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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, 1998
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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)
<TABLE>
<CAPTION>
California 77-0057484
<S> <C>
State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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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
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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 22, 1998, was
approximately $31,125,392 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 22, 1998, approximately 7,205,527 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 1998 Annual Report to Shareholders.
Part III of this Report on Form 10-K incorporates information by reference from
Registrant's Proxy Statement for its 1998 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. These forward-looking statements
represent the Company's expectations or beliefs concerning future events and
include statements, among others, regarding ramp up and establishment of
production capabilities and facilities and the long-term potential of the
market. 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, Inc. ("Celeritek" or the "Company") designs, develops,
manufactures and markets gallium arsenide radio-frequency integrated circuits
(GaAs RF ICs) and high-frequency radio transceiver subsystems and components
that provide core transmit and receive functions for wireless communications
systems and defense electronics. The Company's subsystem products are utilized
in microwave radios, satellite-based communications and defense electronics
systems. The Company's semiconductor products are primarily utilized in handsets
for cellular and PCS systems and wireless local loop subscriber units. For the
year ended March 31, 1998, approximately 58% of the Company's total net sales
were derived from the commercial wireless communications markets.
The Company's gallium arsenide radio-frequency integrated circuits
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 microwave radios and
satellite-based communication systems. The Company's semiconductor division's
products include GaAs RF ICs for cellular and PCS handsets, wireless local loop
subscriber units 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
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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.
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. In
March 1998, the FCC completed auctions of Local Multipoint Distribution Systems
(LMDS), specialized point-to-multipoint systems in the 28 GHz to 31 GHz bands,
that are expected to become increasingly popular for transmitting multimedia
data.
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 and
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.
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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 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:
Increase Market Share in 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 as point-to-point microwave radio applications, and emerging
mainstream markets, such as PCS. The Company believes this approach will
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. In order to
address the needs of the commercial wireless communications industry, the
Company focuses 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 Company
believes that 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 and GaAs Technology. Since its inception in 1984, the Company has
accumulated a substantial base of knowledge
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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.
MARKET AND CUSTOMERS
The Company's products are utilized primarily in four markets: (i)
microwave radios; (ii) cellular and personal communications services systems;
(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, PCS networks and
emerging wireless local telephone or local loop service. The increased demand
for wireless communications services has led existing service providers such as
cellular service providers, to upgrade their networks to more effectively use
their allocated frequency spectrum to accommodate more users and increased
features. One method of increasing capacity requires dividing existing cells
into several smaller radius cells, which allows the radio frequency spectrum to
be reused in adjacent cells. These micro cell upgrades to existing systems
require the establishment of additional, interconnected base stations.
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 microwave 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 network 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., Alcatel
Telecom, and Innova Corp. for microwave 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.
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Consumers are demanding small, light weight cellular and PCS handsets
that provide clear, uninterrupted communication. This demand has led to a need
for smaller, more efficient RF components in wireless handsets. One of the most
expensive and complex components in the RF portion of the handset is the power
amplifier. Historically, discrete GaAs solutions have been used for this
function. As GaAs integrated circuits have become more available and cost
effective they have begun replacing discrete solutions because they are more
reliable and smaller than discrete hybrids. Because of the physical properties
of GaAs, GaAs power amplifiers are more efficient than silicon and this
efficiency enables the handset manufacturer to use smaller, lighter batteries.
Celeritek produces a line of GaAs power amplifier products that addresses most
access technologies and frequencies.
The Company produces GaAs power amplifiers for handsets for customers
including Motorola, Inc., and Philips Consumer Communications.
Satellite-based Communications
Very Small Aperture Terminals ("VSAT") are satellite communication
systems which have the ability to transmit voice, fax, data and video utilizing
fixed-site terminals. In North America, the primary use of VSATs is for data
transmission applications such as credit card validation, inventory management,
accounting data collection and remote monitoring. In the international markets,
the primary application is for basic telephony services including voice,
facsimile and low speed data transmission.
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 Gilat Satellite Networks
Ltd., GE Spacenet and STM Wireless Inc. 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.
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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 ITT
Aerospace, Racal Radar Defense Systems, Ltd., Northrop-Grumman Corp., Dassault
Electronique and Litton Industries 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, the Company has shifted
its focus from defense markets to commercial wireless communications markets.
During fiscal 1997 and 1998, defense sales accounted for 39% and 42% of total
net sales, respectively. The Company does not expect sales to defense customers
to increase from the levels achieved in the 1998 fiscal year due to reductions
in funding for new defense programs. While the Company will continue to support
its customers in the defense markets, there can be no assurance that sales to
defense customers will not further decrease in the future.
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
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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 such as power amplifiers for cellular and PCS handsets.
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 to resolving these performance problems 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.
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 processes use state-of-the-art process
equipment for the wafer fabrication of GaAs products with geometry's as small as
0.25 micron. These processes enable the volume production of high performance,
highly integrated devices. The Company's current lithography process using
stepper-based, i-line, phase-shift technology provides it with the ability to
produce very fine line width devices in volume with proven production methods.
Using the Company's proprietary pHEMT (pseudomorphic High Electron Mobility
Transistor) and MESFET (Metal Semiconductor Field Effect Transistor) process
technologies, which are simpler and more reliable than some competing
technologies, the Company is able to match the process and the particular
circuit design to maximize product performance. The Company has also placed
emphasis on the packaging and test areas of production to insure that the
surface mount devices meet the most rigorous performance and quality
specifications with advanced materials, packaging systems and testing methods.
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 and
satellite communication systems. The Company's component products include GaAs
RF ICs for cellular and PCS handsets, wireless local loop
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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.
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
power amplifiers for use in wireless handsets for cellular and PCS networks.
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 17 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.
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During the year ended March 31, 1998, Celeritek had one customer,
P-Com, who accounted for approximately 20% of total net sales. In fiscal 1997,
two customers, P-Com and Westinghouse, accounted for approximately 20% and 11%
of total net sales, respectively. In fiscal 1996, two customers, P-Com and
Westinghouse, accounted for 19% and 29% of total net sales, respectively. A
relatively limited number of OEM customers have historically accounted for a
substantial portion of the Company's sales. In fiscal 1997 and 1998, sales to
the top ten customers accounted for approximately 66% and 63%, 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. 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.
For fiscal 1997 and 1998, sales from international customers accounted for 20%
and 23%, 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 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. Although the Company does
not have significant direct sales to Asian customers, several of the Company's
products are intended for end use in Asian markets. Should financial conditions
in Asia negatively effect demand for these products, the Company's business,
operating results and financial condition would be materially adversely
affected.
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, 1998 was approximately $37
million, of which 68% was for commercial customers, as compared to approximately
$35 million at March 31, 1997, of which 50% 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 one customer.
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, 1998, Celeritek employed 36 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, 1996, 1997 and 1998 were $3.8 million, $4.3
million, and $5.4 million, respectively.
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<PAGE> 11
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 commercial and
defense 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, 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 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.
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. Failure to maintain
acceptable yields may a have material adverse effect on the Company's business,
operating results, and financial condition. In addition, during periods of
decreased demand, high fixed wafer fabrication costs could 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
11
<PAGE> 12
a timely manner, the Company may experience an interruption in production until
alternative sources of supply can be obtained, which could damage customer
relationships and 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 Company, Remec, Inc., and Mitsubishi
Corporation. In the GaAs RF IC products, the Company competes primarily with
ANADIGICS, Inc., RF Micro Devices Inc. and Raytheon Co. 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.
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 a material 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
and on the Company's business, operation results and financial condition.
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
12
<PAGE> 13
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, 1998, the Company had a total of 422 employees
including 16 in marketing, sales and related customer support services, 36 in
research and development, 373 in manufacturing and 16 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 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. The Company also leases an additional 25,000 square foot
building in Santa Clara, California to house its wireless subsystems
manufacturing operation, which is leased through June 30, 2005. 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, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER MATTERS
13
<PAGE> 14
The information required by this item is included under "Market for
Registrants' Common Stock" in the Company's 1998 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 1998 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 1998 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
1998 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 1998 Annual Report to Shareholders
and is incorporated herein by reference.
