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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to _________________
COMMISSION FILE NUMBER: 0-25560
CELERITEK, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0057484
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3236 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (408) 986-5060
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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 24, 1999, was approximately $35,900,000 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 24, 1999, approximately 7,381,211 shares of the Registrant's
Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates information by
reference from Registrant's Proxy statement for its 1999 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.
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 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.
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 high band width wireless
voice and data communications systems and defense electronics. The Company's
semiconductor products are primarily utilized in handsets for cellular and PCS
systems and wireless local loop subscriber units. The Company's subsystem
products are utilized in microwave radios, satellite-based communications and
defense electronics systems. For the year ended March 31, 1999, approximately
50% of the Company's total net sales were derived from the commercial wireless
communications markets.
The Company's GaAs RF ICs and high frequency radio transceiver
subsystems and components operate in the high radio frequency ("RF") range of
800 MHz to 1 GHz and in the microwave frequency range of 1GHz to 40 GHz. The
Company's semiconductor product line includes GaAs RF ICs for cellular and PCS
handsets, wireless local loop subscriber units and base station applications.
The Company's wireless subsystem product line includes subsystems and components
for microwave radios, and very small aperture terminals ("VSAT") . 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
provided its original equipment manufacturer ("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 performance improvements in such wireless communications products
as cellular, PCS and satellite-based voice and data systems have also
contributed to this growth. As demand for wireless communications services
grows, service providers are expanding associated infrastructure. Wireless
communications systems can offer the functional advantages of wired
communications systems without the costly and time consuming development of an
extensive wired infrastructure. The relative advantages of wireless and wired
communications systems with respect to cost, transmission quality, reliability
and other factors depend on the specific applications for which such systems are
used and the existence of a wired or wireless infrastructure already in place.
The factors responsible for the market's growth, coupled with regulatory changes
in the United States and abroad as well as advances in wireless communications
technology, have led to significant growth in existing wireless
telecommunications systems and the emergence of new wireless applications.
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
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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 Federal Trade Commission ("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 System
("LMDS"), a specialized point-to multipoint system in the 28 GHz to 31 GHz
bands. LDMS is expected to become increasingly popular for transmitting
multimedia data. In addition, several system manufactures now have
point-to-multipoint systems in design or pre-production stages. These systems
have the potential to significantly expand the radio market in support of this
multi-point function.
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 in developing countries, 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 instead of a traditional wired approach. Wireless
transmission systems involve a number of short-haul radio connections and as a
result, generally offer lower cost and faster installation. Demand for high data
rate access to the Internet is in demand to serve large businesses, small and
medium size enterprises and individuals. Wireless solutions are now available
with high data rate radios for the subscriber connection to fiber optic
networks. New point-to-multipoint radio systems and satellite systems are also
used for Internet connections.
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.
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
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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, that it expects to generate revenue in the near-term while
providing for medium and long-term growth.
Target Worldwide Industry Leaders. Many of the wireless communication
markets are dominated by a limited number of large system manufacturers. The
Company targets industry leaders to optimize return from its engineering and
manufacturing resources.
Team with Customers. The Company's sales and engineering teams work
closely with its customers, from design through prototype and into
manufacturing, to help them develop system-wide solutions to their wireless
transmission needs. The Company's customer engineering support team uses its
expertise in components, subsystems and system architecture to develop
application-specific wireless transmission solutions for its customers'
products. The Company has successfully developed close working relationships
with many of its major customers where the Company's engineering organization
assists customers in their analysis and design of new wireless transmissions
systems.
Offer Broader Range of Solutions. The Company focuses on designing
application-specific products for its customers. Historically, the Company
manufactured transceiver components for the defense industry. 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 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 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)
cellular and personal communications services systems; (ii) microwave radios;
(iii) satellite-based communications; and (iv) defense electronics.
Semiconductors for Cellular Telephone Systems, Personal Communication Services
and Wireless Local Loop.
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,
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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 networks, are stimulating competition from cellular
providers as they overhaul their analog networks to compete with the clarity,
security and capacity of digital processing.
Consumers are demanding small, light weight cellular and PCS handsets
that provide clear, uninterrupted communication. This demand has lead 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 all
access technologies and frequencies.
Use of wireless local loop for telephony applications is being driven by
the demand for basic telephone service in 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. These systems offer a
cost-effective alternative to traditional wired telephony systems, with a faster
installation time.
The Company produces GaAs RF ICs for handsets for customers including
Motorola, Inc., Mitsubishi, and Ericcson Corporation.
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 RF 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 RF
radios.
In certain high traffic applications, a point-to-point radio system is a
more economical means to connect base stations than wire or fiber connections. A
radio system can be installed more quickly and at a lower cost than a wired
system, primarily because of limitations and difficulties in installing land
lines for a wired system. The market for point-to-point radios is also
increasing as companies use radios to bypass local telephone operating companies
for private networking applications. Also, as alternative access providers
establish new infrastructures to deliver local telephone service, the Company
believes that they will likely use microwave radio networks as, in many cases,
these networks can be implemented faster and more cost-effectively than
traditional wired approaches.
Fast and easy access to the Internet is critical for success in today's
business world. Global businesses are now demanding wireless access anytime,
anywhere for their increasingly mobile workforces. Besides mobile workers, there
are an estimated over half million office buildings in the United States that
need unwired, high speed data access. This provides a significant opportunity
for companies like Celeritek, to provide cost-effective, quickly implemented,
wireless solutions. Point-to-point and point-to-multipoint systems are used to
connect subscribers with high data rate needs to fiber optic backbone tranceiver
systems.
The Company designs, manufactures and markets microwave radio
transceivers and outdoor units to customers including P-COM, Inc., DMC, Bosch,
and Alcatel for microwave radio applications.
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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 often in conjunction with a
wireless local loop, 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 terrain. These systems offer a
cost-effective alternative to traditional wired telephony systems, with a faster
installation time.
Celeritek produces subsystems and components for use in VSAT data and
telephony systems for system providers including Gilat Satellite Networks Ltd,
and STM Wireless Inc., which provide VSAT earth stations and related hub
equipment. The Company also manufactures RF IC's for mobile satellite subscriber
applicants. These products are supplied to Ericsson and Hughes Network Systems.
VSAT products are sold for distribution through Norsat worldwide.
The Company's ability to grow will depend substantially on its ability
to continue to apply its RF and microwave signal processing expertise and GaAs
semiconductor technologies to existing and emerging commercial wireless
communications markets. If the Company is unable to design, manufacture and
market new products for existing or emerging commercial markets successfully,
its business, operating results and financial condition will be adversely
affected. Furthermore, if the markets for the Company's products in the
commercial wireless communications area fail to grow, or grow more slowly than
anticipated, the Company's business, operating results and financial condition
could be materially adversely affected.
The Company's customers establish demanding specifications for
performance and reliability. There can be no assurance that problems will not
occur in the future with respect to performance and reliability of the Company's
products. If such problems occur, the Company could experience increased costs,
delays in or reductions, cancellations or rescheduling of orders and shipments,
product returns and discounts, and product redesigns, any of which would have a
material adverse effect on the Company's business, operating results and
financial condition.
