<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CELERITEK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 77-0057484
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
3236 SCOTT BOULEVARD
SANTA CLARA, CALIFORNIA 95054
(408) 986-5060
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
TAMER HUSSEINI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CELERITEK, INC.
3236 SCOTT BOULEVARD
SANTA CLARA, CALIFORNIA 95054
(408) 986-5060
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
JOHN T. SHERIDAN, ESQ. STANTON D. WONG, ESQ.
CAROLYNN JONES, ESQ. BLAIR W. WHITE, ESQ.
JONATHAN BLOCK, ESQ. JUSTIN D. HOVEY, ESQ.
WILSON SONSINI GOODRICH & ROSATI PILLSBURY MADISON & SUTRO LLP
PROFESSIONAL CORPORATION P.O. BOX 7880
650 PAGE MILL ROAD SAN FRANCISCO, CA 94120
PALO ALTO, CA 94304-1050 (415) 983-1000
(650) 493-9300
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective statement for the same
offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, no par
value(3).............. 2,300,000 shares $55.06 $126,638,000 $33,433
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 300,000 shares that the underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of computing the
registration fee and based on the average high and low sale prices of the
common stock as reported on the Nasdaq National Market on May 16, 2000.
(3) Associated with the common stock are preferred stock purchase rights that
will not be exercisable or evidenced separately from the common stock prior
to the occurrence of certain events.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION, DATED MAY 17, 2000
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
2,000,000 SHARES
[INSERT LOGO]
CELERITEK, INC.
COMMON STOCK
$ PER SHARE
- --------------------------------------------------------------------------------
Celeritek, Inc. is offering 2,000,000 shares of common stock with this
prospectus. This is a firm commitment underwriting.
The common stock is traded on the Nasdaq National Market under the symbol
"CLTK." On May 16, 2000, the last reported sale price of the common stock on the
Nasdaq National Market was $56.00 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 4.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Price to the public.................................. $ $
Underwriting discount................................ $ $
Proceeds to Celeritek................................ $ $
</TABLE>
Celeritek has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 300,000 additional
shares from Celeritek within 30 days following the date of this prospectus to
cover over-allotments.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC WORLD MARKETS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
The date of this prospectus is , 2000
<PAGE> 3
Graphic depiction of our products as utilized both within wireless networks
("Networks") and as a means for users to access wireless networks ("Network
Access"). Each of the depicted graphics shows how our components and subsystems
fit into these applications.
The graphic contains the heading "GaAs Semiconductor Components and GaAs-based
Subsystems for Broadband Wireless Networks."
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 3
Forward-Looking Statements.................................. 12
Use of Proceeds............................................. 12
Dividend Policy............................................. 12
Price Range of Common Stock................................. 13
Capitalization.............................................. 14
Selected Consolidated Financial Data........................ 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Business.................................................... 21
Management.................................................. 34
Underwriting................................................ 36
Legal Matters............................................... 37
Experts..................................................... 38
Where You Can Find More Information......................... 38
Incorporation of Certain Documents by Reference............. 38
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------------------
Our principal executive offices are located at 3236 Scott Boulevard, Santa
Clara, California 95054. Our telephone number is (408) 986-5060. Our web site
can be found at www.celeritek.com. Our web site does not constitute a part of
this prospectus.
Unless otherwise stated, all information contained in this prospectus assumes no
exercise of the over-allotment option granted to the underwriters. As used in
this prospectus, the terms "we," "us," "our" and "Celeritek" mean Celeritek,
Inc. and its subsidiary, unless the context indicates a different meaning, and
the term "common stock" means our common stock, no par value.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. We own or have rights to various copyrights,
trademarks and tradenames used in our business. Celeritek is our registered
trademark. Other copyrights, trademarks and tradenames referred to in this
prospectus are the property of their respective owners.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained in other parts of this prospectus.
Because it is a summary, it does not contain all of the information that you
should consider before investing in the shares. You should read the entire
prospectus carefully, including "Risk Factors" and the consolidated financial
statements and related notes, before making an investment decision.
THE COMPANY
We design and manufacture gallium arsenide, or GaAs, semiconductor components
and GaAs-based subsystems used in the transmission of voice, video and data over
wireless communications networks. Our semiconductor components and subsystems
are designed to facilitate broadband voice and data transmission in mobile
handsets and wireless communications network infrastructure. Our GaAs
semiconductor components mainly consist of power amplifiers for mobile handsets
which employ code division multiple access, or CDMA, wireless technology. Our
GaAs-based subsystems are used in fixed broadband terrestrial and satellite
wireless communication systems. In addition, we sell our subsystem products to
major defense contractors.
The demand for GaAs semiconductor components has increased with the rapid
adoption of mobile wireless communications. According to International Data
Corporation, or IDC, the number of cellular and personal communications
services, or PCS, subscribers worldwide increased 40% in 1999 over the prior
year, to 427 million subscribers, and is expected to reach 1.1 billion
subscribers by 2003. In addition, the use of mobile wireless devices for
Internet access and other data transmission is expected to increase
substantially over the next several years. According to IDC, the number of
subscribers worldwide with wireless access to the Internet was approximately 10
million in 1999 and is expected to grow to 562 million subscribers by 2004.
Wireless communication is also an important element of modern networks, as
service providers are using wireless technology as an effective and less costly
means of transmitting voice and data over portions of their networks. Wireless
infrastructure solutions used to transmit voice and data in communications
networks include point to point systems, point to multipoint and fixed wireless
systems, high capacity wireless SONET/SDH systems and satellite communications
systems. Our subsystem products include the transmitter and receiver portions of
microwave and millimeter wave radios and the transmitter portion of two way
satellite ground terminals that enable these wireless infrastructure systems.
Gallium arsenide is used in mobile handsets and subsystems because of its
inherent linearity, the ability to amplify a signal with minimal distortion, and
efficiency, a measure of the strength of an amplified signal relative to the
amount of power consumed.
Our objective is to become the leading provider of GaAs semiconductor components
and GaAs-based subsystems for the broadband wireless communications market. The
following are the key elements of our strategy:
- leveraging our expertise in linear efficient GaAs technology and component
integration;
- further penetrating high growth broadband communications markets;
- capitalizing on our vertical integration capabilities in the design and
manufacture of integrated components; and
- expanding our relationships with leading worldwide manufacturers of wireless
equipment.
Our largest GaAs semiconductor component customers for the fiscal year ended
March 31, 2000 were Motorola, Metricom, Mitsubishi and Ericsson. Our largest
GaAs-based subsystems customers for the fiscal year ended March 31, 2000 were
P-COM, Digital Microwave, ITT Aerospace and Gilat Satellite.
1
<PAGE> 6
THE OFFERING
Common stock offered by Celeritek....... 2,000,000 shares
Common stock to be outstanding after the
offering................................ 11,361,356 shares
Use of proceeds......................... For working capital and other
general corporate purposes, for the
purchase of capital equipment
relating to our planned increase in
manufacturing capacity and for
potential acquisitions of
technologies, product lines or
businesses.
Nasdaq National Market symbol........... CLTK
The number of shares outstanding is based on shares outstanding as of April 30,
2000, but excludes:
- 1,272,891 shares of common stock issuable upon exercise of outstanding
options;
- 437,069 shares of common stock reserved for future issuance under our stock
option and employee stock purchase plans.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net sales................................ $37,724 $45,346 $56,317 $41,128 $48,211
Income (loss) from operations............ 3,953 5,374 5,997 (9,887) (7,154)
Net income (loss)........................ $ 2,276 $ 3,656 $ 3,991 $(7,538) $(6,824)
Net income (loss) per share:
Basic.................................. $ 0.73 $ 0.52 $ 0.56 $ (1.04) $ (0.88)
Diluted................................ $ 0.38 $ 0.50 $ 0.54 $ (1.04) $ (0.88)
Shares used to compute net income (loss)
per share:
Basic.................................. 3,107 7,017 7,126 7,265 7,736
Diluted................................ 5,953 7,352 7,450 7,265 7,736
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $26,716 $131,986
Working capital............................................. 41,974 147,244
Total assets................................................ 63,655 168,925
Long-term debt and capital leases, less current portion..... 636 636
Accumulated deficit......................................... (1,563) (1,563)
Total shareholders' equity.................................. 50,831 156,101
</TABLE>
The "As Adjusted" column of the balance sheet data reflects the receipt of the
estimated net proceeds from the sale of 2,000,000 shares of common stock by us
at an assumed public offering price of $56.00 per share, after deducting the
estimated underwriting discount and estimated offering expenses.
2
<PAGE> 7
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
If any of the following risks actually occur, our business, results of
operations or cash flows could be adversely affected. In those cases, the
trading price of our common stock could decline, and you may lose all or part of
your investment.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND WE EXPECT
THESE FLUCTUATIONS TO CONTINUE. IF OUR RESULTS ARE WORSE THAN EXPECTED, OUR
STOCK PRICE COULD FALL.
Our operating results have fluctuated in the past, and may continue to fluctuate
in the future. These fluctuations may cause our stock price to decline. Some of
the factors that may cause our operating results to fluctuate include:
- the timing, cancellation or delay of customer orders or shipments;
- the mix of products that we sell;
- our ability to secure manufacturing capacity and effectively utilize the
capacity;
- the availability and cost of components;
- GaAs semiconductor component and GaAs-based subsystem failures and
associated support costs;
- variations in our manufacturing yields related to our GaAs semiconductor
components;
- the timing of our introduction of new products and the introduction of new
products by our competitors;
- market acceptance of our products;
- variations in average selling prices of our products; and
- changes in our inventory levels.