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 1998 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 55 Chairman of the Board, President and Chief Executive Officer
Margaret E. Smith 50 Vice President, Finance and Chief Financial Officer
Robert D. Jones 58 Senior Vice President, Marketing and Sales
William W. Hoppin 35 Vice President, Sales
Gary J. Policky 56 Vice President, Engineering and Chief Technical Officer
Richard G. Finney 48 Vice President, Subsystem Division
Perry A. Denning 51 Vice President, Semiconductor Division
</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
14
<PAGE> 15
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.
ROBERT D. JONES, a founder of the Company, has served as Vice
President, Marketing since the Company's organization in 1984. In April 1997,
Mr. Jones was appointed Senior Vice President, Marketing and Sales. 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.
WILLIAM W. HOPPIN, joined the Company in July 1985 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.
GARY J. POLICKY, a founder of the Company, has served as Vice
President, Signal Processing Operations since the Company's organization in
1984. In April 1996, Mr. Policky was appointed as the Company's Vice President
of Engineering and Chief Technical Officer. 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.
RICHARD G. FINNEY joined the Company in 1985 as Director of
Manufacturing and has served as Vice President, Manufacturing since January
1996. In April 1997, Mr. Finney was appointed Vice President and General Manager
of the Subsystems Division. 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.
PERRY A. DENNING joined the Company in July 1997 as Vice President
and General Manager of the Semiconductor Division. Prior to joining the Company,
Mr. Denning was employed by Monolithic Systems Technology, Inc. from September
1996 to June 1997 as the Vice President of Operations. Before joining Monolithic
Systems, Mr. Denning was employed by VLSI Technology, Inc., from 1990 to 1995
most recently as Vice President of Corporate Facilities and Support Operations.
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 1998 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 1998 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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<PAGE> 16
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 1998 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 1998
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, 1998 and 1997.
Consolidated Statements of Income for the years ended March 31, 1998,
1997 and 1996.
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flow for the years ended March 31,
1998, 1997, and 1996.
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.
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.
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
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 (2) Lease agreement dated April 11, 1997 between the Registrant and Spieker Properties, L.P.
10.13 Loan modification agreement dated September 11, 1997 between Registrant and Silicon Valley Bank.
13 Annual Report to Shareholders for the year ended March 31, 1998.
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.
(2) Incorporated by reference to the identically numbered exhibit to the
Company's Form 10-K filing for the fiscal year ended March 31, 1997
(Commission File No. 0-25560).
b. Reports on Form 8-K
Form 8-K filed 5/7/98 - Restatement of selected data as it relates to the
adoption of FAS 128, "Earnings per share."
17
<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 5, 1998 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 5, 1998
- ------------------------------- and Chairman of the Board of
Tamer Husseini Directors (Principal Executive Officer)
/s/ MARGARET E. SMITH Vice President, Finance and Chief June 5, 1998
- ------------------------------- Financial Officer (Principal Financial
Margaret E. Smith and Accounting Officer)
/s/ WILLIAM H. YOUNGER JR. Director June 5, 1998
- -------------------------------
William H. Younger, Jr.
/s/ CHARLES P. WATIE Director June 5, 1998
- -------------------------------
Charles P. Waite
/s/ WILLIAM D. RASDAL Director June 5, 1998
- -------------------------------
William D. Rasdal
/s/ ROBERT MULLALEY Director June 5, 1998
- -------------------------------
Robert Mullaley
</TABLE>
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<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 (2) Lease agreement dated April 11, 1997 between the Registrant and Spieker Properties, L.P.
10.13 Loan modification agreement dated September 11, 1997 between Registrant and Silicon Valley Bank.
13 Annual Report to Shareholders for the year ended March 31, 1998.
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.
(2) Incorporated by reference to the identically numbered exhibit to the
Company's Form 10-K filing for the fiscal year ended March 31, 1997
(Commission File No. 0-25560).
<PAGE> 1
[SILICON VALLEY BANK LETTERHEAD]
Exhibit 10.13
September 11, 1997
Peggy Smith
Vice President and Chief Financial Officer
Celetitek, Inc.
3236 Scott Boulevard
Santa Clara, CA 95054
Dear Peggy:
Silicon Valley Bank ("Bank") is pleased to propose the following credit
facilities (collectively, "Loan") to Celetitek, Inc. ("Borrower") under the
terms and conditions as outlined in this letter. This letter is not meant to be,
nor shall it be construed as, an attempt to define all of the terms and
conditions of the Loan.
The following is a summary of the basic points of the Bank's proposal:
<TABLE>
<CAPTION>
<S> <C>
Loan: (A) Revolving Line of Credit.
(B) Term Loan.
Amount: (A) $4,000,000.
(B) $1,000,000.
Maturity: (A) One year from date of loan documents.
(B) Draw down period: For a period of 12 months from date of loan documents.
Repayment period: (a) Balance outstanding after 6 months to be repaid in 36 equal installments of
principal plus interest. (b) Balance outstanding after 12 months to be repaid in 36 equal installments
of principal plus interest.
Collateral: (A) Unsecured.
(B) Specific filings on financed equipment.
Interest Rate: (A) Bank's Prime Rate, floating.
(B) Bank's Prime Rate, floating, plus 0.50%.
Loan Fee: (A) $10,000.
(B) $2,500.
Borrowing Formula: (A) None.
(B) Advances to be based on 100% of the invoice cost of leasehold improvement expenses and equipment
purchases. Equipment purchase advances to exclude taxes, shipping, and installation expenses.
No more than 25% of the loan amount may be for software or used equipment costs. Minimum amount of
each advance to be $50,000 or greater. No advances will be allowed after the date twelve months from
date of the loan documents.
</TABLE>
<PAGE> 2
September 11, 1997
Ms. Peggy Smith
page 2
WARRANTIES &
COVENANTS: Borrower shall make customary representations, warranties,
and covenants, together with such other representations,
warranties, and covenants as the Bank or its counsel may
deem reasonably necessary or desirable, including the
following:
FINANCIAL COVENANTS: Maintain, on a quarterly basis, unless otherwise noted,
the following financial covenants in conformance with
generally accepted accounting principles (GAAP), based
upon the consolidated financial statements of Borrower.
(1) Minimum Quick Ratio of 2.00 to 1.00.
(2) Minimum Tangible Net Worth of $33,000,000.
(3) Maximum Total Liabilities to Tangible Net Worth of
1.00 to 1.00.
(4) Profitability, with allowance for one quarterly loss
not to exceed $500,000. Borrower to be profitable on
an annual basis.
(5) Minimum Debt Service Coverage (DSC) of 1.50 to 1.00.
Debt Service Coverage (DSC) is defined as net income plus
depreciation, amortization and interest expense, less
unfunded capital expenditures, divided by interest
expense and scheduled principal payments, all calculated
on a rolling three-month basis.
REPORTING REQUIREMENTS:
(1) Within 95 days of fiscal year-end, audited annual
financial statements (Form 10-K).
(2) Within 50 days of quarter-end, quarterly financial
statements (Form 10-Q).
(3) Within 50 days of quarter-end, a Compliance
Certificate.
OTHER REQUIREMENTS: (1) Proof of insurance on all corporate assets with
Lenders' Loss Payable Clause naming Bank Loss Payee.
EXPENSES: (1) Borrower shall pay cost of legal fees and other costs
incurred by Bank in connection with the preparation and
negotiation of the loan documents and the closing of the
transaction. Such fees and costs payable by Borrower are
in addition to the Loan Fee described above.
CONDITIONS
OF CLOSING: The following shall be satisfied prior to closing and
shall be conditions precedent to the Bank's obligation to
fund the Loan:
(1) Compliance with all warrants and covenants, including
financial and reporting requirements.