Defense Electronics Market
Military forces worldwide are dependent on sophisticated electronic
equipment. Military aircraft and naval vessels generally contain extensive
electronic countermeasure equipment for defense against enemy missile and radar
systems. These systems typically provide protection for the aircraft or the ship
from incoming enemy missiles by jamming the missiles' tracking systems through
various RF and microwave signal processing techniques. The Company supplies its
transceiver components to major electronic system manufacturers such as ITT
Aerospace, Racal Radar Defense Systems, Ltd., Northrop-Grumman Corp., Dassault
Electronique, Lockheed Martin 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. 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. During fiscal 1999, defense sales were $20.7M, and 50% of total net
sales, respectively. The Company does not expect sales to defense customers to
increase from the levels achieved in the 1999 fiscal year due to the low level
of funding for new defense programs.
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TECHNOLOGY
The Company utilizes its experience and expertise in RF and microwave
circuit design and GaAs semiconductor technology to design and manufacture
transceiver subsystems for commercial and military wireless transmissions
applications. The Company also designs and manufactures component parts for
transceivers such as amplifiers, oscillators and mixers as well as devices such
as transistors, diodes, switches and integrated circuits that make up such
components.
Transceivers
A transceiver serves two signal processing functions: as a transmitter,
it transforms modulated voice or data into a signal for wireless transmission;
as a receiver, it converts the incoming signal back into modulated voice or
data. In the transmission process, lower frequency voice or data signals are
converted to higher frequency signals in components such as mixers or
multipliers by using signals generated by oscillators. The signals are then
amplified so that they will have sufficient strength to reach the next location
and filtered so that only the desired signal will be transmitted. When received,
the signals are weak and are amplified with an amplifier and converted with a
mixer back to the modulated voice or data that was originally transmitted.
Transceivers and component parts for transceivers are circuits that
perform the functions described above. RF and microwave circuits can be either
non-integrated ("hybrid circuits") or integrated ("ICs"). The hybrid circuit is
a basic building block of a transceiver. A hybrid circuit typically consists of
a ceramic platform called a substrate on which GaAs field effect transistors
("FETs") and other electronic components are interconnected to perform signal
processing functions such as amplification, conversion from one frequency to
another and filtering. The performance of the circuit is affected by the
characteristics of the FETs and other electronic components, the
inter-connectivity patterns of various components, the shape, size and location
of the components with respect to each other, the type of material used for the
substrate, and the size, shape and type of enclosure that is designed to hold
the circuit. Predicting and controlling performance in circuit designs at RF and
microwave frequencies requires a combination of design experience and precise
modeling of component performance. Perfecting circuit designs also requires
expertise in partitioning circuit blocks. Knowledge of which functions to
integrate or separate and how various blocks will interact in the system results
in better overall performance and small circuit size.
An IC is a highly integrated circuit on a single chip that is capable of
performing functions similar to those performed by a hybrid circuit and is
typically manufactured using GaAs. Because of their high degree of integration,
ICs are substantially smaller, lighter weight, less costly, more reliable and
more easily incorporated into customers' end equipment than hybrid circuits
intended to perform the same function. However, unlike hybrid circuits, ICs
typically cannot achieve certain specialized performance levels and cannot be
easily customized through tuning. As a result, ICs are particularly well suited
for cost-sensitive, high volume applications 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 resolving these performance problems associated
with package design and plastic packaging compounds and has designed circuits
with low-cost packages that meet specific performance objectives. To test its IC
products, the Company uses its knowledge of RF and microwave test equipment and
test circuit environments to produce test stations that interface directly with
commercially available automated handlers. These test circuits are designed to
closely simulate the end application environment while maintaining very high
throughput to keep manufacturing costs down and to minimize the effort needed to
achieve test correlation with customers.
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.
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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 enables the Company 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 the Company believes are far simpler and more reliable than some competing
technologies, the Company believes it is able to precisely 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 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 standard products with published data sheets and
price lists as well as 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
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. With its focus on CDMA("Code
Division Multiple Access") and emerging WCDMA("Wideband Code Divisional Multiple
Access") applications, Celeritek is becoming recognized as a leader in supplying
the transmit power amplifier solutions used by major OEM's. 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.
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.
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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.
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 product. 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 such needs. The Company
believes that its customer engineering support provides it with a key
competitive advantage.
During the year ended March 31, 1999, no customer accounted for more
than 10% of total net sales. In fiscal 1998, one customer, P-Com, 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. A relatively limited number of OEM customers have historically
accounted for a substantial portion of the Company's sales. In fiscal 1998 and
1999, sales to the top ten customers accounted for approximately 63% and 56%,
respectively, of total net sales. Due to the sharp decline in sales to in the
microwave radio and satellite based communications markets, the Company's sales
were less concentrated among a few large customers. The Company still expects
that sales of its products to a limited number of OEM customers will continue to
account for a high percentage of its sales for the foreseeable future.
For fiscal 1998 and 1999, sales from international customers accounted
for 23% and 2l%, 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.
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, 1999 was approximately $22 million,
of which 73% was for commercial customers, as compared to approximately $37
million at March 31, 1998, of which 68% was for commercial customers. Generally,
purchase orders in backlog are subject to cancellation without penalty at the
option of the customer, and from time to time the Company has experienced
cancellation of orders in backlog. Most of the Company's quarterly net sales
have generally resulted from orders obtained in prior quarters. The Company's
backlog is subject to fluctuations and is not necessarily indicative of the
Company's future sales. In addition, there can be no assurance that current
backlog will necessarily lead to sales in any future period.
Of the Company's current backlog, approximately one-third is
attributable to orders received from two customers. If the Company were to lose
a major customer, or if orders by a major OEM customer were to otherwise
decrease or be delayed, including reductions due to market or competitive
conditions in the wireless communications markets or decreases in government
defense spending, the Company's business, operating results and financial
condition would be materially adversely affected.
9
<PAGE> 10
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, 1999, Celeritek employed 37 people to support its research and
development efforts. In addition to their design and development activities, the
engineering staff participates with the Company's marketing department in
proposal preparation and applications support for customers. The Company has
developed an extensive library of proven circuits that can be integrated into
higher level systems. The Company believes that its ability to leverage this
library of modules reduces product time to market and development costs.
The Company uses advanced RF and microwave development tools, including
RF and microwave test equipment and computer aided design ("CAD") systems. The
Company uses workstations and analog simulation tools for circuit design and CAD
systems for mechanical design and thin film mask layouts.
The Company's total expenses for research and development for the fiscal
years ended March 31, 1997, 1998 and 1999 were $4.3 million, $5.4 million, and
$5.9 million, respectively.
MANUFACTURING
The Company substantially relies on a mix of internal and subcontract
manufacturing for production of its radio transceiver subsystems and transceiver
components, GaAs FETs and RF ICs, hybrid circuits and high frequency circuit
boards with surface mount technology. The Company's extensive quality control
system is designed to meet the requirements of sophisticated defense and
commercial communications products. The Company has been approved by defense
customers under the requirements of the U.S. military's MIL-Q9858A quality
system, which approval is also generally accepted by commercial customers.