Any unfavorable changes in the factors listed above or general industry and
global economic conditions could significantly harm our business, operating
results and financial condition. For example, during fiscal 1999, a number of
our GaAs semiconductor components and GaAs-based subsystems contracts were
either terminated or delayed and our net sales declined substantially. We cannot
assure you that additional customers will not terminate contracts, that customer
orders will not be delayed, or that customers will ever reinstate orders under
contracts which have been delayed. We cannot assure you that we will be able to
achieve or maintain quarterly profitability in the future.
Due to fluctuations in our net sales and operating expenses, we believe that
period to period comparisons of our results of operations are not a good
indication of our future performance. It is possible that in some future quarter
or quarters, our operating results will be below the expectations of securities
analysts or investors. In that case, our stock price could decline.
WE MAY NOT EFFECTIVELY MANAGE POSSIBLE FUTURE GROWTH.
The wireless communication industry's rapid growth has caused our business to
expand in size and complexity at a pace we have not encountered in the past. The
recent expansion of our customer base and product line has placed significant
demands on our management and operations. In addition, our business has shifted
recently to rely more upon the commercial mobile handset and infrastructure
markets and less on the defense industry. Our systems, procedures or controls
may not be adequate to support these increased demands and shifts in market
emphasis. We may not be able to achieve the rapid expansion
3
<PAGE> 8
necessary to meet our current orders. For example, a significant portion of our
approximately $65 million backlog as of March 31, 2000 represents orders whose
requested shipment dates have passed, some by more than six months. If we cannot
successfully manufacture our products in the future at volumes, yields or cost
levels necessary to meet our customers' needs, we may lose customers and our net
sales will suffer. We do not know if we will be able to manage our future growth
and increasing emphasis on the mobile handset and infrastructure markets and
customers, and the failure to do so could seriously harm our business.
OUR MANUFACTURING CAPACITY AND OUR ABILITY TO INCREASE SALES VOLUME IS DEPENDENT
ON THE SUCCESSFUL HIRING OF SUFFICIENT DESIGN, ASSEMBLY AND TEST PERSONNEL AND
OUR ABILITY TO INSTALL CRITICAL ASSEMBLY AND TEST EQUIPMENT ON A TIMELY BASIS.
Our ability to satisfy our current backlog and any additional orders we may
receive in the future will depend on our ability to successfully hire or
contract for additional design engineers, assembly and test personnel. Our
design engineers reside at our headquarters in Santa Clara, California and at
our two design centers in the United Kingdom. We contract with third parties
located primarily in Asia for many of our assembly and test requirements. Our
need to successfully hire, contract, train and manage these personnel will
intensify further if our production volumes are required to increase
significantly from expected levels. Demand for people with these skills is
intense and we cannot assure you that we will be successful in hiring and
contracting for sufficient personnel with these critical skills. Our business
has been harmed in the past by our inability to retain people with these
critical skills, and we cannot assure you that similar problems will not
reoccur. For example, in 1997 we experienced manufacturing capacity constraints
which resulted from our inability to hire a sufficient number of test personnel.
We also lost an order from a major customer in fiscal 2000 due to a shortage we
experienced in design engineers.
Our ability to increase manufacturing capacity also depends on our ability to
install additional assembly and test equipment at our Santa Clara facility and
at our Asian subcontractors' facilities on a timely basis. We rely on third
party providers of this equipment to deliver and install it on a timely basis.
If there is a delay in the delivery and installation of this equipment, our
planned increased production capacity will be reduced or delayed. This could
result in delayed or lost sales to customers, adversely affect our customer
relationships and harm our business.
OUR IN-HOUSE FOUNDRY CAPACITY IS LIMITED. IF WE ARE UNABLE TO MANUFACTURE A
SUFFICIENT NUMBER OF GAAS SEMICONDUCTOR COMPONENTS AT OUR IN-HOUSE FOUNDRY AND
THROUGH THIRD PARTY FOUNDRY RELATIONSHIPS TO MEET OUR PRODUCTION NEEDS, WE WOULD
BE UNABLE TO SATISFY CUSTOMER DEMAND FOR OUR PRODUCTS AND OUR BUSINESS WOULD
SUFFER.
We currently operate our own foundry located in Santa Clara, California to
produce GaAs semiconductor components for sale as well as for use in our
GaAs-based subsystems products. Our foundry does not have sufficient capacity to
meet anticipated customer demand for our GaAs semiconductor components and
GaAs-based subsystems. We plan to expand the capacity of our foundry and
currently expect that the expansion will be completed during calendar 2000. If
the expansion is not completed on a timely basis, we may not be able to meet our
planned production requirements which could result in a loss of customers and
sales which would harm our business.
Even if our planned expansion is successfully completed, our in-house capacity
will not be sufficient by itself to satisfy anticipated demand and our growth
objectives. Accordingly, in order to meet increasing customer demand, we entered
into an arrangement in February 2000 with a third party foundry located in Los
Angeles, California. However, our production requests are submitted on a
purchase order basis and we do not have a formal agreement with this third party
foundry that obligates it to accept our production requests. If this foundry
does not deliver to us the GaAs semiconductor components we request in a timely
manner at acceptable yields, we would not be able to satisfy customer demand for
our products on a timely basis. In addition, our use of this third party foundry
can be subject to approval by our customers.
4
<PAGE> 9
If our customers do not approve of the use of this foundry, we may not be able
to fulfill their orders for our products.
We anticipate that we may have to enter into additional arrangements with
independent foundries to meet our future production requirements. We anticipate
these future arrangements may require us to enter into agreements that may
include:
- contracts that commit us to purchase specified quantities at specified
prices over extended periods;
- option payments, non-refundable deposits, loans or other prepayments; or
- joint ventures or other strategic partnerships with foundries.
Qualifying a new foundry can take six months or longer. We may not be able to
make any such arrangements in a timely fashion or at all, and these
arrangements, if any, may not be favorable to us. Our increasing reliance on
third party foundries means we have less control over delivery schedules,
manufacturing yields and costs. Our relationship with outside foundries will
also require us to successfully manage and coordinate our production through
third parties over which we have limited or no control. If we are not successful
in effectively managing and coordinating our in-house manufacturing capabilities
with the independent foundries, our integrated component production could be
disrupted and fail to meet our requirements which could severely harm our
business.
THE VARIABILITY OF OUR MANUFACTURING YIELDS MAY AFFECT OUR GROSS MARGINS.
The success of our business depends largely on our ability to produce our
products efficiently through a manufacturing process that results in a large
number of usable products, or yields, from any particular production run. In the
past we have experienced significant delays in our product shipments due to
lower than expected production yields. Due to the rigid technical requirements
for our products and manufacturing processes, our production yields can be
negatively affected for a variety of reasons, some of which are beyond our
control. For instance, yields may be reduced by:
- defects in masks which are used to transfer circuit patterns onto wafers;
- impurities in materials used;
- contamination of the manufacturing environment; and
- equipment failures.
Our manufacturing yields also vary significantly among our products due to
product complexity and the depth of our experience in manufacturing a particular
product. We cannot assure you that we will not experience problems with our
production yields in the future. Decreases in our yields can result in
substantially higher costs for our products. If we cannot maintain acceptable
yields in the future, our business, operating results and financial condition
will suffer.
WE DEPEND ON A SMALL NUMBER OF ORIGINAL EQUIPMENT MANUFACTURERS AS CUSTOMERS. IF
WE LOSE ONE OR MORE OF OUR SIGNIFICANT CUSTOMERS, OR IF PURCHASES BY ONE OF OUR
KEY CUSTOMERS DECREASE, OUR NET SALES WILL DECLINE AND OUR BUSINESS WILL BE
HARMED.
A substantial portion of our sales are derived from sales to a small number of
original equipment manufacturers. For example, in the fiscal year ended March
31, 2000, sales to our top ten customers accounted for approximately 61% of our
net sales. Motorola accounted for approximately 15% of our net sales and P-COM
accounted for approximately 11% of our net sales during fiscal 2000. We expect
that sales to a limited number of customers will continue to account for a large
percentage of our net sales in the future. In addition, the mix of our major
customers has shifted during the fiscal year ended March 31, 2000 to rely more
upon customers in the mobile handset and wireless communications infrastructure
markets, and less upon defense industry customers. Accordingly, our
relationships with many of our anticipated major customers have only recently
been established. Our success depends on our ability to
5
<PAGE> 10
successfully satisfy these customers' GaAs semiconductor component and
GaAs-based subsystem requirements. If we lose a major customer or if anticipated
sales to a major customer do not to materialize, our operating results and
business would be harmed. For example, in fiscal 1999, our net sales were
adversely affected when a major customer cancelled a significant order as a
result of a decline in demand for point to point radio networks.
OUR BACKLOG MAY NOT RESULT IN SALES.
Our backlog primarily represents signed purchase orders for products due to ship
within the next year. As of March 31, 2000, our backlog was approximately $65
million. Backlog is not necessarily indicative of future sales as our customers
may cancel or defer orders without penalty. Nevertheless, we make a number of
management decisions based on our backlog, including our purchase of materials,
hiring of personnel and other matters that may increase our production
capabilities and costs. Cancellation of pending purchase orders or termination
or reduction of purchase orders in progress could significantly harm our
business. A significant portion of our backlog as of March 31, 2000 represents
orders whose requested shipment dates have passed, some by more than six months.