(2) After due-diligence inquiry conducted by the Bank
there shall be no discovery of any facts or circumstances
which would negatively affect, in the Bank's sole
discretion, collectability of the Loan against Borrower.
If these basic terms and conditions are acceptable, please so indicate by
signing the enclosed copy of this letter and returning it to the attention of
the undersigned by September 26, 1997 or such later date as agreed to by Bank
in writing. The proposal will constitute your instruction to the Bank to
commence, at your expense, documentation which shall supersede this letter.
This letter is intended to set forth the proposed terms of the Loan currently
under discussion between us.
2
<PAGE> 3
September 11, 1997
Ms. Peggy Smith
page 3
Except for your obligation to pay the Bank's expenses and charges described
above, this letter and our other communications and negotiations regarding the
proposed Loan do not constitute an agreement or an offer and do not create any
legal rights benefiting, or obligations binding on, either of us. It is
intended that all legal rights and obligations of the Bank and Borrower will be
set forth in definitive loan documents.
Peggy, we are delighted to make this proposal to you and look forward to our
continued relationship with Celeritek.
Sincerely,
SILICON VALLEY BANK
/s/ SILVIA FERNANDEZ /s/ PETER A. KIDDER
- --------------------------------------- ------------------------------
Silvia Fernandez Peter A. Kidder
Senior Vice President and Group Manager Vice President
AGREED TO AND ACCEPTED THIS 12 DAY OF SEPTEMBER, 1997
Celeritek, Inc.
By: /s/ MARGARET SMITH
----------------------------
Its: CFO
---------------------------
3
<PAGE> 1
Exhibit 13.1
Celeritek, Inc. designs and manufactures gallium arsenide radio-frequency
integrated circuits (GaAs RF ICs) and high-frequency radio transceiver
subsystems and components that enable a wide range of wireless communications
applications. The Company's products are used worldwide by leading manufacturers
of wireless communications systems.
Contents
---------------------------------
1998 Highlights 1
Letter to Shareholders 2
Gallium Arsenide 6
Semiconductors 10
Wireless Subsystems 14
1998 Financial Review 18
<PAGE> 2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
(in thousands, except per share data)
<TABLE>
<CAPTION>
STATEMENT OF INCOME DATA: 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------
Fiscal Year Ended March 31,
<S> <C> <C> <C> <C> <C>
Net sales:
Commercial $32,887 $27,632 $28,021 $10,854 $ 6,274
Defense 23,430 17,714 9,703 21,813 29,755
- ---------------------------------------------------------------------------------------
Total net sales 56,317 45,346 37,724 32,667 36,029
Gross profit 20,170 16,428 13,840 11,922 17,653
Income from operations 5,997 5,374 3,953 895 3,681
Net income 3,991 3,656 2,276 284 1,925
- ---------------------------------------------------------------------------------------
Basic earnings per share $ 0.56 $ 0.52 $ 0.73 $ 0.17 $ 1.32
Diluted earnings per share $ 0.54 $ 0.50 $ 0.38 $ 0.05 $ 0.38
- ---------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Total assets $48,448 $41,157 $33,877 $22,658 $22,995
Long-term obligations 906 -- -- 1,294 1,712
- ---------------------------------------------------------------------------------------
</TABLE>
This 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 Act of 1934. These forward-looking statements represent the Company's
expectations or beliefs concerning future events and include statements, among
others, regarding ramp up and establishment of production capabilities and
facilities and the long-term potential of the market. Reference is made to the
discussion of risk factors detailed in the Company's filings with the Securities
and Exchange Commission, including its report on Form 10-K and 10-Q.
<PAGE> 3
FELLOW SHAREHOLDERS:
- --------------------------------------------------------------------------------
As we continued our expansion into growing wireless markets, Celeritek gained
real momentum in fiscal year 1998. We executed on our long-term growth goals. We
made significant investments in capital equipment and increased capacity. We
made strong additions to our technical management team. And we introduced
innovative products that were embraced by leading original equipment
manufacturers (OEMs) around the world. It has been a busy and productive year.
FINANCIAL PERFORMANCE
For the year ended March 31, 1998, Celeritek reported revenue of $56.3 million,
a 24 percent increase from fiscal 1997 revenue of $45.3 million. Net income was
$4.0 million or $0.54 per share, compared to net income of $3.7 million, or
$0.50 per share the year before.
Sales in our wireless subsystems division grew to $48.3 million, a 22
percent increase from last year's $39.7 million. Semiconductor division sales
grew substantially, climbing 43 percent to $8.0 million from $5.6 million in
1997.
GaAS MARKET OPPORTUNITY
From our roots supplying advanced gallium arsenide (GaAs) components and
subsystems for wireless communications systems in military markets, Celeritek
today is increasingly focused on applying our extraordinary technology
capabilities for use in expanding commercial applications. As the demand for
wireless communications has grown, the lower frequency bands used for
communications have become crowded. This has resulted in the allocation of
higher frequencies for commercial applications.
In the wireless handset market, the frequencies for Personal Communications
Systems (PCS) and the European GSM standard are moving up to 2 GHz, a range
where Celeritek's microwave signal processing technology and GaAs capabilities
are strongest. In fiscal 1998, Celeritek executed on its plan to implement a
state-of-the art fabrication facility, and automated assembly and test functions
to help us meet the high-volume demand generated by this growing global
marketplace.
EXPANDED CAPABILITIES
The first step in our plan was to put in place a team of semiconductor
professionals with the experience and technical skills to run a high-volume,
leading-edge factory. To this end, we strengthened our management team, naming
Perry A. Denning vice president and general manager of Celeritek's semiconductor
division. Denning, a 28-year veteran of the semiconductor industry, has held
operations and production management positions at both VLSI Technology and Texas
Instruments. In addition, we recruited a number of outstanding technologists
with many years of experience in high-volume semiconductor production.
We also upgraded our semiconductor manufacturing operations, applying
proven high-volume, semiconductor manufacturing techniques to the manufacture of
GaAs ICs. We automated the test function and added assembly equipment. We
invested in new tool sets, and installed an advanced i-line stepper and robotic
wafer handling equipment. The Company believes this equipment will allow us to
increase output with improved quality and yields. We also enhanced etching, thin
film deposition and other associated tools and processes. In the past, Celeritek
has produced hardware in the thousands. We believe we are now ready to produce
in the millions. With our expanded facilities and team, we believe that we will
be able to achieve these levels.
<PAGE> 4
SEMICONDUCTOR TECHNOLOGY
Celeritek upheld its tradition of delivering technologically advanced products
in fiscal 1998. For example, our new Triniti DX(TM) PRO products were the first
true 3.0-volt power amplifiers on the market. Because of the linearity and
efficiency of these amplifiers, our customers are able to design phones with
smaller batteries and longer talk time. New product introductions such as these
are essential to maintain our competitive edge. As an experienced microwave
company, we are able to apply our knowledge and expertise in microwave design to
solve customers' wireless transmission problems. This ability to help customers
use our products most efficiently is a key differentiator for Celeritek.
SUBSYSTEMS GROWTH
In our subsystems division, we continued to expand our customer base. Alcatel
Espace, a major producer of microwave radios in France and the United States,
became a Celeritek customer. In the satellite market, STM Wireless, a
manufacturer and service supplier of satellite communications systems, selected
Celeritek to develop products for their next-generation Ku-Band system. We are
striving to further expand our customer base in fiscal 1999.
Development efforts for components for the local multipoint distribution
systems (LMDS) market are underway. LMDS will be used to transmit voice, video
and fast data at millimeter wave frequencies directly to offices and homes.
Frequencies for LMDS have been allocated, and auctions for these frequency
blocks began in February, 1998. We believe our technological strength is well
suited for this market growth area. Celeritek is a major supplier of millimeter
wave products for commercial radio applications, and we believe that this
valuable experience should allow us to succeed in the growing LMDS marketplace.