The Company maintains manufacturing control of its products through the
use of its in-house GaAs wafer production facility. The fabrication of
semiconductor products is highly complex and sensitive to dust and other
contaminants, requiring production in a highly controlled, clean environment.
The Company's facility includes clean rooms, with class 10 performance (no more
than ten particles larger than 0.5 microns in size per cubic foot of air) for
fabrication operations. Minute impurities, 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 to assemble certain of
its subsystem product-line 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, this 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
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<PAGE> 11
experience in manufacturing the product. To the extent that the Company does not
maintain acceptable yields, its operating results could be adversely affected.
In addition, during periods of decreased demand, high fixed wafer fabrication
costs could have a material adverse effect on the Company's business, operating
results and financial condition.
Certain components used by the Company in its existing products are only
available from single sources, while certain other components are presently
available or acquired only from a limited number of suppliers. In the event that
its single or limited source suppliers are unable to fulfill the Company's
requirements in a timely manner, the Company may experience an interruption in
production until alternative sources of supply can be obtained, which could
damage customer relationships or have a material adverse effect on the Company's
business, operating results and financial condition.
COMPETITION
The Company's current and potential competitors include specialized
manufacturers of RF and microwave signal processing components, large,
vertically integrated systems producers that manufacture their own GaAs
components and independent suppliers of silicon and GaAs integrated circuits
that compete with the Company's GaAs devices. Furthermore, the Company currently
supplies components to large OEM customers that are continuously evaluating
whether to manufacture their own components or purchase them from outside
sources. The Company expects significantly increased competition both from
existing competitors and a number of companies that may enter the wireless
communications market. In the area of wireless subsystems products, the Company
competes primarily with Hewlett-Packard Co., Remec, Inc., 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 that are subject to various FCC regulations. Regulatory changes,
including changes in the allocation of available frequency spectrum, could
significantly impact the Company's operations by restricting development efforts
by the Company's customers, obsoleting current products or increasing the
opportunity for additional competition. Changes in, or the failure by the
Company to comply with, applicable domestic and international regulations could
have an adverse effect on the Company's business, operating results and
financial condition. In addition, the increasing demand for wireless
communications has exerted pressure on regulatory bodies worldwide to adopt new
standards for such products and services, generally following extensive
investigation of and deliberation over competing technologies. The delays
inherent in this government approval process have in the past, and may in the
future, cause the cancellation, postponement or rescheduling of the installation
of communications systems by the Company's customers, which in turn may have a
material adverse effect on the sale of products by the Company to such
customers.
The Company is subject to a variety of federal, state and local laws,
rules and regulations related to the discharge and disposal of toxic, volatile
and other hazardous chemicals used in its manufacturing process. The failure to
comply with present or future regulations could result in fines being imposed on
the Company, suspension of production or a cessation of operations. Such
regulations could require the Company to acquire significant equipment or to
incur substantial other expenses in order to comply with environmental
regulations. Any past or future failure by the Company to control the use of, or
to restrict adequately the discharge of, hazardous substances could subject the
Company to future liabilities and could have a material adverse effect on the
Company's business, operating results and financial condition.
PROPRIETARY RIGHTS
The Company's ability to compete will depend, in part, on its ability to
obtain and enforce intellectual property protection for its technology in the
United States and internationally. Although the Company has three U.S. patents,
expiring from 2005 to 2008, the Company currently relies primarily on a
combination of trade secrets, copyrights, trademarks and contractual rights to
protect its intellectual property. None of the Company's patents are critical to
the Company's business. There can be no assurance that the steps taken by the
Company will be adequate to deter misappropriation or impede third party
development of its technology. In addition, the laws of certain foreign
countries in
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<PAGE> 12
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, 1999, the Company had a total of 329 employees including
11 in marketing, sales and related customer support services, 37 in research and
development, 265 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. 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, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by this item is included under "Market for
Registrants' Common Stock" in the Company and is incorporated herein by
reference.
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
FISCAL 1999
<S> <C> <C>
June 30, 1998 $ 12.13 $ 5.25
September 30, 1998 6.63 3.63
December 31, 1998 4.00 2.63
March 31, 1999 6.69 2.75
</TABLE>
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<PAGE> 13
<TABLE>
<CAPTION>
FISCAL 1998 HIGH LOW
<S> <C> <C>
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
</TABLE>
At April 16, 1999, there were approximately 221 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 lines of credit
prohibit payment of cash dividends without prior bank approval.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included under "Summary
Consolidated Financial Information" and is incorporated herein by reference on
page one of the Company's Annual Financial Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As stated in Item 1 preceding, the discussion and analysis below
contains trend analysis and other 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.
The following discussion should be read in conjunction with the
Company's Financial Statements and Notes thereto.
OVERVIEW
The Company designs, develops, manufactures and markets 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.
A relatively limited number of OEM customers have historically accounted
for a substantial portion of the Company's sales. In fiscal 1998 and 1999, sales
to the top ten such customers accounted for approximately 63% and 56%,
respectively, of total net sales. In fiscal 1999, none of the Company's OEM
customers accounted for more than 10% 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.
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, market demand for lower
cost products in commercial markets and adequate production volumes. Because of
the different gross margins on various products,
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<PAGE> 14
changes in product mix can impact gross margins in any particular time period.
In addition, in the event that the Company is not able to adequately respond to
pricing pressures, the Company's current customers may decrease, postpone or
cancel current or planned orders, and the Company might not be able to secure
new customers. As a result, the Company may not be able to achieve desired
production volumes or gross margins.
In addition, average selling prices for the Company's products generally
fluctuate from period to period due to a number of factors, including product
mix, competition and unit volumes. The average selling prices of a specific
product also tend to decrease over that product's life. To offset such
decreases, the Company relies primarily on obtaining design and yield
improvements and corresponding cost reductions in the manufacture of existing
products. Also, on introducing new products the company will incorporate
advanced features that can be sold at higher average selling prices.
FISCAL 1999 COMPARED TO FISCAL 1998
The Company's total net sales decreased 27% from $56.3 million in fiscal
1998 to $41.1 million in fiscal 1999. During fiscal 1999, commercial sales
decreased 38% over fiscal 1998 from $32.9 million to $20.5 million. Defense
sales decreased 12% from $23.4 million in fiscal 1998 to $20.7 million in fiscal
1999.
The decrease in sales between fiscal 1998 and fiscal 1999 was primarily
due to decreased sales to the commercial markets. Commercial sales decreased
38%. Commercial subsystems sales decreased 61% from $24.9 in fiscal 1998 million
to $9.7 million in fiscal 1999. The decrease in sales to the commercial
subsystem market was the net result of reduced installations of new radio
networks compared to the prior year and economic conditions facing several of
the Company's point-to-point radio and VSAT customers. The decrease in
commercial subsystem sales was partially offset by 34% growth in semiconductor
products sales, from $8.0 million in fiscal 1998 to $10.8 million in fiscal
1999. The increase in the semiconductor sales was the result of an increase in
the sales of GaAs RF power amplifiers for use in PCS handsets. Sales in fiscal
1999 to the defense electronics markets decreased primarily as a result of
decreased government spending in defense programs available to the Company and
continued competition in the defense industry. The Company does not expect
defense sales to increase in the future.