We do not believe that our backlog as of any particular date is representative
of actual sales for any succeeding period, and we do not know whether our
current order backlog will necessarily lead to sales in any future period.
Of our current backlog, approximately 28% is attributable to orders received
from one customer. If we lose this customer or any other major customer, or if
orders by a major customer were to otherwise decrease or be delayed, including
reductions due to market or competitive conditions in the wireless
communications markets or further decreases in government defense spending, our
business, operating results and financial condition would be harmed.
WE DEPEND ON SINGLE AND LIMITED SOURCES FOR KEY COMPONENTS. IF WE LOSE ONE OR
MORE OF THESE SOURCES, DELIVERY OF OUR PRODUCTS COULD BE DELAYED OR PREVENTED
AND OUR BUSINESS COULD SUFFER.
We acquire some of the components for our existing products from single sources,
and some of the other components for our products are presently available or
acquired only from a limited number of suppliers. For example, our
single-sourced components include millimeter wave components and semiconductor
packages. In the event that any of these suppliers are unable to fulfill our
requirements in a timely manner, we may experience an interruption in production
until we locate alternative sources of supply. If we encounter shortages in
component supply, we may be forced to adjust our product designs and production
schedules. The failure of one or more of our key suppliers or vendors to fulfill
our orders in a timely manner and with acceptable quality and yields could cause
us to not meet our contractual obligations, could damage our customer
relationships and could harm our business.
WE DEPEND HEAVILY ON OUR KEY MANAGERIAL AND TECHNICAL PERSONNEL. IF WE CANNOT
ATTRACT AND RETAIN PERSONS FOR OUR CRITICAL MANAGEMENT AND TECHNICAL FUNCTIONS
WE MAY BE UNABLE TO COMPETE EFFECTIVELY.
Our success depends in significant part upon the continued service of our key
technical, marketing, sales and senior management personnel and our continuing
ability to attract and retain highly qualified technical, marketing, sales and
managerial personnel. In particular, we have experienced and continue to
experience difficulty attracting and retaining qualified engineers, which has
harmed our ability to meet some GaAs-based subsystem orders in a timely manner.
Competition for these kinds of experienced personnel is intense, and we cannot
assure you that we can retain our key technical and managerial employees or that
we can attract, assimilate or retain other highly qualified technical and
managerial personnel in the future. Our failure to attract, assimilate or retain
key personnel could significantly harm our business, operating results and
financial condition.
6
<PAGE> 11
OUR BUSINESS WILL BE HARMED IF POTENTIAL CUSTOMERS DO NOT USE GALLIUM ARSENIDE
COMPONENTS.
Silicon semiconductor technologies are the dominant process technologies for
integrated circuits and the performance of silicon integrated circuits continues
to improve. Our prospective customers may be systems designers and manufacturers
who are evaluating these silicon technologies and, in particular, silicon
germanium versus gallium arsenide integrated circuits for use in their next
generation high performance systems. Customers may be reluctant to adopt our
gallium arsenide products because of:
- unfamiliarity with designing systems with gallium arsenide products;
- concerns related to relatively higher manufacturing costs and lower yields;
and
- uncertainties about the relative cost effectiveness of our products compared
to high performance silicon components.
In addition, potential customers may be reluctant to rely on a smaller company
like us for critical components. We cannot be certain that prospective customers
will design our products into their systems, that current customers will
continue to integrate our components into their systems or that gallium arsenide
technology will continue to achieve widespread market acceptance.
WE NEED TO KEEP PACE WITH RAPID PRODUCT AND PROCESS DEVELOPMENT AND
TECHNOLOGICAL CHANGES TO BE COMPETITIVE.
We compete in markets with rapidly changing technologies, evolving industry
standards and continuous improvements in products. To be competitive we will
need to continually improve our products and keep abreast of new technology. For
example, our ability to grow will depend substantially on our ability to
continue to apply our GaAs semiconductor components and GaAs-based subsystems
processing expertise to existing and emerging wireless communications markets.
New process technologies could be developed that have characteristics that are
superior to our current processes. If we are unable to develop competitive
processes or design products using new technologies, our business and operating
results will suffer. We cannot assure you that we will be able to respond to
technological advances, changes in customer requirements or changes in
regulatory requirements or industry standards. Any significant delays in our
development, introduction or shipment of products could seriously harm our
business, operating results and financial condition.
BECAUSE MANY OF OUR EXPENSES ARE FIXED, OUR EARNINGS WILL DECLINE IF WE DO NOT
MEET OUR PROJECTED SALES.
Our business requires us to invest heavily in manufacturing equipment and a
related support infrastructure that we must pay for regardless of our level of
sales. To support our manufacturing capacity we also incur costs for maintenance
and repairs and employ personnel for manufacturing and process engineering
functions. These expenses, along with depreciation costs, do not vary greatly,
if at all, as our net sales decrease. In addition, the lead time for developing
and manufacturing our products often requires us to invest in manufacturing
capacity in anticipation of future demand. If future demand does not materialize
or if our net sales decline, we may continue to incur many of these
manufacturing related costs causing our results to suffer. For instance, during
fiscal 1999, we experienced two major customer order cancellations. These
cancellations caused net sales to decline faster than our ability to reduce our
costs and contributed to our net loss for that year. If our net sales
projections are inaccurate or we experience declines in demand for our products,
we may not be able to reduce many of our costs rapidly, if at all, and our
business, operating results and financial condition may be harmed.
DECREASES IN OUR CUSTOMERS' SALES VOLUMES COULD RESULT IN DECREASES IN OUR SALES
VOLUMES.
A significant number of our products are designed to address the specific needs
of individual original equipment manufacturer customers. Where our products are
designed into an original equipment manufacturer's product, our sales volumes
depend upon the commercial success of the original equipment
7
<PAGE> 12
manufacturer's product. Sales of our major customers' products can vary
significantly from quarter to quarter. Accordingly, our sales could be adversely
affected by a reduction in demand for mobile handsets and for wireless subsystem
infrastructure equipment. Our operating results have been significantly harmed
in the past by the failure of anticipated orders to be realized and by deferrals
or cancellations of orders as a result of changes in demand for our customers'
products. For example, in 1999, our operating results were adversely affected
when a major customer experienced a reduction in anticipated demand for point to
point networks.
OUR PRODUCTS MAY NOT PERFORM AS DESIGNED AND MAY HAVE ERRORS OR DEFECTS THAT
COULD RESULT IN A DECREASE IN NET SALES OR LIABILITY CLAIMS AGAINST US.
Our customers establish demanding specifications for product performance and
reliability. Our standard product warranty period is one year. Problems may
occur in the future with respect to the performance and reliability of our
products in conforming to customer specifications. If these problems do occur,
we 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 negative impact on our business, operating
results and financial condition. In addition, errors or defects in our products
may result in legal claims that could damage our reputation and our business,
increase our expenses and impair our operating results.
THE SALES CYCLE OF OUR PRODUCTS IS LENGTHY AND THE LIFE CYCLE OF OUR PRODUCTS IS
SHORT, MAKING IT DIFFICULT TO MANAGE OUR INVENTORY EFFICIENTLY.
Most of our products are components in mobile handsets or wireless subsystem
infrastructure equipment. The sales cycle associated with our products is
typically lengthy, and can be as long as two years, due to the fact that our
customers conduct significant technical evaluations of our products before
making purchase commitments. This qualification process involves a significant
investment of time and resources from us and our customers to ensure that our
product designs are fully qualified to perform with the customers' equipment.
The qualification process may result in the cancellation or delay of anticipated
product shipments, thereby harming our operating results.
In addition, our inventory can rapidly become out of date due to the short life
cycle of the end products which incorporate our products. For example, the life
cycle of mobile handsets has been and is expected to continue to be relatively
short with models, features and functionality evolving rapidly. In fiscal 1999,
we wrote off out of date inventory when one of our customers stopped producing
the mobile handset that incorporated our power amplifier. Our business,
operating results and financial condition could be harmed by excess or out of
date inventory levels if our customers' products evolve more rapidly than
anticipated or if demand for a product does not materialize.
INTENSE COMPETITION IN OUR INDUSTRY COULD RESULT IN THE LOSS OF CUSTOMERS OR AN
INABILITY TO ATTRACT NEW CUSTOMERS.
We compete in an intensely competitive industry and we expect our competition to
increase. A number of companies produce products that compete with ours or could
enter into competition with us. These competitors, or potential future
competitors, include ANADIGICS, Conexant Systems, CTT, EndWave, Litton
Industries, MTI (Taiwan), New Japan Radio Corporation, REMEC, RF Micro Devices,
SPC America, Telaxis, and TriQuint Semiconductor. In addition, a number of
smaller companies may introduce competing products. Many of our current and
potential competitors have significantly greater financial, technical,
manufacturing and marketing resources than we have and have achieved market
acceptance of
8
<PAGE> 13
their existing technologies. Our ability to compete successfully depends upon a
number of factors, including:
- the willingness of our customers to incorporate our products into their
products;
- product quality, performance and price;
- the effectiveness of our sales and marketing personnel;
- the ability to rapidly develop new products with desirable features;
- the ability to produce and deliver products that meet our customers'
requested shipment dates;
- the capability to evolve as industry standards change; and
- the number and nature of our competitors.
We cannot assure you that we will be able to compete successfully with our
existing or new competitors. If we are unable to compete successfully in the
future, our business, operating results and financial condition will be harmed.
WE EXPECT OUR PRODUCTS TO EXPERIENCE RAPIDLY DECLINING AVERAGE SALES PRICES, AND
IF WE DO NOT DECREASE COSTS OR DEVELOP NEW OR ENHANCED PRODUCTS, OUR MARGINS
WILL SUFFER.