POSITIONED FOR THE FUTURE
In closing, I would like to thank you--our shareholders, board of directors,
customers and employees--for your ongoing support in helping to make Celeritek
an ever-stronger player in the expanding wireless communications industry. Going
forward, we will continue to focus on providing innovative products for
high-growth commercial wireless markets, while continuing to support our
customers in military markets. We believe that the investments we made this year
position Celeritek to maintain its momentum in meeting the evolving needs of an
increasingly wireless world.
[PHOTO OF CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER]
/s/ TAMER HUSSEINI
- ----------------------------------------------
Tamer Husseini
Chairman, President and Chief Executive Officer
<PAGE> 5
[Photo of Top] [Photo of the String]
With a clear focus on enabling commercial wireless communications applications,
Celeritek is moving ahead. Five years ago, virtually all of our business came
from military markets. Today, almost 60 percent of our business comes from
commercial customers. And the evolution continues. We have organized the Company
into two synergistic divisions--GaAs RF ICs, or semiconductors, and wireless
subsystems. We believe that the advanced ICs and transceivers from these two
complementary divisions help customers who are building the infrastructure of
wireless networks, as well as those who are supplying products for end-user
subscribers to those networks. With a product line from 800 MHz to 40 GHz, we
cover all of the major wireless frequencies and applications, enabling us to
meet a broad range of OEM customers' requirements. We believe that Celeritek has
tremendous momentum in the commercial markets we've targeted...and we are
continuing to pick up the pace.
MOMENTUM
<PAGE> 6
ENABLING WIRELESS COMMUNICATION THROUGH GALLIUM ARSENIDE TECHNOLOGY
[Photos of Products]
THE TECHNOLOGY FOR THE TIMES
As the lower frequency bands used in commercial wireless communications markets
have become increasingly congested, there has been a growing demand to apply
radio frequency (RF) and microwave technologies to commercial wireless
applications. Gallium arsenide (GaAs) enables RF and microwave wireless
communication products to achieve the necessary price/performance levels for
high-volume commercial applications.
From our heritage of enabling high-performance wireless communications for
military markets, Celeritek has advanced its proven expertise in GaAs technology
over the past 13 years. Now we are using our strong capabilities in GaAs and
microwave signal processing to help leading manufacturers add value to their
wireless communications products for commercial applications--from cellular
telephones to satellite systems. Our in-house foundry for producing GaAs
semiconductors gives us an additional advantage in being able to provide
customers with customized chips--and subsystems--in the shorter timeframes we
believe they need to gain an edge in their markets. And our application
engineers have the specialized knowledge and ability to support customers in
developing the next generation of system-level wireless products that will
provide even better access to people and information around the globe.
<PAGE> 7
[Photo of Spinning Tops]
From home offices to corporate telecommuters, the demand for high-speed Internet
access is accelerating at an explosive pace. The proliferation of mobile
computing is pushing the demand for wireless data networks. Digital cellular,
PCS and GSM phones are finding their way into the pockets of more and more
people as these once-luxury products become increasingly essential to people's
everyday professional and personal lives. Developing countries around the world
are finding it economically advantageous to go wireless as they design and
build-out their communications infrastructures. These are the markets Celeritek
seeks to serve with our advanced GaAs RF ICs and wireless subsystems.
EXPANSION
<PAGE> 8
SEMI-CONDUCTORS
MAKING WIRELESS PHONES SOUND Our semiconductor division focuses on
BETTER AND LAST LONGER providing GaAs RF ICs and GaAs field effect
transistors (FETs) that are used in wireless
telephone handsets and base stations. We're
not just making ICs and FETs, however--we're
really making it possible for wireless
telephones to sound better and let people
talk longer. We're making it possible for
handsets to be smaller and lighter to carry.
[PHOTO OF PRODUCTS]
10
<PAGE> 9
KEEPING AN EDGE IN EXPANDING MARKETS
[PHOTO OF PRODUCTS]
Celeritek's advanced GaAs RF ICs enable manufacturers to deliver smaller,
lighter wireless telephones with longer talk times.
CONDUCTORS
STAYING ON TOP OF THE TRENDS
The whole world, it seems, is going wireless.
In developed countries, people are signing up for wireless telephone
services at an accelerating rate. With more and more subscribers looking for
better voice clarity and higher quality across greater distances, analog
cellular phone service is giving way to digital cellular and PCS phone systems,
which operate at higher frequencies. And consumer demand continues to climb for
smaller, lighter phones--the smaller and lighter, the better. These demands
require specific technical capabilities. And these are the capabilities that
Celeritek offers. Our high gain and efficiency capabilities, for example, enable
smaller, lighter handsets. Linear power provides phones that sound better.
Dual-band PCS and cellular capabilities allow phones to work almost everywhere.
In developing countries, where basic telephone service has been rare or
nonexistent, governments have made financial commitments to install wireless,
rather than conventional land-based wireline systems. Celeritek has the ability
to be instrumental in enabling these widespread wireless local loop (WLL)
projects by providing advanced yet affordable IC solutions for the networks'
base stations as well as for subscribers' terminals.
And because these trends are growing, they translate into expanding
opportunities for Celeritek.
[PHOTO OF PRODUCTS]
<PAGE> 10
SEMI
[PHOTO OF THE FAB AREA]
PIONEERING 3.0-VOLT PERFORMANCE
With this year's introduction of the Triniti DX(TM) PRO line of 3.0-volt power
amplifiers, Celeritek once again led the charge, becoming the first supplier to
provide true 3.0-volt performance. This innovation enables the smaller, lighter
handsets and longer talk times that consumers are demanding. Offering solutions
for dual-band cellular and PCS frequencies, the new product line also supports
TDMA, CDMA and the European/worldwide GSM modulation schemes, providing OEMs
with the possibility of producing phones that truly do work everywhere.
Embraced by customers, our new 3.0-volt products have already earned
multiple design wins from major OEMs for use in their next-generation products.
[PHOTO OF PRODUCTS]
<PAGE> 11
CONDUCTORS
[PHOTOS OF THE TEST AREAS]
ONGOING TECHNOLOGY LEADERSHIP
Celeritek continues to lead the way in producing technologically advanced yet
cost-effective GaAs RF IC power amplifiers. Our pHEMT technology, coupled with
our unique microwave expertise, enables Celeritek to deliver innovative circuit
solutions that extract the best performance from a given design. Our ultralinear
efficient power amplification extends battery performance. And Celeritek has one
of the smallest die size in the industry, resulting in advanced products that
are also affordable. Our innovative cavity packaging technology further improves
product performance and gives Celeritek an additional technological edge.
Our low-cost semiconductor solutions have earned Celeritek many strategic
design wins. These include wins from OEMs engaged in cellular GSM and PCS
handsets and infrastructure projects; from WLL single- and multi-line terminal
manufacturers; and from satellite handset programs including Global Star. We
believe these wins--and the Celeritek people and products behind them--position
our company for ongoing success in a wide array of expanding wireless markets
around the world.
Previous design wins from such industry-leading cellular and PCS handset
OEMs as Motorola and Philips Consumer Communications (PCC) have led to current
high-volume production contracts. This year, we upgraded our IC foundry with
state-of-the-art equipment, and expanded its capacity to meet the volume demands
of these kinds of contracts.
[PHOTOS OF MANUFACTURING AREAS]
<PAGE> 12
WIRELESS
BUILDING THE WIRELESS NETWORK Helping customers build the wireless
networks around the world, Celeritek's
subsystems division focuses on
point-to-point radios, point-to-multipoint
radios, LMDS and satellite applications.
Wireless networks depend on high-quality
transceivers to complete a clear, accurate
communications link. Celeritek's subsystem
products make these high-quality links
possible by enabling critical RF and
microwave transmit-and-receive functions
within the networks.
[PHOTOS OF PRODUCTS]
<PAGE> 13
KEEPING AN EDGE IN EXPANDING MARKETS
[PHOTO OF PRODUCTS]
Celeritek's high-quality wireless subsystem products enable critical
transmit-and-receive functions for a range of advanced point-to-point radio
applications.