Gross margin decreased from 36% in fiscal 1998 to 11% in fiscal 1999.
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
dramatically lower production levels and continued pricing pressure due to the
market conditions facing the Company's customers resulted in unfavorable
production cost capacity variances on a per unit and overall basis.
Research and development expenses increased from $5.4 million, or 10% of
total net sales in fiscal 1998, to $5.9 million, or 14% of total net sales in
fiscal 1999, reflecting the Company's continuing investment in commercial
product development, particularly for semiconductor products. The increase was
primarily due to the design center established in Northern Ireland. The Company
expects research and development expenses to continue to increase in future
periods.
Selling, general and administrative expenses decreased from $8.8 million
or 16% of total net sales in fiscal 1998, to $8.5 million, or 21% of total net
sales in fiscal 1999. The dollar decrease resulted from lower commissions on
sales, and management actions to lower salary costs and general spending.
Interest income and expense and other income, net, was $416,000 of
income in fiscal 1998 compared to $92,000 of expense in fiscal 1999. The
decrease is primarily due to lower interest income because of lower cash
balances, and increased interest expense due to debt resulting from the purchase
of capital assets.
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 to
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<PAGE> 15
$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 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 $416,000 in fiscal 1998. The decrease is primarily due
to lower interest income, resulting from lower cash balances, and increased
interest expense due to debt resulting from the purchase of capital assets.
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. Ongoing employee
stock purchase and stock option exercises currently generate between $.5 and
$1.0M annually.
Net cash provided by operating activities was $6.9 million in fiscal
1997, and net cash used in operating activities was $1.1 million and $3.1
million in fiscal 1998 and 1999, respectively. The cash used in operating
activities in fiscal 1998 as compared to fiscal 1997 was due to increases in
accounts receivable and inventory. The cash used in operating activities in
fiscal 1999 compared to fiscal 1998 was primarily due to a net loss from
operations for the year which was the result of lower levels of sales activity,
offset by reductions in accounts receivable.
Net cash used in investing activities was $3.7 million, $3.4 million and
$0.5 million during fiscal 1997, 1998 and 1999. The net cash used for investing
for all periods relates primarily to purchases of equipment and the sale and
purchase of short-term investments. The company leases capital equipment in
order to conserve cash.
The Company financed $1.0 million of equipment purchases through
long-term debt for both fiscal years 1998 and 1999.
As of March 31, 1999, the Company had $1.7 million of cash and cash
equivalents, $5.9 million of short-term investments and $23.3 million of working
capital. The Company believes that the current capital resources combined with
its existing credit facilities and pending tax refund will be sufficient to meet
its liquidity and capital expenditure requirements at least through fiscal 2000.
As discussed in Note 8 that follows, the Company expects to reach a favorable
agreement with the bank, regarding covenant requirements for the current fiscal
year.
IMPACT OF YEAR 2000
The Company has determined it has no exposure to contingencies related
to the Year 2000 issue for the products it has sold.
The Company has tested, modified and upgraded its software so that its
various computer systems will function properly and that the Year 2000 will not
pose significant operational problems for its computer systems. The company has
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<PAGE> 16
initiated communications with all of its suppliers. Over 300 companies have been
surveyed, responses reviewed, and risk levels categorized. Ongoing completion of
the full assessment of supplier risk and recovery planning will continue through
the year 2000. The cost of compliance monitoring and remediation activities has
not been material, nor is it expected to adversely affect the operating results.
EURO
The Company is addressing issues raised by the introduction of the
Single European Currency ("Euro") for the initial implementation as of January
1, 1999, and through the transition period to January 1, 2002. The Company does
not expect the the introduction of the Euro will materially adversely affect
transaction costs, nor does the company believe such introduction will have a
material adverse affect on the Company's overall financial results.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The following factors should be carefully reviewed in addition to the
other information contained in this 10K Report.
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 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 grows 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 that 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 or limited source suppliers are unable to fulfill the Company's
requirements in a timely manner, the Company may
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<PAGE> 17
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 adversely affect its business, operating results and
financial condition.
ITEM 7A QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISKS.
Interest Rate Risk
At March 31, 1999, the Company's cash equivalents and short-term
investments consisted primarily of high-grade fixed income securities of
short-term maturity. The Company maintains a strict investment policy which
ensures the safety and preservation of its invested funds, by limiting default
risk, market risk and reinvestment risk. The securities held are subject to
interest rate fluctuations and may decline in value when interest rates change.
However, the short-term maturity of all securities removes any material market
risk, and in the opinion of management, no material impact could result in the
Company's financial results due to these holdings.
Foreign Currency Exchange Risk
The current foreign exchange exposure in all international operations is
deemed to be immaterial since all of the Company's revenues and the majority of
liabilities are receivable and payable in US Dollars. A 10% change in exchange
rates would not be material to the Company's financial condition and results
from operations. Accordingly, the Company does not use derivative financial
instruments to hedge against foreign exchange exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is listed under Item 14(a)1, of
Part IV of this Report on Form 10-K and in the records at the Securities and
Exchange Commission (Edgar Data Base).
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 1999 Annual Meeting of Shareholders and is
incorporated herein by reference.
The information required by this item relating to the Company's
executive officers is as follows:
17
<PAGE> 18
Executive Officers
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Tamer Husseini 56 Chairman of the Board, President and Chief Executive Officer
P. Michael Houlihan 51 Vice President, Finance and Chief Financial Officer
Robert D. Jones 59 Senior Vice President, Marketing and Sales
William W. Hoppin 36 Vice President, Sales
Gary J. Policky 57 Vice President, Engineering and Chief Technical Officer
Richard G. Finney 49 Vice President, Subsystem Division
Perry A. Denning 52 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 applications and now a division of Hewlett-Packard
Company, from 1972 until 1982, most recently as General Manager of the Microwave
Transistor Division.
P, MICHAEL HOULIHAN joined the Company in 1998 as Vice President,
Finance and Chief Financial Officer. Prior to joining the Company, Mr. Houlihan
was an employee of Hewlett Packard Corporation from 1973 until 1997. Mr.
Houlihan served 12 years as the Chemical Analysis Group Controller and prior had
held various divisional controller and international financial management
positions. Before joining Celeritek, from 1997 to 1998 Mr. Houlihan had
consulted at Verifone, Inc.
ROBERT D. JONES, a founder of the Company, has served as Vice President,
Marketing since the Company's organization in 1984. In 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 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 1997,
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 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. as the Vice
President of Operations. Before joining Monolithic Systems, Mr. Denning was
employed by VLSI Technology, Inc., 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 1999 Annual Meeting of Shareholders and is incorporated
herein by reference.