In each of the markets where we compete, average sales prices of established
products have significantly declined in the past. We anticipate that prices will
continue to decline and negatively impact our gross profit margins. Accordingly,
to remain competitive, we believe that we must continue to develop product
enhancements and new technologies that will either slow the price declines of
our products or reduce the cost of producing and delivering our products. If we
fail to do so, our results of operations would be seriously harmed.
WE ARE SUBJECT TO STRINGENT ENVIRONMENTAL REGULATION WHICH COULD NEGATIVELY
IMPACT OUR BUSINESS.
We are 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 our manufacturing process. Our failure to comply
with present or future regulations could result in fines being imposed on us,
suspension of our production or a cessation of our operations. The regulations
could require us to acquire significant equipment or to incur substantial other
expenses in order to comply with environmental regulations. Any past or future
failure by us to control the use of or to restrict adequately the discharge of
hazardous substances could subject us to future liabilities and could cause our
business, operating results and financial condition to suffer. In addition,
under some environmental laws and regulations we could be held financially
responsible for remedial measures if our properties are contaminated, even if we
did not cause the contamination.
IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, OR IF IT WERE
DETERMINED THAT WE INFRINGED THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, OUR
ABILITY TO COMPETE IN THE MARKET MAY BE IMPAIRED.
Our success depends in part on our ability to obtain patents, trademarks and
copyrights, maintain trade secret protection and operate our business without
infringing the intellectual property rights of other parties. Although there are
no pending lawsuits against us, from time to time we have been notified in the
past and may be notified in the future that we are infringing another party's
intellectual property rights. For example, we recently received a letter from
Rockwell International Corporation alleging that components supplied to us by a
third party were manufactured by that third party using a process claimed in a
Rockwell patent. These components were processed and tested by us for use by us
as part of our InGaP HBT power amplifiers. The letter from Rockwell invited us
to discuss a licensing assignment for Rockwell's patented technology. Rockwell's
patent expired in January 2000 and prior to that time we had distributed for
testing but had not sold products incorporating the third party supplied
components. We are
9
<PAGE> 14
currently reviewing this matter but do not believe it will seriously harm our
operating results or financial condition. If, however, Rockwell files suit in
connection with our use of the third party supplied components, we cannot assure
you that we will prevail. In addition, litigation would be costly and time
consuming.
In the event of any adverse determination of litigation alleging that our
products infringe the intellectual property rights of others, we may be unable
to obtain licenses on commercially reasonable terms, if at all. If we were
unable to obtain necessary licenses, we could incur substantial liabilities and
be forced to suspend manufacture of our products. Litigation arising out of
infringement claims could be costly and divert the effort of our management and
technical personnel.
In addition to patent and copyright protection, we also rely on trade secrets,
technical know-how and other unpatented proprietary information relating to our
product development and manufacturing activities. We try to protect this
information with confidentiality agreements with our employees and other
parties. We cannot be sure that these agreements will not be breached, that we
would have adequate remedies for any breach or that our trade secrets and
proprietary know-how will not otherwise become known or independently discovered
by others.
In addition, to retain our intellectual property rights we may be required to
seek legal action against infringing parties. This legal action may be costly
and may result in a negative outcome. An adverse outcome in litigation could
subject us to significant liability to third parties, could put our patents at
risk of being invalidated or narrowly interpreted and could put our patent
applications at risk of not issuing. If we are not successful in protecting our
intellectual property our business will suffer.
OUR CUSTOMERS' FAILURE TO ADHERE TO GOVERNMENTAL REGULATIONS COULD HARM OUR
BUSINESS.
A significant portion of our products are integrated into the wireless
communications subsystems of our clients. These subsystems are regulated
domestically by the Federal Communications Commission and internationally by
other government agencies. With regard to equipment in which our products are
integrated, it is typically our customers' responsibility, and not ours, to
ensure compliance with governmental regulations. Our net sales will be harmed if
our customers' products fail to comply with all applicable domestic and
international regulations.
OUR SALES TO INTERNATIONAL CUSTOMERS EXPOSE US TO RISKS WHICH MAY HARM OUR
BUSINESS.
In fiscal 2000, sales from international customers accounted for 22% of our net
sales. In fiscal 1999, sales from international customers accounted for 21% of
our net sales. We expect that international sales will continue to account for a
significant portion of our net sales in the future. In addition, many of our
domestic customers sell their products outside of the United States. These sales
expose us to a number of inherent risks, including:
- the need for export licenses;
- unexpected changes in regulatory requirements;
- tariffs and other potential trade barriers and restrictions;
- reduced protection for intellectual property rights in some countries;
- fluctuations in foreign currency exchange rates;
- the burdens of complying with a variety of foreign laws;
- the impact of recessionary or inflationary environments in economies outside
the United States; and
- generally longer accounts receivable collection periods.
We are also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with our international operations. Potential markets for
10
<PAGE> 15
our products exist in developing countries that may deploy wireless
communications networks. These countries may decline to construct wireless
communications networks, experience delays in the construction of these networks
or use the products of one of our competitors to construct their networks. As a
result, any demand for our products in these countries will be similarly limited
or delayed. If we experience significant disruptions to our international sales,
our business, operating results and financial condition could be harmed.
ANTITAKEOVER PROVISIONS COULD AFFECT THE PRICE OF OUR COMMON STOCK.
The ability of our board of directors to issue preferred stock at any time with
rights preferential to those of our common stock and the presence of our
shareholder rights plan may deter or prevent a takeover attempt, including a
takeover attempt in which the potential purchaser offers to pay a per share
price greater than the current market price for our common stock. The practical
effect of these provisions is to require a party seeking control of our company
to negotiate with our board, which could delay or prevent a change in control.
These provisions could limit the price that investors might be willing to pay in
the future for our common stock.
YOU WILL BE RELYING ON THE JUDGMENT OF OUR MANAGEMENT REGARDING OUR USE OF
PROCEEDS.
We expect to use a portion of the net proceeds from our sale of common stock for
working capital and other general corporate purposes, for the purchase of
capital equipment relating to our planned increase in manufacturing capacity and
for potential acquisitions of technologies, product lines or businesses.
Consequently, our management will have significant flexibility in applying the
net proceeds of this offering and will have the ability to change the
application of the proceeds of this offering without shareholder approval.
THE VOLATILITY OF OUR STOCK PRICE COULD AFFECT YOUR INVESTMENT IN OUR STOCK.
The market price of our stock has fluctuated widely. Between January 1, 1999 and
March 31, 2000, the sales price of our common stock fluctuated from a low of
$2.88 per share to a high of $85.25 per share. The current market price of our
common stock may not be indicative of future market prices and we may not be
able to sustain or increase the value of your investment in our common stock.
WE MAY NEED ADDITIONAL CAPITAL THAT WE MAY NOT BE ABLE TO OBTAIN, WHICH COULD
PREVENT US FROM CARRYING OUT OUR BUSINESS STRATEGY.
We currently anticipate that our available cash resources, cash generated from
operations and borrowings available from both our line of credit and available
equipment leasing sources, combined with the net proceeds from this offering
should be sufficient to fund our operating needs for at least the next year. At
some point in the future, however, we may be required to raise additional
financing in an amount that we cannot determine at this time. In that event, we
would likely raise funds through public or private debt or equity financings.
If funds are raised through the issuance of equity securities, the percentage
ownership of our then current shareholders may be reduced and the holders of new
equity securities may have rights, preferences or privileges senior to those of
the holders of our common stock. If additional funds are raised through bank
credit facilities or the issuance of debt securities, the holder of this
indebtedness would have rights senior to the rights of the holders of our common
stock and the terms of this indebtedness could impose restrictions on our
operations. If we need to raise additional funds, we may not be able to do so on
terms favorable to us, or at all. If we cannot raise adequate funds on
acceptable terms as needed, we may not be able to continue to fund our
operations.
11
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate to
future events or our future financial performance. We have attempted to identify
forward-looking statements by terminology including "believes," "can,"
"continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "predicts," "should," or "will" or the negative of these terms or
other comparable terminology.
Forward-looking statements involve known and unknown risks and uncertainties
which may cause our actual results in future periods to differ materially from
what is currently anticipated. We make cautionary statements in a number of
sections of this prospectus, including under "Risk Factors." You should read
these cautionary statements as being applicable to all related forward-looking
statements wherever they appear in:
- this prospectus;
- in the materials referred to in this prospectus;
- in the materials incorporated by reference into this prospectus; and
- in our press releases.
No forward-looking statement is a guarantee of future performance and you should
not place undue reliance on any forward-looking statement.
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $105.3 million
from the sale of our common stock that we are offering by this prospectus at an
assumed public offering price of $56.00 per share and after deducting the
estimated underwriting discount and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that the
net proceeds will be approximately $121.2 million.
We currently intend to use the net proceeds for the purchase of capital
equipment for our planned increase in manufacturing capacity and for working
capital and other general corporate purposes. We may use a portion of the net
proceeds for acquisitions of technologies, product lines or businesses that are
complementary to our business. We have no current agreement or negotiations
regarding any potential acquisitions. Pending these uses, we plan to invest the
net proceeds in interest bearing, investment grade securities. Management will
have broad discretion over the allocation of the net proceeds from this
offering.
DIVIDEND POLICY
We never have declared or paid cash dividends on our common stock or other
securities. We do not anticipate paying a cash dividend in the foreseeable
future. Our master loan agreement with a bank also prohibits us from paying
dividends.