SUBSYTEMS
EXPANDING OPPORTUNITIES
Celeritek has long been a leading supplier to manufacturers of point-to-point
microwave radios that serve as the digital links between cellular and PCS base
stations and switched networks. Now, as these OEMs increasingly transition from
point-to-point radios to point-to-multipoint radios to meet growing demands for
high-speed Internet access, the concurrent market opportunity is expanding
significantly. Celeritek believes that it has the products--complete outdoor
units (ODUs) and microwave converters--to support these evolving market needs.
We are also developing products for LMDS, a specialized point-to-multipoint
system that is expected to become increasingly popular for transmitting
multimedia data. Auctions for LMDS frequencies began this past February in the
United States. Celeritek provides a full range of components at all frequencies
between 13-38 GHz to meet a wide range of domestic and international
requirements. Current customers include such leading manufacturers as Alcatel,
Innova and P-Com.
[PHOTO OF PRODUCTS]
<PAGE> 14
WIRELESS
[PHOTO OF ASSEMBLY AREA]
Satellite applications, too, are expanding in similar volumes, driven by
increasing needs for small office/home office (SOHO) applications in developed
countries, and wireless telephony applications in developing countries. These
changing market dynamics are creating significantly increased opportunities for
Celeritek. By providing higher levels of integration in our Ku- and C-Band
transceivers and ODUs for use in very small aperture terminals (VSATs), we are
able to offer our customers--such as G.E. Spacenet and Gilat--advanced
functionality, smaller sizes, lower costs and higher volumes.
Celeritek is also continuing to help customers build the growing PCS and
cellular telephone infrastructures with our base station power amplifiers and
drivers. We have now developed a line of standard transmit products for
repeaters and picocells--essentially, small transceivers--to address the needs
of a broad base of customers within a dynamic marketplace.
[PHOTOS OF PRODUCTS]
<PAGE> 15
SUBSYTEMS
[PHOTO OF ASSEMBLY AREA]
A MILITARY HERITAGE
Our strong technology foundation is built on a 13-year track record of providing
broadband amplifiers and complex wireless subsystems for defense communications
systems. Military solutions require technological superiority and the highest
reliability--qualities that Celeritek seeks to deliver to our customers in
defense and commercial markets.
DESIGNING FOR VOLUME
From our years of experience designing and manufacturing RF and microwave
devices for use in high-volume communications applications, Celeritek has
compiled an extensive library of proven signal-processing circuits that can be
quickly and efficiently integrated into higher-level systems. We believe this
modular approach to the engineering process helps our customers bring their
products to market faster and at lower costs. Our vertically integrated
manufacturing operations--including our internal GaAs semiconductor foundry,
state-of-the-art thin-film hybrid technology and surface mount technology (SMT)
assembly operations--enable us to provide customers with the manufacturing
technology necessary for each job.
[PHOTOS OF PRODUCTS]
<PAGE> 16
FINANCIAL
[GRAPHS]
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
CONSOLIDATED BALANCE SHEETS 23
CONSOLIDATED STATEMENTS OF INCOME 24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 25
CONSOLIDATED STATEMENTS OF CASH FLOWS 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 37
INVESTOR INFORMATION 38
</TABLE>
<PAGE> 17
Management's Discussion and Analysis of Financial
Conditions and Results of Operations
REVIEW
The following discussion 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 ramp up and establishment of production capabilities and
facilities and the long-term potential of the market. Actual results could
differ materially from those projected in the forward-looking statements as a
result of known and unknown risk factors and uncertainties. Such factors may
include, but are not necessarily limited to, the timing, cancellations or delay
of customer orders; continued achievement of design wins; the mix of products
sold; changes in manufacturing capacities and variation in the utilization of
this capacity; market acceptance of the Company's and its customers' products;
variations in manufacturing yields, and other competitive factors and other
factors set forth in "-factors that may affect future operating results".
Reference is made to the discussion of risk factors detailed in the Company's
filings with the Securities and Exchange Commission, including its reports on
Forms 10-K and 10-Q.
OVERVIEW
The Company designs, develops, manufactures and markets gallium arsenide
radio-frequency integrated circuits (GaAs RF ICs) and high-frequency radio
transceiver subsystems and components that provide core transmit and receive
functions for wireless communications systems and defense electronics. The
Company's subsystems products are primarily utilized in point-to-point and
point-to-multipoint radios, satellite-based communications and defense
electronics systems. The Company's semiconductor products are primarily utilized
in telephones for cellular, PCS and wireless local loop subscriber units. During
fiscal 1998, commercial sales increased 19% over fiscal 1997 from $27.6 million
to $32.9 million. Defense sales increased 32% from $17.7 million in fiscal 1997
to $23.4 million in fiscal 1998. Sales in fiscal 1998 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.
A relatively limited number of OEM customers have historically accounted
for a substantial portion of the Company's sales. In fiscal 1997 and 1998, sales
to the top ten such customers accounted for approximately 66% and 63%,
respectively, of total net sales. In fiscal 1998, one of the Company's OEM
customers accounted for 20% 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. 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.
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
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. The fabrication and packaging of integrated circuits, particularly GaAs
RF ICs, are highly complex and precise processes. Minute impurities, defects in
the masks used to print circuits on a wafer, difficulties in the fabrication or
packaging processes, or other factors could result in lower than expected
production yields, which could adversely effect gross margins. 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 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 1998 COMPARED TO FISCAL 1997
The Company's total net sales increased 24% from $45.3 million in fiscal 1997 to
$56.3 million in fiscal 1998. The increase in sales between fiscal 1997 and
fiscal 1998 was due to increased sales to both the commercial and defense
markets. Commercial sales increased 19%, with semiconductor products growing
from $5.6 million in fiscal 1997 to $8.0 million in fiscal 1998. The increase in
the semiconductor sales was the result of a more than four fold increase in the
sales of GaAs RF power amplifiers for use in PCS handsets. Commercial subsystems
sales increased 13% from $22.0 million in fiscal 1997 to $24.9 million in fiscal
1998. The increase in sales to the commercial subsystem market was the net
result of a 62% increase in sales to microwave radio manufacturers and
relatively flat sales to the satellite market.
Gross margin was consistent at 36% in both fiscal 1998 and 1997. The
Company's products have varying levels of gross margin. Semiconductor margins
are volume and yield dependent. The semiconductor manufacturing process has a
significant level of fixed costs and less than optimal volumes can result in
lower than expected gross margins. Additionally, semiconductor parts generally
have declining average selling prices. In the microwave radio market, continuing
pricing pressures on the radio manufacturers has resulted in eroding average
selling prices.
Research and development expenses increased from $4.3 million, or 9% of
total net sales in fiscal 1997, to $5.4 million, or 10% of total net sales in
fiscal 1998, reflecting the Company's continuing investment in commercial
product development, particularly for semiconductor products. The dollar
increase was to support increased headcount. The Company expects the dollar
amount of research and development expenses to continue to increase in future
periods.
Selling, general and administrative expenses increased from $6.8 million, or
15% of total net sales in fiscal 1998, to $8.8 million, or 16% of total net
sales in fiscal 1998. The dollar increase was due to increased administrative
costs to support increased headcount, legal expenses related to an acquisition
attempt and increased insurance costs. Selling expenses increased due to higher
commissions on an increased orders level and additional headcount.
Interest income and expense and other income, net, was $525,000 in fiscal
1997 compared to $415,000 in fiscal 1998. The decrease is primarily due to lower
interest income, due to lower cash balances, and increased interest expense, due
to debt resulting from the purchase of capital assets.
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 market in fiscal
1997 was offset by increased sales to the microwave radio market. 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
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
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.
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 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.
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.
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 $1.8 million and $6.9 million
in fiscal 1996 and 1997, respectively, and net cash used in operating activities
was $1.1 million in fiscal 1998. The increase in cash provided by operating
activities in fiscal 1997 as compared to fiscal 1996 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. The decrease in cash provided by operating activities in fiscal 1998
was due to increased accounts receivable and inventory levels which were the
result of higher levels of sales activity.