18
<PAGE> 19
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 1999 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under "Certain
Relationships and Related Transactions" in the Company's Proxy Statement to be
filed in connection with its 1999 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. Report of Ernst & Young LLP, Independent Auditors. Page 21 as follows
Consolidated Balance Sheets as of March 31, 1999 and 1998. Page 22
Consolidated Statements of Operations for the years ended March 31,
1999, 1998 and 1997. Page 23
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1999, 1998 and 1997. Page 24
Consolidated Statements of Cash Flow for the years ended March 31,
1999, 1998, and 1997. Page 25
Notes to Consolidated Financial Statements. Pages 26-34
2. Financial Statements Schedules
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.
19
<PAGE> 20
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
4.3 investors.
Shareholders Rights Agreement dated March 25, 1999. Instrument
defining the rights of security holders. Filed Form 8-A12G April 1,
1999.
10.1 (1) 1985 Stock Incentive Program and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement.
10.2 (3) 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 (4) 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 exhibit to the Companys Form 10-K filing
for the Fiscal Year ended March 31, 1997.
(3) Incorporated by reference to the Registrants Statement on Form S-8 (Comm Fil
No. 333-52037), filed May 7, 1998.
(4) Incorporated by reference to the Company's Form 10-K for the Fiscal Year
ended March 31, 1999.
b. Reports on Form 8-K (None filed).
20
<PAGE> 21
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, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended March 31, 1999. Our audits also included the
financial statement schedule listed in the index at Item 14(a)2. These financial
statements and schedule 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1999, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material aspects the information set forth herein.
/s/ Ernst & Young, LLP
San Jose, California
April 23, 1999
21
<PAGE> 22
Consolidated Balance Sheets (In Thousands, except share amounts)
<TABLE>
<CAPTION>
-----------------
March 31,
-----------------
1999 1998
-----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,729 $ 4,022
Short-term investments 5,904 7,500
Accounts receivable, net of allowance for doubtful accounts of
$517 and $595 at March 31, 1999 and 1998, respectively 10,615 15,816
Inventories 11,376 10,635
Income Tax Refund Receivable 2,441 --
Prepaid expenses and other current assets 306 415
Deferred tax assets 494 1,927
-----------------
Total current assets 32,865 40,315
Net property and equipment 7,201 8,042
Other assets 144 91
-----------------
Total assets $40,210 $48,448
-----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 1611 333
Current obligations under capital leases 162 70
Accounts payable 4,217 4,491
Accrued payroll 1,400 1, 570
Accrued liabilities 2,215 4,065
-----------------
Total current liabilities 9,605 10,529
Long-term debt, less current portion -- 667
Noncurrent obligations under capital lease commitments 257 239
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-7,381,396 at March 31, 1999
and 7,175,581 at March 31, 1998 25,087 24,214
Retained earnings 5,261 12,799
-----------------
Total shareholders' equity 30,348 37,013
-----------------
Total liabilities and shareholders' equity $40,210 $48,448
-----------------
</TABLE>
See accompanying notes.
22
<PAGE> 23
Consolidated Statements of Operations (In Thousands, except per share data)
<TABLE>
<CAPTION>
--------------------------------
Fiscal Years Ended March 31,
--------------------------------
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Net sales $ 41,128 $ 56,317 $ 45,346
Cost of goods sold 36,600 36,147 28,918
--------------------------------
Gross profit 4,528 20,170 16,428
Operating expenses:
Research and development 5,927 5,389 4,252
Selling, general, and administrative 8,488 8,784 6,802
--------------------------------
Total operating expenses 14,415 14,173 11,054
--------------------------------
Income (loss) from operations (9,887) 5,997 5,374
Interest income and other 300 475 525
Interest expense (392) (59) --
--------------------------------
Income (loss) before income taxes (9,979) 6,413 5,899
Provision (benefit) for income taxes (2,441) 2,422 2,243
--------------------------------
Net income (loss) ($ 7,538) $ 3,991 $ 3,656
--------------------------------
Basic earnings (loss) per share ($ 1.04) $ 0.56 $ 0.52
Diluted earnings (loss) per share ($ 1.04) $ 0.54 $ 0.50
--------------------------------
Weighted average common shares outstanding 7,265 7,126 7,017
Weighted average common shares 7,265 7,450 7,352
outstanding, assuming dilution
--------------------------------
</TABLE>
See accompanying notes.
23
<PAGE> 24
Consolidated Statements of
Shareholders' Equity
<TABLE>
<CAPTION>
Total
Common Retained Shareholders'
Stock Earnings Equity
----------------------------------------
Shares Amount
----------------------------------------
<S> <C> <C> <C> <C>
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 and total comprehensive -- -- 3,656 3,656
income
---------------------------------------
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 and total comprehensive -- -- 3,991 3,991
income
---------------------------------------
BALANCE AT MARCH 31, 1998 7,176 24,214 12,799 37,013
Issuance of common stock
on exercise of options
under stock option plan 83 425 -- 425
Issuance of common stock
under employee stock
purchase plan 122 448 -- 448
Net and total comprehensive -- -- (7,538) (7,538)
income (loss)
---------------------------------------
BALANCE AT MARCH 31, 1999 7,381 $ 25,087 $ 5,261 $ 30,348
---------------------------------------
</TABLE>
See accompanying notes.
24
<PAGE> 25
Consolidated Statements of Cash Flows (In Thousands)
<TABLE>
<CAPTION>
--------------------------------
FISCAL YEARS ENDED MARCH 31,
--------------------------------
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $( 7,538) $ 3,991 $ 3,656
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,143 2,358 2,119
Loss on disposal of property and equipment -- -- 7
Income Tax Receivable (2,441)
Deferred income taxes 1,433 306 (603)
Changes in operating assets and liabilities
Accounts receivable 5,201 (5,705) (436)
Inventories (741) (3,317) (920)
Prepaid expenses and other assets 56 (145) (144)
Accounts payable, accrued payroll and
accrued liabilities (2,294) 1,364 3,184
--------------------------------
Net cash provided by (used in) operating activities (3,181) (1,148) 6,863
INVESTING ACTIVITIES
Purchases of property and equipment (2,084) (4,029) (3,043)
Decrease in other assets -- (48) --
Purchase of short-term investments (12,504) (10,180) (14,525)
Proceeds from maturities of short-term investments 14,100 10,880 13,825
--------------------------------
Net cash used in investing activities (488) (3,377) (3,743)
FINANCING ACTIVITIES
Payments on long-term debt (389) -- --
Borrowings on long-term debt 1,000 1,000 --
Payments on obligations under capital leases (108) (24) --
Net proceeds from issuance of common stock 873 538 602
--------------------------------
Net cash provided by financing activities 1,376 1,514 602
--------------------------------
Increase (decrease) in cash and cash equivalents (2,293) (3,011) 3,722
Cash and cash equivalents at beginning of period 4,022 7,033 3,311
--------------------------------
Cash and cash equivalents at end of period $ 1,729 $ 4,022 $ 7,033
--------------------------------
</TABLE>
See accompanying notes.
25
<PAGE> 26
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
(GaAs RF ICs) 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 1999, 1998, and 1997 ended on March 28, March 29, and March 30,
respectively. For convenience, the accompanying financial statements have been
shown as ending on the last day of the calendar month.