12
<PAGE> 17
PRICE RANGE OF COMMON STOCK
Our common stock trades on the Nasdaq National Market under the symbol CLTK. The
following table sets forth, for the periods indicated, the high and low sales
prices for our common stock, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1999:
First Quarter............................................. $12.50 $ 5.00
Second Quarter............................................ 6.88 2.75
Third Quarter............................................. 4.25 2.50
Fourth Quarter............................................ 7.13 2.88
FISCAL YEAR ENDED MARCH 31, 2000:
First Quarter............................................. $ 7.00 $ 3.63
Second Quarter............................................ 8.69 4.75
Third Quarter............................................. 19.88 5.09
Fourth Quarter............................................ 85.25 15.31
FISCAL YEAR ENDING MARCH 31, 2001:
First Quarter (through May 16, 2000)...................... $63.50 $24.19
</TABLE>
On May 16, 2000, the last reported sale price on the Nasdaq National Market for
our common stock was $56.00 per share. On April 28, 2000, there were
approximately 211 holders of record of the common stock.
13
<PAGE> 18
CAPITALIZATION
The following table presents:
- our actual capitalization as of March 31, 2000; and
- our capitalization as of March 31, 2000 as adjusted to reflect the sale of
2,000,000 shares of common stock that we are offering by this prospectus at
an assumed public offering price of $56.00 per share, and the receipt of the
estimated net proceeds of this offering.
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------
ACTUAL AS ADJUSTED
------- -----------
(in thousands)
<S> <C> <C>
Long-term debt and capital leases, less current portion..... $ 636 $ 636
------- --------
Shareholders' equity:
Preferred stock, no par value; authorized shares
2,000,000; issued, none................................ -- --
Common stock, no par value; authorized shares 20,000,000;
issued shares of 9,316,927 actual and 11,316,927 as
adjusted............................................... 52,394 157,664
Accumulated deficit....................................... (1,563) (1,563)
------- --------
Total shareholders' equity............................. 50,831 156,101
------- --------
Total capitalization................................. $51,467 $156,737
======= ========
</TABLE>
The total number of shares of outstanding common stock as of March 31, 2000,
excludes shares issuable upon exercise of outstanding options to purchase
1,105,320 shares at a weighted average exercise price of $6.35 per share.
14
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
This section presents our selected historical financial data. You should read
carefully the consolidated financial statements included in this prospectus,
including the notes to the consolidated financial statements. The selected data
in this section is not intended to replace the consolidated financial
statements.
We derived the statement of operations data for the fiscal years ended March 31,
1998, 1999 and 2000, and balance sheet data as of March 31, 1999 and 2000 from
the audited consolidated financial statements in this prospectus. Those
financial statements were audited by Ernst & Young, LLP, independent auditors.
We derived the statement of operations data for the fiscal years ended March 31,
1996 and 1997, and the balance sheet data as of March 31, 1996, 1997 and 1998
from audited consolidated financial statements that are not included in this
prospectus.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $37,724 $45,346 $56,317 $41,128 $48,211
Cost of goods sold........................ 23,884 28,918 36,147 36,600 39,838
------- ------- ------- ------- -------
Gross profit.............................. 13,840 16,428 20,170 4,528 8,373
Operating expenses:
Research and development................ 3,772 4,252 5,389 5,927 6,659
Selling, general and administrative..... 6,115 6,802 8,784 8,488 8,868
------- ------- ------- ------- -------
Total operating expenses............. 9,887 11,054 14,173 14,415 15,527
------- ------- ------- ------- -------
Income (loss) from operations............. 3,953 5,374 5,997 (9,887) (7,154)
Interest and other income (expense),
net..................................... (244) 525 416 (92) 330
------- ------- ------- ------- -------
Income (loss) before income taxes......... 3,709 5,899 6,413 (9,979) (6,824)
Provision (benefit) for income taxes...... 1,433 2,243 2,422 (2,441) --
------- ------- ------- ------- -------
Net income (loss)......................... $ 2,276 $ 3,656 $ 3,991 $(7,538) $(6,824)
======= ======= ======= ======= =======
Basic net income (loss) per share......... $ 0.73 $ 0.52 $ 0.56 $ (1.04) $ (0.88)
======= ======= ======= ======= =======
Diluted net income (loss) per share....... $ 0.38 $ 0.50 $ 0.54 $ (1.04) $ (0.88)
======= ======= ======= ======= =======
Shares used in net income (loss) per share
calculation(1):
Basic................................... 3,107 7,017 7,126 7,265 7,736
Diluted................................. 5,953 7,352 7,450 7,265 7,736
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $10,811 $15,233 $11,522 $ 7,633 $26,716
Working capital........................... 22,755 26,403 29,786 23,260 41,974
Total assets.............................. 33,877 41,157 48,448 40,210 63,655
Long-term debt and capital leases, less
current portion......................... -- -- 906 257 636
Retained earnings (accumulated deficit)... 5,152 8,808 12,799 5,261 (1,563)
Total shareholders' equity................ 27,919 32,484 37,013 30,348 50,831
</TABLE>
- ---------------------------
(1) See note 2 of notes to consolidated financial statements for a description
of the computation of the number of shares and net income (loss) per share.
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with the financial statements and other
financial information included in this prospectus. This discussion and analysis
contains forward-looking statements that involve risks, uncertainties and
assumptions. See "Forward-Looking Statements." Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including those described under "Risk Factors"
and elsewhere in this prospectus.
OVERVIEW
We design and manufacture gallium arsenide, or GaAs, semiconductor components
and GaAs-based subsystems used in the transmission of voice, video and data over
wireless communication networks. Our products are designed to facilitate
broadband voice and data transmission in mobile handsets and wireless
communications network infrastructure. Our GaAs semiconductor components mainly
consist of power amplifiers for mobile handsets which employ code division
multiple access, or CDMA, wireless technology. Our GaAs-based subsystems are
used in point to point and point to multipoint microwave radios, satellite
transceivers and high capacity wireless SONET/SDH networks.
Since our inception in 1984, we have supplied transceiver products to the
defense industry. The U.S. military pioneered the use and funded the initial
development of radio frequency, or RF, and microwave wireless transmission
technology. RF and microwave transmission systems are well suited for military
applications because higher frequency transmissions have shorter wavelengths,
which afford greater accuracy for detection and guidance systems and allow for
small lightweight transmission equipment.
As government defense spending declined in the last decade, we began to
transition our business to focus on transceivers and transceiver components for
the commercial wireless communications market. These commercial products are
built with the same technology and processes as the products we have
historically made for the defense industry. All of our current defense business
consists of repeat purchases of products that were designed in the past. We are
not pursuing any new defense business that requires design effort, and,
accordingly, we expect our net sales from our defense customers to continue to
decline.
A limited number of customers have historically accounted for a substantial
portion of our sales. During the fiscal year ended March 31, 2000, sales to our
top ten customers accounted for approximately 61% of net sales. Sales to
Motorola accounted for approximately 15% of net sales, and sales to P-COM
accounted for approximately 11% of net sales. During the fiscal year ended March
31, 1999, sales to our top ten customers accounted for approximately 56% of net
sales while none of our customers accounted for more than 10% of net sales. We
expect that sales of our products to a limited number of customers will continue
to account for a high percentage of our net sales for the foreseeable future. If
we were to lose a major customer, or if orders by a major customer were to
otherwise decrease or be delayed, our business, operating results and financial
condition would be seriously harmed.
Our gross margins in any period are affected by a number of different factors.
Gross margins for some of our products, primarily our semiconductor components,
are strongly impacted by production volume. The fabrication and packaging of
GaAs semiconductor components 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 affect gross
margins. Gross margins for our products are also affected by pricing pressure,
market demand for lower cost products in commercial markets and adequate
production volumes. Because gross margins on our products differ due to, among
other things, the stage of the life cycles of the products, changes in product
mix can impact gross margins in any particular time period. In addition, in the
event that we are not able to adequately respond to pricing pressures, our
current customers may decrease, postpone or cancel current or planned orders,
and we might be unable to secure new customers. As a result, we may not be able
to achieve desired production volumes or gross margins.
16
<PAGE> 21
In addition, average selling prices for our 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 these decreases, we rely primarily
on obtaining design and yield improvements and corresponding cost reductions in
the manufacture of existing products.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 64.2 89.0 82.6
----- ----- -----
Gross profit................................................ 35.8 11.0 17.4
Operating expenses:
Research and development.................................. 9.6 14.4 13.8
Selling, general and administrative....................... 15.6 20.6 18.4
----- ----- -----
Total operating expenses............................... 25.2 35.0 32.2
----- ----- -----
Income (loss) from operations............................... 10.6 (24.0) (14.8)
Interest and other income (expense), net.................... 0.7 (0.2) 0.7
----- ----- -----
Income (loss) before income taxes........................... 11.3 (24.2) (14.1)
Provision (benefit) for income taxes........................ 4.3 (5.9) --
----- ----- -----
Net income (loss)........................................... 7.0% (18.3)% (14.1)%
===== ===== =====
</TABLE>
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 2000
Net sales. Net sales increased 17% from $41.1 million in fiscal 1999 to $48.2
million in fiscal 2000. During fiscal 2000, net sales, excluding sales to
defense customers, increased 66% over fiscal 1999 from $20.5 million to $34.1
million. Net sales to defense customers decreased 32% from $20.7 million in
fiscal 1999 to $14.1 million in fiscal 2000, primarily as a result of decreased
government spending in defense programs for our type of products, continued
competition in the defense industry and our focus on commercial markets.
