at such times as Advances exceed $4,000,000 and upon an
Event of Default occurring and continuing.
7. Section 6.7 entitled "Financial Covenants" are hereby amended in
their entirety to read as follows:
Borrower will maintain as of the last day of each quarter, unless
otherwise noted:
(i) QUICK RATIO. A ratio of Quick Assets to Current Liabilities
of at least 2.00 to 1.00.
(ii) DEBT/TANGIBLE NET WORTH RATIO. A ratio of Total Liabilities
less Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than 1.00 to 1.00.
(iii) TANGIBLE NET WORTH. A Tangible Net Worth of at least
$32,500,000 through the quarter ending December 31, 1998,
decreasing to $31,500,000 thereafter.
(iv) PROFITABILITY. Borrower shall have a minimum net profit of
$1 each quarter, except that Borrower may suffer one
quarterly loss, not to exceed $500,000. Notwithstanding the
foregoing, Bank will test the covenant beginning with the
quarter ending June 30, 1999.
(v) MINIMUM CASH. Borrower shall maintain monthly Minimum Cash
of at least $4,000,000.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby
amended wherever necessary to reflect the changes described
above.
5. PAYMENT OF THE LOAN FEE. Borrower shall pay to Bank a fee in the
amount of Fifteen Thousand Dollars ($15,0 00.00) (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, Bank 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. Bank's
agreement to modifications to the existing Indebtedness pursuant
to this Loan Modification Agreement in no way shall obligate Bank
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 Bank and Borrower to
retain as liable parties all makers and endorsers of Existing
Loan Documents, unless the party is expressly released by Bank in
writing. No maker, endorser, or guarantor will be released by
virtue of this Loan Modification Agreement. The terms of this
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 (i) Borrower's payment of the Loan Fee (ii)
Borrower's execution of a UCC Financing Statement covering the
Collateral and (iii) Bank satisfactory review of a UCC search,
ascertaining it has a first priority security interest in the
Collateral.
4
<PAGE> 5
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
CELERITEK, INC. SILICON VALLEY BANK
By: /s/ MARGARET SMITH By: /s/ JOELLEN ADEMSKI
---------------------------------- ----------------------------------
Name: Margaret Smith Name: Joellen Ademski
-------------------------------- --------------------------------
Title: CFO Title: SWP
------------------------------- -------------------------------
5
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,713
<SECURITIES> 4,000
<RECEIVABLES> 12,141
<ALLOWANCES> 689
<INVENTORY> 11,042
<CURRENT-ASSETS> 35,637
<PP&E> 7,844
<DEPRECIATION> 19,211
<TOTAL-ASSETS> 43,605
<CURRENT-LIABILITIES> 8,739
<BONDS> 0
0
0
<COMMON> 24,404
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 43,605
<SALES> 10,829
<TOTAL-REVENUES> 10,829
<CGS> 8,189
<TOTAL-COSTS> 8,189
<OTHER-EXPENSES> 3,393
<LOSS-PROVISION> 689
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> (784)
<INCOME-TAX> (298)
<INCOME-CONTINUING> (486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (486)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