USE OF ESTIMATES The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers
highly liquid investments with maturities of less than three months when
purchased to be cash equivalents. 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.
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.
EARNINGS PER SHARE In accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share," (SFAS) 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
26
<PAGE> 27
computation of shares outstanding pursuant to Staff Accounting Bulletins Nos.
55, 64, and 83 are now excluded from the computation. All earnings per share
amounts for all periods have been presented, and were appropriately restated to
conform to the SFAS 128 requirements.
REPORTING COMPREHENSIVE INCOME The Company has adopted SFAS 130, "Reporting
Comprehensive Income" and had no significant impact on its financial statements.
Under SFAS 130, the Company is required to display comprehensive income and its
components as part of the Company's full set of financial statements. The
measurement and presentation of net income did not change. Comprehensive income
comprises net income and other comprehensive income. Other comprehensive income
includes certain changes in equity of the Company that are excluded from net
income. Specifically, SFAS 130 requires unrealized gains and losses on the
Company's available-for-sale securities, which were reported separately in
stockholders' equity, to be included in accumulated other comprehensive income.
Comprehensive income in fiscal 1999, 1998, and 1997 has been reflected in the
Consolidated Statements of Stockholders' Equity.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION The Company
has adopted SFAS 131, "Disclosure About Segments of an Enterprise and Related
Information." 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.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting
Standards Board issued Statement No. 133 "Accounting for Derivative Instruments
and Hedging Activities"(SFAS 133). It establishes accounting and reporting
standards for such derivative instruments as forward currency exchange contracts
or interest note swaps or embedded derivatives. The Company is required to adopt
SFAS 133 for the year ending March 31, 2001. As the company currently does not
use such derivatives, the adoption of SFAS 133 is expected to have no effect on
the Company's consolidated earnings or financial position.
- --------------------------------------------------------------------------------
NOTE 2. NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
----------------------------
(in Thousands, except per share amounts) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net income (loss) ($7,538) $ 3,991 $ 3,656
Denominator:
Denominator for basic net income (loss) per
share-Weighted average common shares 7,265 7,126 7,017
Effect of dilutive securities:
Stock options -- 324 335
------- ------- -------
Denominator for diluted net income (loss) per share-
Weighted average common and equivalent shares $ 7,265 $ 7,450 $ 7,352
Basic net income (loss) per share ($ 1.04) $ 0.56 $ 0.52
Diluted net income (loss) per share ($ 1.04) $ 0.54 $ 0.50
</TABLE>
- --------------------------------------------------------------------------------
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, 1999 and 1998, all short term
investments were available-for-sale securities.
Available-for-sale securities are carried at fair value, and the
unrealized gains and losses, net of taxes, are not material. 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
27
<PAGE> 28
dividends on securities classified as available-for-sale are included in income.
The following is a summary of available-for-sale securities at fair value, which
approximates cost:
<TABLE>
<CAPTION>
(In Thousands) March 31, 1999 March 31, 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Corporate bonds, municipal bonds,
investment trusts, and preferred stock $ 5,904 $ 7,500
======= =========
</TABLE>
The gross realized gains and losses of available-for-sale securities for
the fiscal years ended March 31, 1999 and 1998 were not significant.
- --------------------------------------------------------------------------------
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
(In Thousands) March 31,1999 March 31, 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 3,054 $ 3,405
Work-in-process 8,322 7,230
-------- -------
$ 11,376 $10,635
======== =======
</TABLE>
- --------------------------------------------------------------------------------
NOTE 5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
(In Thousands) March 31, 1999 March 31, 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 22,544 $20,270
Furniture and fixtures 621 613
Leasehold improvements 4,813 4,875
-------- -------
27,978 25,758
Accumulated depreciation and
amortization 20,777 17,716
-------- -------
Net property and equipment $ 7,201 $ 8,042
======== =======
</TABLE>
- --------------------------------------------------------------------------------
NOTE 6. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
(In Thousands) March 31, 1999 March 31, 1998
- --------------------------------------------------------------------------------------
<S> <C> <C>
Accrued commission $ 684 $ 909
Warranty accrual 353 349
Income taxes payable 385 1,804
Other 793 1,003
-------- ------
$ 2,215 $4,065
======== ======
</TABLE>
- --------------------------------------------------------------------------------
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>
(In Thousands) March 31, 1999 March 31, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Property and equipment $ 551 $ 333
Less accumulated amortization (154) (30)
$ 397 $ 303
======== ======
</TABLE>
28
<PAGE> 29
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, 1999:
<TABLE>
<CAPTION>
Capital Operating
(In Thousands) Leases Leases
- --------------------------------------------------------------------------------
<S> <C> <C>
2000 $ 174 $3,150
2001 174 2,899
2002 103 1,416
2003 -- 632
2004 -- 515
Thereafter -- --
------ ------
Total minimum lease payments 451 $8.612
======
Less amounts representing interest (32)
------
Present value of net minimum lease payments 419
Less current portion (162)
------
$ 257
======
</TABLE>
The above figures include an operating lease funded after March 31, 1999
for lithography equipment to used produce semiconductor components in high
volume. Rent expense was approximately $3,393,000, $2,385,000 and $1,584,000 for
the years ended March 31, 1999, 1998, and 1997, respectively.
- --------------------------------------------------------------------------------
NOTE 8. LONG-TERM DEBT (INCLUDING PORTIONS CLASSIFIED AS "CURRENT")
The Company has available two revolving lines of credit covered by a
Master Loan Agreement (the "Loan Agreement"), as amended, which expires October
30, 1999. The first available line of credit is for $6,000,000 and will bear
interest at the bank's reference rate (7.75% at March 31, 1999). The second line
of credit was converted into a term loan of thirty-six months. Borrowings under
the term loan bear interest at the bank's reference rate plus 0.5% at March 31,
1999. As of March 31, 1999, the Company had borrowings totaling $1,611,111 under
the term loan and no borrowings under the first line of credit. Such credit
facilities are secured by the Company's assets.
The Loan Agreement contains certain covenants, including among others, covenants
to maintain certain financial ratios, profitability and liquidity levels, a
minimum tangible net worth of $31,250,000, and limits the payment of dividends.
As of March 31, 1999, the Company was not in compliance with its minimum
tangible net worth requirement. The Company has obtained a waiver from the bank
for one quarter ended March 31, 1999 and is engaged in negotiations with the
bank to modify the existing covenants and at this time, the Company believes it
will be successful in doing so. However, if negotiations with the bank are
unsuccessful, the Company's business, operating results and financial condition
would be adversely affected if the loan agreement were to be terminated. Until
such time that the Company is operating within the limits of agreed upon
covenants with the bank, the outstanding debt including portions due after one
year from the balance sheet date, $833,333 at March 31, 1999 will be classified
as short-term.