Net sales of GaAs-based subsystems increased 63%, from $9.7 million in fiscal
1999 to $15.8 million in fiscal 2000, primarily because of increased sales of
GaAs-based subsystems for point to point radios. GaAs semiconductor component
sales increased 69% from $10.8 million in fiscal 1999 to $18.3 million in fiscal
2000. The increase in the semiconductor component sales was the result of an
increase in the sales of GaAs RF power amplifiers for use in mobile handsets.
Gross margin. Gross margin increased from 11% in fiscal 1999 to 17% in fiscal
2000. Gross margin was lower in fiscal 1999 because of decreased revenues,
excess capacity and inventory write downs resulting from canceled orders. We had
an increase in our quarterly shipment rate in the second half of fiscal 2000
that improved gross margin because of better utilization of capacity. During
fiscal 2000, we transferred some of our subsystem assembly and test functions to
a subcontractor in Asia and incurred related costs in fiscal 2000 for employee
terminations, moving, training and other start up costs associated with this
transfer.
Research and development. Research and development expenses increased 14% from
$5.9 million in fiscal 1999 to $6.7 million in fiscal 2000. This increase
primarily reflects the hiring of additional personnel in the
17
<PAGE> 22
United States and the staffing of a new commercial product development and
design center in the United Kingdom in January 2000.
Selling, general and administrative. Selling, general and administrative
expenses increased 5% from $8.5 million in fiscal 1999 to $8.9 million in fiscal
2000. This increase resulted primarily from increased commissions associated
with higher sales levels.
Interest and other income (expense). Interest and other income (expense), net,
was $92,000 of expense in fiscal 1999 compared to $330,000 of income in fiscal
2000. The increase is primarily due to higher interest income because of higher
cash balances generated by a private placement of common stock. Interest expense
was also lower due to lower average debt balances.
Provision (benefit) for income taxes. No tax provision or benefit was recorded
in fiscal 2000. In fiscal 1999, we recorded an income tax benefit of $2.4
million to reflect income taxes recoverable from prior years. Due to our overall
loss position, a valuation allowance has been established in an amount equal to
the expected benefit derived by applying the statutory rate to the net loss in
fiscal 2000.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1999
Net sales. Net sales decreased 27% from $56.3 million in fiscal 1998 to $41.1
million in fiscal 1999. During fiscal 1999, net sales, excluding sales to
defense customers, decreased 38% over fiscal 1998 from $32.9 million to $20.5
million. Net sales to defense customers decreased 12% from $23.4 million in
fiscal 1998 to $20.7 million in fiscal 1999, primarily as a result of decreased
government spending in defense programs for our type of products and continued
competition in the defense industry.
Net sales of subsystems decreased 37% from $48.3 million in fiscal 1998 to $30.3
million in fiscal 1999, primarily because a major customer cancelled a
significant order as a result of a decline in demand for point to point radio
networks. The decrease in subsystem sales was partially offset by 35% growth in
semiconductor component 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 mobile handsets.
Gross margin. Gross margin decreased from 36% in fiscal 1998 to 11% in fiscal
1999 due to decreased revenues, excess capacity and significant inventory write
downs resulting from the point to point radio order cancellation and from an OEM
customer's decision to cancel a substantial order for GaAs semiconductor
components in connection with this customer's termination of production of a
mobile handset.
Research and development. Research and development expenses increased 9% from
$5.4 million in fiscal 1998 to $5.9 million in fiscal 1999, reflecting our
continuing investment in product development, particularly for semiconductor
products. The increase resulted primarily from expenses associated with the
establishment of a design center in Northern Ireland.
Selling, general and administrative. Selling, general and administrative
expenses decreased 3% from $8.8 million in fiscal 1998 to $8.5 million in fiscal
1999. The decrease resulted from lower commissions on sales and reduced salary
costs.
Interest and other income (expense). Interest and other income (expense), net,
was $416,000 of income in fiscal 1998 compared to $92,000 of expense in fiscal
1999. The decrease was 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.
Provision (benefit) for income taxes. In fiscal 1999, we recorded an income tax
benefit of $2.4 million to reflect income taxes recoverable from prior years. In
fiscal 1998, we recorded a provision for income taxes of $2.4 million,
reflecting a tax rate of 38%.
18
<PAGE> 23
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly data for the eight quarters
ended March 31, 2000, and this data expressed as a percentage of net sales for
these quarters. In our opinion, this information has been presented on the same
basis as the audited consolidated financial statements included elsewhere in
this prospectus, and all necessary adjustments have been included in the amounts
stated below to present fairly the unaudited quarterly results when read in
conjunction with our audited consolidated financial statements. Results of
operations for any quarter are not necessarily indicative of the results to be
expected for the entire fiscal year or for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- --------- -------- -------- -------- --------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS
DATA:
Net sales......................... $10,196 $10,829 $10,004 $10,099 $10,188 $10,731 $11,822 $15,470
Cost of goods sold................ 11,466 8,189 8,207 8,738 9,395 8,381 10,806 11,256
------- ------- ------- ------- ------- ------- ------- -------
Gross profit...................... (1,270) 2,640 1,797 1,361 793 2,350 1,016 4,214
Operating expenses:
Research and development........ 1,861 1,357 1,313 1,396 1,439 1,444 1,644 2,132
Selling, general and
administrative................ 2,502 2,036 2,052 1,898 2,227 1,942 2,515 2,184
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses...... 4,363 3,393 3,365 3,294 3,666 3,386 4,159 4,316
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations..... (5,633) (753) (1,568) (1,933) (2,873) (1,036) (3,143) (102)
Interest and other income
(expense), net.................. (6) (31) (26) (29) 40 78 18 194
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes........................... (5,639) (784) (1,594) (1,962) (2,833) (958) (3,125) 92
Benefit for income taxes.......... (2,143) (298) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................. $(3,496) $ (486) $(1,594) $(1,962) $(2,833) $ (958) $(3,125) $ 92
======= ======= ======= ======= ======= ======= ======= =======
Basic net income (loss) per
share........................... $ (0.48) $ (0.07) $ (0.22) $ (0.27) $ (0.38) $ (0.13) $ (0.42) $ 0.01
======= ======= ======= ======= ======= ======= ======= =======
Diluted net income (loss) per
share........................... $ (0.48) $ (0.07) $ (0.22) $ (0.27) $ (0.38) $ (0.13) $ (0.42) $ 0.01
======= ======= ======= ======= ======= ======= ======= =======
Shares used in net income (loss)
per share calculation:
Basic........................... 7,210 7,212 7,270 7,370 7,381 7,427 7,464 8,671
Diluted......................... 7,210 7,212 7,270 7,370 7,381 7,427 7,464 9,678
AS A PERCENTAGE OF NET SALES:
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................ 112.5 75.6 82.0 86.5 92.2 78.1 91.4 72.8
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................... (12.5) 24.4 18.0 13.5 7.8 21.9 8.6 27.2
Operating expenses:
Research and development........ 18.3 12.5 13.1 13.8 14.1 13.5 13.9 13.8
Selling, general and
administrative................ 24.5 18.8 20.5 18.8 21.9 18.1 21.3 14.1
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses...... 42.8 31.3 33.6 32.6 36.0 31.6 35.2 27.9
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations..... (55.3) (6.9) (15.6) (19.1) (28.2) (9.7) (26.6) (0.7)
Interest and other income
(expense), net.................. (0.0) (0.3) (0.3) (0.3) 0.4 0.7 0.2 1.3
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes........................... (55.3) (7.2) (15.9) (19.4) (27.8) (9.0) (26.4) 0.6
Benefit for income taxes.......... (21.0) (2.8) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................. (34.3)% (4.4)% (15.9)% (19.4)% (27.8)% (9.0)% (26.4)% 0.6%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through cash flows from
operations and sales of equity securities. As of March 31, 2000, we had $8.7
million of cash and cash equivalents, $18.0 million of short-term investments
and $42.0 million of working capital. In February 2000, we issued 1.5 million
shares of common stock to institutional investors and received net proceeds of
approximately $25.3 million.
19
<PAGE> 24
Net cash used in operating activities was $1.1 million in fiscal 1998, $3.2
million in fiscal 1999 and $2.8 million in fiscal 2000. The increase in cash
used in operating activities in fiscal 1999 and fiscal 2000 was primarily due to
net losses for both years that were the result of lower levels of sales
activity.
Net cash used in investing activities was $3.4 million in fiscal 1998, $488,000
in fiscal 1999 and $16.6 million in fiscal 2000. Net cash used in investing
activities in fiscal 1998 and 1999 relates primarily to purchases of capital
equipment. In fiscal 2000, we purchased $4.5 million of capital equipment and
made net purchases of $12.1 million of short-term investments.
Net cash provided by financing activities was $1.5 million in fiscal 1998, $1.4
million in fiscal 1999 and $26.4 million in fiscal 2000. We financed $1.0
million of equipment purchases through long-term debt for both fiscal years 1998
and 1999. We raised approximately $25.3 million in a private placement of common
stock and received $2.0 million from the purchase of common stock under our
stock plans.
On October 25, 1999, we renewed our Master Loan Agreement which will expire
October 31, 2000. Under that agreement, we have available credit facilities,
consisting of a line of credit and letters of credit, of up to $6.0 million,
subject to a borrowing base test related to our accounts receivable. As of March
31, 2000, we had no balance outstanding under our line of credit. Borrowings
under the line of credit bear interest at the bank's reference rate (9% per
annum as of March 31, 2000) plus 0.5%. Additionally, we had $725,000 in
outstanding letters of credit, leaving a balance of up to $5.3 million available
under the credit facility as of March 31, 2000. The credit facilities are
secured by our assets.