Net cash used in investing activities was $8.1 million, $3.7 million and
$3.4 million during fiscal 1996, 1997 and 1998, respectively. The net cash used
for investing activities for all periods relates primarily to purchases of
equipment and the sale and purchase of short-term investments. In fiscal 1996,
the net cash used in investing activities was primarily due to the purchase of
short-term investments. In fiscal 1997 and 1998, the net cash used was primarily
for the purchase of equipment.
In fiscal 1998, the Company financed $1.0 million of equipment purchases
through long-term debt.
As of March 31, 1998, the Company had $4.0 million of cash and cash
equivalents, $7.5 million of short-term investments and $29.8 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 through at least fiscal 1999.
IMPACT OF YEAR 2000
The Company has determined that it will need to modify or upgrade portions of
its software so that its various computer systems will function properly with
respect to dates in the year 2000 and beyond. The Company presently believes
that with modifications to existing software and conversions to newer versions
of existing software, the Year 2000 will not pose significant operational
problems for its computer systems. However, if such modifications and
conversions are not made, or are not completed in a timely fashion, and such
modifications and conversions to software of the Company's vendors, suppliers,
financial institutions and service providers are not made or completed in a
timely fashion, the Year 2000 issue could have a material adverse effect on the
Company's business, operating results and financial condition. The Company does
not, at this time, expect these modifications to materially impact the financial
results of the Company. The Company plans to initiate formal communications with
all of its significant suppliers and financial institutions to ensure that those
parties have appropriate plans to deal with Year 2000 issues where their systems
could impact the Company's operations. The Company has determined it has no
exposure to contingencies related to the Year 2000 issue for the products it has
sold.
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
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 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
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.
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.
The life cycles of certain of the Company's products are dependent on the
life cycle of the end products which utilize the Company's products. The life
cycle of cellular and PCS telephones is expected to be relatively short. The
Company's business, operating results and financial condition could be
materially adversely affected by excess or obsolete inventory levels if the
expected demand for a product does not materialize.
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 uses various third party integrated circuit assembly vendors to
package its semiconductor products. The packaging of microwave components is
technically difficult as the package acts as a tuning element on the integrated
circuit causing the performance of the integrated circuit when packaged to
differ from the performance before packaging. Because of these difficulties, all
assembly vendors need to be carefully qualified and quality and volume issues
may result in single source suppliers at times. The Company's inability to
obtain acceptable quality levels or timely deliveries from its assembly vendors
or the loss of any of its current vendors would result in delays or reduction of
product shipments and could materially adversely affect its business, operating
results and financial condition.
<PAGE> 21
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1998 MARCH 31, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands, except share amounts)
Assets
Current assets:
Cash and cash equivalents $ 4,022 $ 7,033
Short-term investments 7,500 8,200
Accounts receivable, net of allowance for doubtful accounts of
$595 and $520 at March 31, 1998 and 1997, respectively 15,816 10,111
Inventories 10,635 7,318
Prepaid expenses and other current assets 415 270
Deferred tax assets 1,927 2,144
---------------------------
Total current assets 40,315 35,076
Net property and equipment 8,042 6,038
Other assets 91 43
---------------------------
Total assets $ 48,448 $ 41,157
===========================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 333 $ --
Current obligations under capital leases 70 --
Accounts payable 4,491 3,889
Accrued payroll 1,570 1,190
Accrued liabilities 4,065 3,594
---------------------------
Total current liabilities 10,529 8,673
Long-term debt, less current portion 667 --
Noncurrent obligations under capital lease commitments 239 --
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-7,175,581 at March 31,
1998 and 7,096,126 at March 31, 1997 24,214 23,676
Retained earnings 12,799 8,808
---------------------------
Total shareholders' equity 37,013 32,484
---------------------------
Total liabilities and shareholders' equity $ 48,448 $ 41,157
===========================
</TABLE>
See accompanying notes.
<PAGE> 22
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1998 1997 1996
<S> <C> <C> <C>
Net sales $ 56,317 $ 45,346 $ 37,724
Cost of goods sold 36,147 28,918 23,884
-----------------------------------------------
Gross profit 20,170 16,428 13,840
Operating expenses:
Research and development 5,389 4,252 3,772
Selling, general, and administrative 8,784 6,802 6,115
-----------------------------------------------
Total operating expenses 14,173 11,054 9,887
-----------------------------------------------
Income from operations 5,997 5,374 3,953
Interest income and other 475 525 210
Interest expense (59) -- (454)
-----------------------------------------------
Income before income taxes 6,413 5,899 3,709
Provision for income taxes 2,422 2,243 1,433
-----------------------------------------------
Net income $ 3,991 $ 3,656 $ 2,276
===============================================
Basic earnings per share $ 0.56 $ 0.52 $ 0.73
Diluted earnings per share $ 0.54 $ 0.50 $ 0.38
-----------------------------------------------
Weighted average common shares outstanding 7,126 7,017 3,107
Weighted average common shares outstanding, assuming dilution 7,450 7,352 5,953
-----------------------------------------------
</TABLE>
See accompanying notes.
<PAGE> 23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
CONVERTIBLE RETAINED SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK EARNINGS EQUITY
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands) Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
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 initial 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
Issuance of common stock
on exercise of options
under stock option plan -- -- 32 134 -- 134
Issuance of common stock
under employee stock
purchase plan -- -- 48 404 -- 404
Net income -- -- -- -- 3,991 3,991
---------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 -- $ -- 7,176 $24,214 $12,799 $37,013
=======================================================================================
</TABLE>
See accompanying notes.
<PAGE> 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
- -----------------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,991 $ 3,656 $ 2,276
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,358 2,119 1,880
Loss on disposal of property and equipment -- 7 56
Deferred income taxes 306 (603) (152)
Changes in operating assets and liabilities
Accounts receivable (5,705) (436) (2,104)
Inventories (3,317) (920) (1,279)
Prepaid expenses and other current assets (145) (144) (65)
Accounts payable, accrued payroll
and accrued liabilities 1,364 3,184 1,186
------------------------------------------
Net cash provided by (used in) operating activities (1,148) 6,863 1,798
INVESTING ACTIVITIES
Purchases of property and equipment (4,029) (3,043) (628)
Decrease in other assets (48) -- --
Purchase of short-term investments (10,180) (14,525) (23,500)
Proceeds from maturities of
short-term investments 10,880 13,825 16,000
------------------------------------------
Net cash used in investing activities (3,377) (3,743) (8,128)
FINANCING ACTIVITIES
Payments on lines of credit -- -- (3,750)
Borrowings under lines of credit -- -- 2,250
Payments on long-term debt -- -- (2,815)
Borrowings on long-term debt 1,000 -- 286
Payments on obligations under capital leases (24) -- (701)
Net proceeds from issuance of common stock 538 602 12,177
------------------------------------------
Net cash provided by financing activities 1,514 602 7,447
------------------------------------------
Increase (decrease) in cash and cash equivalents (3,011) 3,722 1,117
Cash and cash equivalents at beginning of period 7,033 3,311 2,194
------------------------------------------
Cash and cash equivalents at end of period $ 4,022 $ 7,033 $ 3,311
==========================================
</TABLE>
See accompanying notes.
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES Celeritek, Inc. (the "Company") designs, develops,
manufactures, and markets gallium arsenide radio-frequency integrated circuits
and high frequency radio transceiver subsystems and components that provide core
transmit and receive functions for wireless communications systems. The
Company's subsystems products are utilized in point-to-point and
point-to-multipoint radios, satellite-based communications and defense
electronics. The Company's semiconductor products are primarily used in
telephones for cellular and PCS systems, and wireless local loop subscriber
terminals. 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 1998, 1997 and 1996 ended on March 29, March 30 and March 31,
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
reporting 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. Investments with maturities greater than three
months and less than one year are classified as short-term investments. 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. Actual credit losses may differ from
management's estimates.