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES
Significant components of the provision (benefit) for income taxes are
as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
--------------------------------
(in Thousands)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $(3,363) $ 1,892 $ 2,468
State (348) 224 378
------- ------- -------
Total current (3,711) 2,116 2,846
</TABLE>
29
<PAGE> 30
<TABLE>
<S> <C> <C> <C>
Deferred:
Federal 922 266 (506)
State 348 40 (97)
------- ------- -------
Total deferred $ 1,270 306 (603)
------- ------- -------
Provision(benefit) for income taxes $(2,441) $ 2,422 $ 2,243
======= ======= =======
</TABLE>
The reconciliation of the provision(benefit) 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,
1999 1998 1997
------------------ ----------------- -----------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
(in Thousands, except percentages)
At U.S. statutory rate $(3,393) (34.0%) $ 2,180 34.0% $ 2,005 34.0%
State income tax, net of federal tax benefit 0.0 0.0 174 2.7 186 3.1
Change in valuation allowance 1,162 11.7 -- -- -- --
Research and Development tax credits (172) (1.7) -- -- -- --
Other (38) (0.5) 68 1.1 52 1.0
------- ----- ------- ---- ------- ----
$(2,441) (24.5%) $ 2,422 37.8% $ 2,243 38.1%
======= ===== ======= ==== ======= ====
</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,
(in thousands) -------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax liabilities:
Tax depreciation in excess of financial statement depreciation $ 132 $ 109
------- -------
Total deferred tax liabilities 132 109
Deferred tax assets:
Inventory valuation 1,916 1,129
Accruals and reserves not deductible for tax purposes 694 718
Net operating loss carryforwards 208 --
Tax credit carryforwards 828 --
Other 122 80
------- -------
Deferred tax assets 3,768 1,927
------- -------
Valuation allowance (3,088) --
------- -------
Total Deferred tax assets 680 1,927
------- -------
Net deferred tax assets $ 548 $ 1,818
======= =======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings,
the timing and amount of which are uncertain. Accordingly, deferred tax assets
in excess of recoverable income taxes have been offset by a valuation allowance
to reflect these uncertainties. The valuation allowance increased by
approximately $3,088,000 during the year ended March 31, 1999.
As of March 31, 1999, the Company had stated net operating loss
carryforwards of approximately $3,780,000. The Company also had federal and
state tax credit carryforwards of approximately $598,000 and $347,000,
respectively. If not utilized, the carryforwards will expire beginning in 2005.
- --------------------------------------------------------------------------------
NOTE 10. SALARY DEFERRAL PLAN
The Company maintains a Salary Deferral Plan (the "Plan") which 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 approximately $159,000 in fiscal 1999, $73,000 in fiscal 1998 and $57,000
in fiscal 1997. Administrative expenses relating to the Plan are insignificant.
30
<PAGE> 31
- --------------------------------------------------------------------------------
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 "1994 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, at the Company's annual meeting,
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 lesser
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 of an incentive stock
option will be no less than the fair market value of the Company's common stock
at the date of grant, (ii) the exercise price of a nonstatutory stock option
will be no less than 85% of the fair market value, and (iii) the exercise price
to an optionee who possesses more than 10% of the total combined voting power of
all classes of stock will be no less than 110% of the fair market value. The
plan administrator has the authority to set exercise dates (no longer than ten
years from the date of grant or five years for an optionee who meets the 10%
criteria), payment terms, and other provisions for each grant. Unexercised
options are canceled upon termination of employment and become available under
the 1994 Plan.
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, 500,000 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, 1999, 1998 and 1997, 122,307, 47,450 and 44,365 shares of
common stock respectively, were purchased under the ESPP. Activity under the
Plans with respect to stock options and stock purchase rights is set forth
below:
<TABLE>
<CAPTION>
Outstanding Options Weighted
Shares ------------------------- Average
Available Number of Price Per Exercise
for Grant Shares Share Total Price
------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
Additional shares authorized for 1994 Plan 215,260 --
Options granted (1,119,000) 1,119,000 3.88-10.00 7,283,572 6.51
Options exercised -- (83,508) 3.00-10.00 (418,524) 5.01
Options canceled and expired 867,217 (867,217) 3.00 - 16.00 9,073,753) 10.46
---------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 138,041 1,019,563 $3.00-6.94 $ 5,202,034 $ 5.10
</TABLE>
31
<PAGE> 32
At March 31, 1999, outstanding options covering 531,235 shares were exercisable.
The following table summarizes information about stock options outstanding and
exercisable at March 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- --------------------------------
Weighted-Average Weighted Number Weighted
Range of Number Outstanding Remaining Average Exercisable at Average
Exercise Price at March 31, 1999 Contracted years Exercise Price March 31, 1999 Exercise Price
- -------------- ------------------ ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$3.00-$4.50 235,554 6.14 $ 3.19 204,260 $ 3.02
5.63- 5.63 692,009 7.52 $ 5.63 323,788 $ 5.63
5.88- 6.94 92,000 9.73 $ 6.07 3,187 $ 6.94
--------- -------
1,019,563 7.40 $ 5.10 531,235 $ 4.63
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock options since, as discussed below,
the alternative fair market value accounting provided for under FASB Statement
No. 123, "Accounting for Stock-Based Compensation" (FAS 123), requires use of
option valuation models that were not developed for use in valuing stock
options. Under APB 25, if the exercise price of the Company's stock options is
equal to the market price of the underlying stock on the date of grant, no
expense is recognized.
Pro forma information regarding net income and net income per share is
required by FAS 123, which also requires that the information be determined as
if the Company had accounted for its stock options granted subsequent to March
31, 1995 under the fair value method. The fair market value for options granted
prior to December 1995, the date of the initial public offering of the Company's
common stock, was estimated at the date of grant using the Minimum Value Method.
The fair market value for options granted subsequent to December 1995 was
estimated at the date of grant using the Black-Scholes option pricing model. The
Company valued its employee stock options using the following weighted-average
assumptions for fiscal years ended March 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Fiscal years ended March 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.4% 5.9% 6.4%
Dividend yield 0.0% 0.0% 0.0
Volatility 77.9% 72.9% 72.1%
Expected life of option 5 years 5 years 5 years
</TABLE>
The Company used the following weighted average assumptions for its ESPP:
Fiscal years ended March 31,
<TABLE>
<CAPTION>
Fiscal years ended March 31,
--------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.4% 5.4% 5.3%
Dividend yield 0.0 0.0 0.0
Volatility 77.9% 72.9% 72.1%
Expected life of option 0.5 years 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:
32
<PAGE> 33
<TABLE>
<CAPTION>
Fiscal years ended March 31,
---------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss) ($10,075) $3,066 $3,141
Pro forma basic net income (loss) per share ( $1.39) $0.43 $0.45
Pro forma diluted net income (loss) per share ( $1.39) $0.41 $0.43
</TABLE>
The weighted average grant date fair value of options granted during the fiscal
years ended March 31, 1999, 1998 and 1997 was $2.56, $ 6.96, and $7.43
respectively.
As a result of FAS 123 only being applicable to options granted
subsequent to March 31, 1995, its pro forma effect will not be fully reflected
until future years.