Under the Master Loan Agreement, we have two term loans outstanding, which
expire in March and November 2001. The term loans bear interest at the bank's
reference rate plus 0.5%. As of March 31, 2000, we had borrowings of $889,000
outstanding against the term loans. As part of the agreement, we are required to
maintain various covenants. The covenants pertain to the maintenance of
financial ratios, liquidity levels and minimum tangible net worth and prohibit
the payment of dividends.
We believe our current cash resources, combined with cash generated from
operations and borrowings available both from our line of credit and available
equipment leasing sources, and the net proceeds from this offering should be
sufficient to meet our liquidity requirements through at least the next year.
RECENTLY ISSUED PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition" (SAB 101), which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. We believe our
revenue recognition policy is in compliance with the provisions of SAB 101 and
that the adoption of SAB 101 should have no material effect on our financial
position or results of operations.
DISCLOSURES ABOUT MARKET RISK
At March 31, 2000, our cash equivalents and short-term investments consisted
primarily of high grade fixed income securities of short-term maturity. We
maintain a strict investment policy which ensures the safety and preservation of
our invested funds by limiting default 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 risk, and in the opinion of management, no
material impact could result in our financial results due to these holdings.
The current foreign exchange exposure in all international operations is deemed
to be immaterial since all of our net sales and the majority of liabilities are
receivable and payable in U.S. dollars. A 10% change in exchange rates would not
be material to our financial condition and results from operations. Accordingly,
we do not use derivative financial instruments to hedge against foreign exchange
exposure.
20
<PAGE> 25
BUSINESS
OVERVIEW
We design and manufacture gallium arsenide, or GaAs, semiconductor components
and GaAs-based subsystems used in the transmission of voice, video and data over
wireless communication networks. Our products are designed to facilitate
broadband voice and data transmission in mobile handsets and wireless
communications network infrastructure. Our GaAs semiconductor components mainly
consist of power amplifiers for mobile handsets which employ code division
multiple access, or CDMA, wireless technology. Our GaAs-based subsystems are
used in point to point and point to multipoint microwave radios and satellite
transceivers addressing the high capacity wireless SONET/SDH networks. In
addition, we sell our subsystem products to major defense contractors.
INDUSTRY BACKGROUND
Rapid Growth in the Wireless Communications Industry
The market for wireless communications has become very large and continues to
grow rapidly. Wireless communications are used by consumers for mobile voice
and, increasingly, data. Wireless communication is also an important element of
modern networks as service providers are using wireless technology as an
effective and less costly means of transmitting voice and data over portions of
their networks.
Consumers have quickly adopted mobile wireless devices for voice communications.
According to International Data Corporation, or IDC, the number of cellular and
personal communications services, or PCS, subscribers worldwide increased 40% in
1999 over the prior year, to 427 million subscribers, and is expected to reach
1.1 billion subscribers by 2003. In addition, the use of mobile wireless devices
for Internet access and other data transmission is expected to increase
substantially over the next several years. According to IDC, the number of
subscribers worldwide with wireless access to the Internet was approximately 10
million in 1999 and is expected to grow to 562 million subscribers by 2004.
Challenges Facing Mobile Handset Manufacturers
Consumer demand for smaller handset size, longer battery life and additional
services such as data access, has increased the complexity of mobile handsets.
The increased functionality of these devices means that manufacturers of mobile
handsets have to add more components to existing devices without compromising
size and weight. Many manufacturers seek to find third party providers that have
both semiconductor and systems level expertise to design and supply these
solutions. Also, these factors have caused some mobile handset manufacturers to
look to higher levels of integration for components. Beyond performance
advantages, the integration of these components permits manufacturers to reduce
both the parts count and the number of suppliers.
Handset manufacturers also must adapt to changing wireless technologies, as
analog systems continue the transition to digital technology. The two primary
digital wireless technologies are known as code division multiple access, or
CDMA, and time division multiple access, or TDMA, which includes a variation
called global system for mobile communications, or GSM. TDMA, including GSM, is
currently the most widely used digital wireless technology, although CDMA is the
fastest growing due primarily to its clearer signal and greater capacity for the
transmission of data. According to IDC, CDMA subscribers worldwide increased by
86% in 1999 over the prior year to 42 million subscribers, and IDC estimates
that the number of subscribers will increase to more than 212 million by 2003.
The next generation of wireless technology, known as third generation technology
or 3G, is expected to be based on CDMA technology. 3G technologies are being
designed to provide increased capacity, high bandwidth for multimedia
applications and global roaming capabilities. The increased capacity and data
speeds of 3G networks are expected to permit wireless transmission of integrated
voice, video and data
21
<PAGE> 26
traffic. With speeds up to 2 megabits per second, or Mbps, which is 30 times
faster then a typical 56 kilobits per second, or Kbps, modem, applications such
as broadband wireless access to the Internet and mobile video conferencing are
expected to become a reality. We believe service providers should be able to
implement this technology with new infrastructure or as an equipment overlay to
existing networks. Service providers are expected to begin to upgrade their
networks to 3G levels over the next few years and regulatory agencies in some
countries have allocated additional frequency bands for 3G services.
Wireless Infrastructure Network Buildout
Service providers are expected to upgrade their existing networks or develop new
networks quickly in order to take advantage of new wireless technologies as they
emerge. Service providers must choose between constructing their networks using
traditional wireline infrastructure, wireless infrastructure or a combination of
both. Traditional wireline connectivity solutions typically require significant
installation periods and may be relatively expensive to install. Many service
providers are installing wireless networks because they are generally faster to
install and may be less expensive than traditional wireline networks. As a
result, many service providers are deploying wireless networks as an alternative
to the construction of traditional wireline networks. Wireless networks are
constructed using microwave radios and other equipment to connect base stations
with wired transmission systems and facilities. Wireless infrastructure
solutions used in communications networks include:
- Point to Point Networks. Point to point systems are used to transmit voice
or data traffic over a single transmission link, typically between wireless
communications networks or within a metropolitan area where wired networks
are not available or are not cost effective. Data rates for these systems
range from 4 Mbps to as high as 44 Mbps, which is over 600 times faster than
a typical 56 Kbps modem.
- Point to Multipoint/Fixed Wireless Networks. Point to multipoint and fixed
wireless networks connect a number of communications end users within a
local area to a single point, thereby bypassing the last mile bottleneck in
the communications network. Point to multipoint networks are primarily being
used by businesses as an alternative means of data communication, while
fixed wireless systems are used by consumers as an alternative to
traditional wireline telephone services. These networks transport data at
rates from 44 Mbps to as high as 155 Mbps and can offer consumer access to
data at multiple points from 4 Mbps to 44 Mbps.
- Wireless SONET/SDH. Wireless SONET/SDH systems are high capacity point to
point solutions, which offer service providers wireless alternatives for
fiber optic network expansion. SONET and SDH are fiber optic transmission
standards. Because wireless SONET/SDH systems can transport data at speeds
comparable with fiber based systems, the high capacity portion of networks
can now be more rapidly and cost effectively deployed with wireless systems.
These high capacity wireless systems support data rates from 155 Mbps,
equivalent to OC-3 fiber optic standards, to as high as 610 Mbps.
- Satellite Voice and Internet Data Terminals. In satellite communications
networks, signals are sent from users on the ground to the satellite, which
then amplifies the signal and sends it back to the end user on the ground.
The signal is typically received via very small aperture terminals, or
VSATs, that are installed at the end user's premises, typically on a
rooftop. Traditional uses of these satellite services include point-of-sale
authorizations and private networks for businesses such as financial
institutions. Emerging applications for satellite communications include
two-way Internet access, which is expected to offer data rates ranging from
2 Mbps to as high as 44 Mbps.
Challenges Facing Broadband Wireless System Providers
To meet the demand for wireless infrastructure solutions, as well as to
construct and augment mobile wireless systems to meet growing subscriber demand,
service providers are turning to systems integrators and original equipment
manufacturers, or OEMs, to build out infrastructure quickly, efficiently and in
accordance with exacting performance specifications. In addition, OEMs are
looking to outsource the
22
<PAGE> 27
design and manufacture of highly integrated, reliable subsystems in a cost
effective manner. By outsourcing subsystems, OEMs can accelerate their time to
market and leverage their core competencies of full system design and
integration. Additionally, OEMs can promote competition among developers and
manufacturers, which leads to technological innovations in wireless
infrastructure equipment. Concurrently, OEMs are seeking to select a core group
of subsystem and component providers in order to reduce the supply and
management risks associated with the currently fragmented supplier base.
GaAs Semiconductor Components and GaAs-based Subsystems Increasingly Address
the Requirements of Broadband Wireless Systems
Manufacturers of mobile handsets and telecommunications systems are increasingly
looking to GaAs solutions because of their requirements for efficient power
consumption and faster integrated circuits for high bandwidth, high performance
communications products. Compared to silicon, GaAs has inherent physical
properties which allow electrons to move several times faster. This translates
into improved linear efficiency and higher frequency performance. The linearity,
or ability to amplify a signal with minimal distortion, and efficiency, a
measure of the strength of an amplified signal relative to the amount of power
consumed, are criteria that become more challenging in broadband wireless
applications. For example, GaAs semiconductor components in mobile handsets used
in transmitter applications are more power efficient than silicon based
components. This efficiency allows for longer battery life or use of smaller
batteries.