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). Assets recorded under capital leases are
amortized by the straight-line method over their respective useful lives of
three to five years or the lease term, whichever is less. 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.
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION The Company has elected to follow APB Opinion 25,
"Accounting for Stock Issued to Employees," in accounting for its employee stock
options and has adopted the "disclosure only" alternative as described in
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123).
EARNINGS PER SHARE In accordance with SFAS No. 128, "Earnings per Share," basic
earnings per common share are computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share
incorporate the incremental shares issuable upon the assumed exercise of stock
options and warrants and assumed conversions of preferred stock.
In February 1998, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 98 (SAB 98). Under SAB 98, certain shares of options and
warrants to purchase common stock, issued at prices substantially below the per
share price sold in the Company initial public offering in December 1995,
previously included in the computation of shares outstanding pursuant to Staff
Accounting Bulletins Nos. 55, 64, and 83 are now excluded from the computation.
Basic and diluted earnings per share have been retroactively restated to apply
the requirements of SAB 98.
REPORTING COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 establishes new standards for the
reporting and display of comprehensive income and its components in the
financial statements. The adoption of SFAS 130 will not effect results of
operations or financial position, but will require unrealized gains (losses) on
the Company's available-for-sale securities, which currently would be reported
in stockholders' equity, to be included in other comprehensive income and the
disclosure of total comprehensive income. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The Company plans to adopt SFAS 130 on April
1, 1998.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION In June,
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
that segments be determined based on how management measures performance and
makes decisions about allocating resources. SFAS 131 will first be reflected in
the company's fiscal 1999 annual report.
NOTE 2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
(in thousands, except per share amounts) 1998 1997 1996
Numerator:
Net income $3,991 $3,656 $2,276
Denominator:
Denominator for basic earnings per share-
weighted average shares 7,126 7,017 3,107
Effect of dilutive securities:
Convertible preferred stock -- -- 2,398
Stock options 324 335 448
------ ------ ------
Dilutive potential common shares 7,450 7,352 5,953
------ ------ ------
Basic earnings per share $ 0.56 $ 0.52 $ 0.73
Diluted earnings per share $ 0.54 $ 0.50 $ 0.38
</TABLE>
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. 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, 1998 and 1997, 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>
March 31, 1998 March 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Municipal bond money market preferred stock $ 7,500 $ 8,200
======== ========
</TABLE>
The gross realized gains and losses of available-for-sale securities for the
fiscal years ended March 31, 1998 and 1997 were not material.
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Raw materials $ 3,405 $ 2,751
Work-in-process 7,230 4,567
-------- --------
$ 10,635 $ 7,318
======== ========
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Equipment $ 20,270 $ 16,982
Furniture and fixtures 613 483
Leasehold improvements 4,875 3,931
-------- --------
25,758 21,396
Accumulated depreciation
and amortization 17,716 15,358
-------- --------
Net property and equipment $ 8,042 $ 6,038
======== ========
</TABLE>
NOTE 6. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Accrued commission $ 909 $ 722
Warranty accrual 349 357
Income taxes payable 1,804 1,914
Other 1,003 601
-------- --------
$ 4,065 $ 3,594
======== ========
</TABLE>
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. LEASES
The Company leases equipment under capital and operating leases. The Company
also leases certain facilities used in operations under non-cancelable operating
leases that expire at various times through the year 2005. Property and
equipment include the following amounts for leases that have been capitalized:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
- -------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
Property and equipment $ 333 $ --
Less accumulated amortization (30) --
---------- ----------
$ 303 $ --
========== ==========
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense. Certain of the leased assets require the Company to maintain adequate
liability insurance coverage.
Future minimum payments under capital leases and non-cancelable operating
leases with initial terms of one year or more consisted of the following at
March 31, 1998:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
(in thousands)
1999 $ 95 $ 2,377
2000 95 2,194
2001 95 1,652
2002 64 573
2003 - 472
Thereafter - 1,130
--------- --------
Total minimum lease payments 349 $ 8,398
Less amounts representing interest (40) ========
---------
Present value of net minimum lease payments 309
Less current portion (70)
---------
$ 239
=========
</TABLE>
Rent expense was approximately $2,385,000, $1,584,000, and $1,472,000 for the
years ended March 31, 1998, 1997 and 1996, respectively.
NOTE 8. LONG-TERM DEBT
The Company has available two revolving lines of credit covered by a Master Loan
Agreement (the "Loan Agreement"), as amended, which expire September 11, 1998.
The first available line of credit, which is unsecured, is for $4,000,000.
Borrowings under the first line of credit bear interest at the bank's reference
rate (8.5% at March 31, 1998). The second line of credit which is for
$1,000,000, is secured by financed equipment and bears interest at the bank's
reference rate plus 0.5%. The Loan Agreement requires the Company to maintain
certain financial ratios, profitability levels, a minimum net worth of
$33,000,000, and limits the payment of dividends. As of March 31, 1998, the
Company had no borrowings under the first line of credit and $1,000,000 borrowed
against the second line of credit.
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. INCOME TAXES
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
- --------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 1,892 $ 2,468 $ 1,387
State 224 378 198
------- ------- -------
Total current 2,116 2,846 1,585
Deferred:
Federal 266 (506) (184)
State 40 (97) 32
------- ------- -------
Total deferred 306 (603) (152)
------- ------- -------
Provision for income taxes $ 2,422 $ 2,243 $ 1,433
======= ======= =======
</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,
- -------------------------------------------------------------------------------------------------------------
(in thousands, except percentages) 1998 1997 1996
-------------------------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C>
At U.S. statutory rate $2,180 34.0% $2,005 34.0% $1,261 34.0%
State income tax, net of federal tax benefit 174 2.7 186 3.1 152 4.1
Other 68 1.1 52 1.0 20 .5
------ ------ ------ ------ ------ ------
$2,422 37.8% $2,243 38.1% $1,433 38.6%
====== ====== ====== ====== ====== ======
</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, 1998 MARCH 31, 1997
- ------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of financial statement depreciation $ 109 $ 20
------ ------
Total deferred tax liabilities 109 20
Deferred tax assets:
Inventory valuation 1,129 1,265
Accruals and reserves not deductible for tax purposes 718 755
Other 80 124
------ ------
Total deferred tax assets 1,927 2,144
------ ------
Net deferred tax assets $1,818 $2,124
====== ======
</TABLE>
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. 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 $73,000 in fiscal 1998 and $57,000 in
fiscal 1997. No contributions were made in fiscal 1996. Administrative expenses
relating to the Plan are insignificant.
NOTE 11. SHAREHOLDERS' EQUITY
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 PLAN 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 August 13, 1997, the shareholders approved an
increase in the number of shares available for issuance under the 1994 Stock
Option Plan by an additional 250,000 shares. The shareholders also approved an
amendment to the Plan to provide that on March 31 of each year, beginning with
March 31, 1998, the number of shares reserved for issuance under the 1994 Plan
shall be increased by an amount equal to the lessor of (i) 250,000 shares, (ii)
3% of the outstanding shares of the Company's Common Stock on such a date or
(iii) a lesser amount determined by the Board of Directors of the Company.
The 1994 Plan provides that (i) the exercise price 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 at the date of grant, 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 at the date of grant. 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.
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Activity under the Plan with respect to stock options and stock purchase rights
is set forth below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------------------
WEIGHTED
SHARES AVAILABLE NUMBER PRICE PER AVERAGE
FOR GRANT OF SHARES SHARE TOTAL EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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 and expired 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
Expiration of 1985 Plan authorization (79,638) -- -- -- --
Additional shares authorized for 1994 Plan 250,000 -- -- --
Options granted (152,000) 152,000 11.00-16.00 2,013,750 13.25
Options exercised -- (32,005) 1.50-13.88 (134,117) 4.19
Options canceled and expired 36,522 (37,831) 1.50-13.88 (443,585) 11.72
---------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 174,564 851,288 $3.00-16.00 $ 7,410,739 $ 8.71
===========================================================================
</TABLE>
At March 31, 1998, outstanding options to purchase 395,764 shares of common
stock were exercisable.