OUTSIDE DIRECTORS' 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 non-employee
members of the Board of Directors at an exercise price equal to 100% of the fair
market value of the option shares on the date of grant. Such options have a
maximum term of 10 years. New directors are automatically granted an option to
purchase 6,000 shares at their date of election or appointment to the Board.
During the fiscal year ended March 31, 1999, 12,000 options were granted. At
March 31, 1999, options to purchase 27,000 shares of common stock were
outstanding of which 12,000 options were exercisable.
The Board of Directors declared a dividend of one Right for each share of Common
Stock to be paid on April 8, 1999, to shareholders of record at such date. Each
Right represents the right to purchase one share of Common Stock at an exercise
price of $45.00 per Right. One additional Right shall be delivered with each
share of Common Stock issued after April 9, 1999.
- --------------------------------------------------------------------------------
NOTE 12. SIGNIFICANT SEGMENTS CUSTOMERS AND EXPORT SALES
The Company's chief operating decision maker is considered to be the
President and Chief Executive Officer (CEO). The Company's CEO evaluates both
consolidated and disaggregated financial information principally consisting of
revenue information in deciding how to allocate resources and assess
performance. The CEO uses certain disaggregated financial information for the
Company's three market segments: Defense; Radio Satellite; and Semiconductors.
The company does not determine a measure of operating income or loss by
product-line. The Company's three market segments have similar long-term
economic characteristics, such as application and are similar in regards to (a)
nature of products and production processes, (b) type of customers, and (c)
method used to distribute products. Accordingly, the Company is in a single
reportable segment as a provider of gallium arsenide wireless infrastructure for
the communications market. All of the Company's revenues result from sales of
its product lines. Revenues by product line (as defined by the Company) as a
percentage of total revenues for fiscal years ended March 31, 1997, 1998 and
1999 were as follows: Defense, 37%, 42% and 50%, respectively; Radio Satellite,
50%, 44% and 24%, respectively; Semiconductors, 13%, 14% and 26%, respectively.
Revenues outside of the United States were approximately $9.0 million, $12.9
million and $8.4 million in fiscal 1997, 1998 and 1999, respectively.
In fiscal 1999, no one customer accounted for more than 10% of net
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. A summary of
geographic sales are as follows:
<TABLE>
<CAPTION>
Fiscal years ended March 31,
-----------------------------------------
(In Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $32,684 $43,380 $36,306
Europe 4,309 6,848 4,720
Japan 2,401 2,154 2,998
Other 1,734 3,935 1,322
------- ------- -------
$41,128 $56,317 $45,346
======= ======= =======
</TABLE>
33
<PAGE> 34
- --------------------------------------------------------------------------------
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Fiscal years ended March 31,
----------------------------
(In Thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $ 386 $ 59 $-
Cash paid for income taxes $ 151 $2,226 $1,495
Capital lease obligations incurred to acquire equipment $ 218 $ 333 $-
</TABLE>
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 1 ,1999 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 1, 1999
- ------------------- and Chairman of the Board of
Tamer Husseini Directors (Principal Executive Officer)
/s/ P.MICHAEL HOULIHAN Vice President, Finance and Chief June 1, 1999
- ---------------------- Financial Officer (Principal Financial
P. Michael Houlihan and Accounting Officer)
/s/ THOMAS W. HUBBS Director June 1, 1999
- -----------------------
Thomas W. Hubbs
/s/ CHARLES P. WAITE Director June 1, 1999
- -----------------------
Charles P. Waite
/s/ WILLIAM D. RASDAL Director June 1, 1999
- ---------------------
William D. Rasdal
/s/ ROBERT J GALLAGHER Director June 1, 1999
- ----------------------
Robert J Gallagher
</TABLE>
34
<PAGE> 35
CELERITEK, INC.
CONDENSED CONSOLIDATED QUARTERLY RESULTS
<TABLE>
<CAPTION>
UNAUDITED Quarter Ended in Fiscal 1999
- -------------------------------------------------------------------------------------
(in thousands except per share data) June 30 Sept. 30 Dec. 31 March 31
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 10,196 $ 10,829 $ 10,004 $ 10,099
Gross profit(loss) (1,270) 2,640 1,797 1,361
Income(loss) from operations (5,633) (753) (1,568) (1,933)
Net income(loss) (3,496) (486) (1,594) (1,962)
Basic net income(loss) per share ($ 0.48) ($ 0.07) ($ 0.22) ($ 0.27)
Diluted net income(loss)per share ($ 0.48) ($ 0.07) ($ 0.22) ($ 0.27)
</TABLE>
<TABLE>
<CAPTION>
Unaudited Quarter Ended in Fiscal 1999
- -------------------------------------------------------------------------------------
(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>
The following financial statement schedule is filed as part of the Report on
Form 10-K on Schedule I and is incorporated herein by reference.
Schedule II - Valuation and Qualifying Accounts
Allowance for Doubtful Accounts (thousands of dollars)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Period of Period Expenses Deductions(1) of Period
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended 3/28/99 $595 $165 $243 $517
Year Ended 3/31/98 $520 $150 $ 75 $595
Year Ended 3/31/97 $519 $186 $185 $520
</TABLE>
- ----------
(1) Deductions represent write-offs of uncollectable accounts receivable.
35
<PAGE> 36
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
4.3 investors.
Shareholders Rights Agreement dated March 25, 1999. Instrument
defining the rights of security holders. Filed Form 8-A12G April 1,
1999.
10.1 (1) 1985 Stock Incentive Program and forms of Incentive Stock Option
Agreement and Nonstatutory Stock Option Agreement.
10.2 (3) 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 (4) 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 exhibit to the Companys Form 10-K filing
for the Fiscal Year ended March 31, 1997.
(3) Incorporated by reference to the Registrants Statement on Form S-8 (Comm Fil
No. 333-52037), filed May 7, 1998.
(4) Incorporated by reference to the Company's Form 10-K for the Fiscal Year
ended March 31, 1999.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Forms S-8 No. 333-286, S-8 No. 333-52037, and S-8 No. 333-68249)
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 23, 1999, with respect to the
consolidated financial statements and schedule of Celeritek, Inc. included in
this Annual Report on Form 10-K for the year ended March 31, 1999.
/s/ Ernst & Young, LLP
San Jose, California
June 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,729
<SECURITIES> 5,904
<RECEIVABLES> 11,132
<ALLOWANCES> 517
<INVENTORY> 11,376
<CURRENT-ASSETS> 32,865
<PP&E> 27,978
<DEPRECIATION> 20,778
<TOTAL-ASSETS> 40,210
<CURRENT-LIABILITIES> 9,605
<BONDS> 0
0
0
<COMMON> 25,087
<OTHER-SE> 5,261
<TOTAL-LIABILITY-AND-EQUITY> 40,210
<SALES> 41,128
<TOTAL-REVENUES> 41,128
<CGS> 36,600
<TOTAL-COSTS> 36,600
<OTHER-EXPENSES> 14,415
<LOSS-PROVISION> 517
<INTEREST-EXPENSE> 392
<INCOME-PRETAX> (9,979)
<INCOME-TAX> (2,441)
<INCOME-CONTINUING> (7,538)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,538)
<EPS-BASIC> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