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------- ----------------------------------------
RANGE OF NUMBER OF SHARES WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER OF SHARES WEIGHTED-AVERAGE
EXERCISE PRICE AT MARCH 31, 1998 REMAINING CONTRACTED LIFE EXERCISE PRICE AT MARCH 31, 1998 EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.00-$ 7.50 305,788 6.57 years $ 3.33 242,599 $ 3.24
9.50-10.75 297,500 8.43 years $10.32 93,782 $10.09
11.00-16.00 248,000 7.63 years $13.39 59,383 $13.36
- ------------------------------------------------------------------------------------------------------------------------------------
851,288 $ 8.71 395,764
=================================================================================================================
</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 SFAS 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.
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma information regarding income and earnings per share is required by
SFAS 123, which 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 employee stock options using the following weighted-average
assumptions for the fiscal years ended March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
- --------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Risk-free interest rate 5.9% 6.4% 5.9%
Dividend yield 0.0 0.0 0.0
Volatility 72.9 72.1 50.1
Expected life of options 5 years 5 years 5 years
- --------------------------------------------------------------------------------
</TABLE>
The Company used the following weighted average assumptions for its employee
stock purchase plan:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
- --------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Risk-free interest rate 5.4% 5.3% --
Dividend yield 0.0 0.0 --
Volatility 72.9 72.1 --
Expected life of options 0.5 years 0.5 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.
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>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $3,066 $3,141 $2,215
Pro forma basic earnings per share $ 0.43 $ 0.45 $ 0.40
Pro forma diluted earnings per share $ 0.41 $ 0.43 $ 0.37
- --------------------------------------------------------------------------------
</TABLE>
The weighted average grant date fair value of options granted during the fiscal
years ended March 31, 1998, 1997 and 1996 was $ 6.96, $7.43 and $4.59,
respectively.
As a result of SFAS 123 only being applicable to options granted subsequent
to March 31, 1995, its pro forma effect will not be fully reflected until future
years.
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. In
fiscal year 1998, no options were granted. At March 31, 1998, options to
purchase 24,000 shares of common stock were outstanding of which 14,500 options
were exercisable.
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 initial public offering, December 1995. During the fiscal year ended
March 31, 1998 and 1997, 47,450 and 44,365 shares of common stock respectively,
were purchased under the ESPP.
NOTE 12. SIGNIFICANT CUSTOMERS AND EXPORT SALES
In fiscal 1998, one customer accounted for 20% of net 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. A summary of export sales are as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
- --------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
United States $43,380 $36,306 $33,159
Europe 6,848 4,720 2,990
Japan 2,154 2,998 1,345
Other 3,935 1,322 230
------- ------- -------
$56,317 $45,346 $37,724
======= ======= =======
</TABLE>
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
- ----------------------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
<S> <C> <C> <C>
Cash paid for interest $ 59 $ -- $ 454
Cash paid for income taxes $2,226 $ 1,495 $1,063
Capital lease obligations incurred to acquire equipment $ 333 $ -- $ 255
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED QUARTERLY RESULTS
<TABLE>
<CAPTION>
UNAUDITED QUARTER ENDED IN FISCAL 1998
- ----------------------------------------------------------------------------------------------------
(in thousands except per share data) JUNE 30 SEPT. 30 DEC. 31 MARCH 31
<S> <C> <C> <C> <C>
Net sales $12,595 $13,529 $14,412 $15,781
Gross profit 4,372 4,938 5,777 5,083
Income from operations 1,369 1,578 1,790 1,260
Net income 956 1,053 1,170 812
Basic earnings per share $ 0.13 $ 0.15 $ 0.16 $ 0.11
Diluted earnings per share $ 0.13 $ 0.14 $ 0.16 $ 0.11
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED QUARTER ENDED IN FISCAL 1997
- ----------------------------------------------------------------------------------------------------
(in thousands except per share data) 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
Basic earnings per share $ 0.13 $ 0.15 $ 0.10 $ 0.14
Diluted earnings per share $ 0.12 $ 0.14 $ 0.10 $ 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 HIGH LOW
- -------------------------------------------------------------------------------
<S> <C> <C>
FISCAL 1998
June 30, 1997 $13.25 $ 9.50
September 30, 1997 18.13 12.25
December 31, 1997 17.94 13.00
March 31, 1998 15.00 10.38
FISCAL 1997
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 16, 1998, there were approximately 252 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.
<PAGE> 35
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, 1998 and 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended March 31, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended March 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
April 24, 1998
<PAGE> 36
INVESTOR INFORMATION
<TABLE>
<S> <C> <C>
BOARD OF DIRECTORS Gary J. Policky ATTORNEYS
Vice President, Engineering Wilson, Sonsini,
William H. Younger, Jr. and Chief Technical Officer Goodrich & Rosati, PC
General Partner 650 Page Mill Road
Sutter Hill Ventures Margaret E. Smith Palo Alto, CA 94304
Vice President, Finance
Charles P. Waite and Chief Financial Officer TRANSFER AGENT AND REGISTRAR
General Partner Bank of Boston
Greylock Ventures Richard Finney c/o Boston EquiServe, LP
Limited Partnership Vice President, PO Box 8040
Subsystems Division Boston, MA 02266-8040
William D. Rasdal
Chairman of the Board Perry A. Denning ANNUAL SHAREHOLDERS' MEETING
and Chief Executive Officer Vice President, July 30, 1998
SymmetriCom, Inc. Semiconductor Division 9:00 am
Corporate Headquarters
Robert C. Mullaley William Hoppin
Consultant and Private Investor Vice President, Sales STOCK MARKET INFORMATION
The common stock is traded
Tamer Husseini CORPORATE HEADQUARTERS on The Nasdaq Stock Market
Chairman of the Board 3236 Scott Boulevard under the symbol CLTK
President and Chief Executive Officer Santa Clara, CA 95054
Celeritek, Inc. (408) 986-5060 CORPORATE AND
www.celeritek.com INVESTOR INFORMATION
OFFICERS A Copy of the Company's Annual
INDEPENDENT ACCOUNTANTS Report and Form 10-K are available
Tamer Husseini Ernst & Young LLP upon written request from:
Chairman of the Board 55 Almaden Boulevard
President and Chief Executive Officer San Jose, CA 95113 INVESTOR RELATIONS
Celeritek, Inc.
Robert D. Jones 3236 Scott Boulevard
Senior Vice President, Santa Clara, CA 95054
Marketing and Sales
</TABLE>
<PAGE> 37
CELERITEK, INC. 3236 SCOTT BOULEVARD SANTA CLARA, CALIFORNIA 95054
TEL (408) 986-5060
<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 24, 1998 included in the 1998
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
(Forms S-8 No. 333-2886 and S-8 No. 333-52037) 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 24, 1998, 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, 1998.
/s/ Ernst & Young LLP
San Jose, California
June 5, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 4,022
<SECURITIES> 7,500
<RECEIVABLES> 16,411
<ALLOWANCES> 595
<INVENTORY> 10,635
<CURRENT-ASSETS> 40,315
<PP&E> 25,758
<DEPRECIATION> 17,716
<TOTAL-ASSETS> 48,448
<CURRENT-LIABILITIES> 10,529
<BONDS> 0
0
0
<COMMON> 24,214
<OTHER-SE> 12,800
<TOTAL-LIABILITY-AND-EQUITY> 48,448
<SALES> 56,317
<TOTAL-REVENUES> 56,317
<CGS> 36,147
<TOTAL-COSTS> 36,147
<OTHER-EXPENSES> 14,173
<LOSS-PROVISION> 595
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> 6,413
<INCOME-TAX> 2,422
<INCOME-CONTINUING> 3,991
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,991
<EPS-PRIMARY> 0.56<F1>
<EPS-DILUTED> 0.54
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