Highly integrated GaAs-based subsystems also leverage the benefits of GaAs
technology to offer compact, broadband wireless solutions. GaAs-based subsystems
with high linear efficiency are critical to a service provider's ability to
reduce interference levels and increase system capacity. Applications that
incorporate GaAs-based subsystems include radio applications at millimeter wave
frequencies and two way satellite voice and Internet data terminals. Since these
GaAs-based products are complex, highly integrated components and hard to
produce in volume, many manufacturers are looking to outsource these components
and subsystems.
THE CELERITEK SOLUTION
We design and manufacture GaAs semiconductor components and GaAs-based
subsystems used in the transmission of voice, video and data over wireless
communication networks. Our semiconductor components and subsystems are designed
to facilitate broadband voice and data transmission in mobile handsets and
wireless communications networks. We believe our core competencies, as outlined
below, enable us to successfully address the existing and emerging opportunities
in these wireless services markets:
Extensive Expertise in GaAs Technologies
We believe our 15 years of experience with GaAs technology has enabled us to
manufacture high performance GaAs semiconductor components and GaAs-based
subsystems. Our expertise allows us to deliver high quality products to our
customers by balancing the latest GaAs technology with advanced manufacturing
techniques. In particular, we are able to manufacture GaAs semiconductor
components that meet the more challenging CDMA linearity requirements, as well
as TDMA requirements. This ability stems from our proficiency with different
GaAs semiconductor processes, such as metal semiconductor field effect
transistor, or MESFET, pseudo-morphic high electron mobility transistor, or
pHEMT, and the indium gallium phosphide method of heterojunction bipolar
transistor, or InGaP HBT.
Millimeter Wave Frequency Expertise
Many of our subsystem products operate in millimeter wave frequency ranges as
high as 40 gigahertz, or GHz. Higher frequencies offer more data transmission
capacity. Wireless solutions at these frequencies require individual building
blocks with demanding tolerances and specifications, which can be difficult to
produce in volume. We believe our circuit design expertise, internally produced
GaAs semiconductor
23
<PAGE> 28
components, extensive experience and understanding in how to better integrate
functionality at these frequencies provides us with a technical advantage. We
believe that our expertise results in simpler, more robust, and higher
performance solutions for our subsystem customers. It has also enabled us to
produce new products targeted for high speed fiber optic applications of up to
10 gigabits per second, or Gbps.
Linear Efficiency Expertise
We have developed technology competencies in multiple disciplines, including
pHEMT and InGaP HBT GaAs technologies, which enable us to achieve high linear
efficiency in our GaAs semiconductor components and GaAs-based subsystems. These
competencies and disciplines include RF integrated circuit technology, solid
state device physics, thermal mechanical packaging design, advance circuit
design, linearity enhancement techniques, advanced signal processing techniques,
and computer aided design and modeling. We believe the linear efficiency of GaAs
allows our subsystem products to be packaged in smaller enclosures due to a
reduced need for heat removal. We also believe our linear efficiency expertise
provides us with an important technology advantage, particularly with respect to
products addressing the rapidly growing CDMA market. CDMA tends to have more
stringent power requirements than other digital standards and is very sensitive
to any distortion, which places greater demands on the linearity characteristics
of CDMA power amplifiers.
Vertically Integrated Manufacturing
The vertical integration of our design and production process improves our
ability to address wireless equipment providers' quantity and time to market
requirements for GaAs semiconductor components and GaAs-based subsystems. We
believe our in-house ability to design and manufacture our products in a modular
fashion is critical to introduce new products meeting the evolving needs of our
customers in a rapid and cost effective manner. We also design our products to
be manufactured in high volumes in modular manufacturing lines, which we believe
improves our ability to secure volume orders from our customers. In addition,
common architectures are used for multiple applications resulting in faster
development times and manufacturing efficiencies associated with common material
content. We have developed relationships with third party manufacturers
throughout our supply chain, which are intended to improve our ability to
increase volume production to meet customers' needs and optimize the utilization
of our in-house capacity.
Design Expertise
Our expertise in RF and microwave design allows us to effectively select and
integrate appropriate circuit blocks to achieve high level functionality with
cost effective performance for our customers. This is typically a very difficult
problem as bandwidth, or data rate, requirements of these systems increase. We
believe our technical advantage stems from selecting appropriate high level
functionality with low parts count and complexity. This advantage translates
into reliable, simple and more manufacturable products. In addition to the
vertical integration benefits that come from our in-house GaAs fabrication, we
also produce our own circuits and components for subsystem applications. These
capabilities support higher levels of integration for our products. For example,
our design expertise enabled us to develop our semiconductor InGaP HBT power
modules for mobile handsets.
24
<PAGE> 29
STRATEGY
Our objective is to become the leading provider of GaAs semiconductor components
and GaAs-based subsystems for the wireless communications market. We target
leading OEMs in growing voice and data driven markets and align our technologies
and products to address their needs. The following are the key elements of our
strategy:
Leverage our Expertise in Linear Efficient GaAs Technology and Integration
We intend to continue to use our expertise in GaAs and integration to address
emerging trends in broadband markets. For example, we recently introduced our
InGaP HBT power amplifier modules, which offer our mobile handset customers an
integrated solution involving fewer parts, greater ease of use, and smaller size
and higher linear efficiency as compared to power amplifiers produced using
other GaAs processes. We believe the modules will also address our customers'
needs for reduced parts count and number of suppliers. Our GaAs-based subsystem
products, such as high capacity wireless SONET/SDH and two-way data satellite
products, integrate circuits produced in-house and GaAs semiconductor components
to address customer demand for compact subsystems.
Further Penetrate High-Growth Broadband Markets
We target both existing and emerging high-growth broadband markets. We seek to
further increase the penetration of our GaAs semiconductor components and
GaAs-based subsystem products in existing and growing voice driven markets,
which include handsets and point to point networks. Our strategy is to further
penetrate emerging broadband markets, which include data handsets, point to
multipoint networks and satellite voice and Internet data terminals.
We believe data rates in fiber optic markets are driving demand for higher
frequency components. Our high frequency expertise positions us to penetrate
these wireline broadband markets. For example, we are developing high
performance 20 GHz driver amplifier solutions for the emerging 10 Gbps, or
OC-192, high speed fiber optic market.
Capitalize on Vertical Integration in Design and Manufacturing of Integrated
Components
We intend to continue to pursue a strategy of vertical integration of our design
and manufacturing processes, from design and development of the semiconductor
integrated circuit through assembly and automated testing. We believe our
expertise in the design and manufacturing of integrated components benefits us
in the wireless subsystems market because GaAs semiconductor components are a
critical part of these GaAs-based subsystems. We also believe our control over
each of these steps contributes to improved linear efficiency, shortens our time
to market, reduces unit costs and increases our control over quality and
reliability. In periods of high industry demand for semiconductors and intense
competition for wafer fabrication capacity, operating a wafer fabrication
facility provides access to a captive supply of RF semiconductors for the mobile
handset market and for integration into our GaAs-based subsystems.
Expand Relationships with Leading Worldwide Manufacturers of Wireless
Infrastructure Equipment
Our strategy is to form lasting customer relationships by working closely with
our customers early in the development process. By working with our customers
throughout the entire development process, we believe we are able to provide
final solutions tailored to their cost and performance goals. We have developed
relationships with large wireless customers, including Motorola, P-COM, Digital
Microwave, Metricom, Gilat and Ericsson. We believe that our customer
relationships also allow us to develop insight into their requirements and to
design specific products that meet their needs by rapidly delivering product
designs and volume production. In addition, we do not generally compete with our
customers and we believe, as a result, they are more willing to openly discuss
with us their proprietary technologies and development plans.
25
<PAGE> 30
PRODUCTS
We design, develop, manufacture and market GaAs semiconductor components and
GaAs-based subsystems.
GaAs Semiconductor Components
We offer our GaAs semiconductor components to customers for use in the wireless
communications markets, and integrate them into our own GaAs-based subsystems.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
SEMICONDUCTOR
MARKET COMPONENTS APPLICATIONS PRODUCT BENEFITS
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Mobile Handsets - Power amplifier RFICs Transmitter portion of cellular - Lengthens talk
- HBT Power Modules and PCS CDMA, TDMA, and, in the time
- Driver RFICs future, 3G mobile handsets, for - Increases data capacity up
voice and data to 2 Mbps
- Decreases size of handsets
- Decreases battery voltage
- Increases integration
- ----------------------------------------------------------------------------------------------------------------
Wireless - Power amplifier RFICs Transmitter and receiver - Increases range
Infrastructure - Power transistors portions of cellular, GSM, and - Increases data capacity up
- Low noise transistors PCS wireless infrastructure to 2 Mbps
equipment - Reduces size of base
stations
- ----------------------------------------------------------------------------------------------------------------
Fixed Wireless - Power amplifier RFICs Transmitter portion of 1.9 GHz, - Increases data capacity up
- Power transistors 2.4 GHz and 3.5 GHz fixed to 2 Mbps
- Low noise transistors wireless base stations and - Lengthens battery back up
- Driver RFICs subscriber terminals - Reduces size of base
stations
- ----------------------------------------------------------------------------------------------------------------
Point to Point and - Millimeter wave Transmitter and receiver - Provides a secure source
Point to Multipoint microwave monolithic portions of our GaAs-based of supply and reduce the
integrated circuits subsystems cost of our GaAs-based
(MMICs) subsystems
- ----------------------------------------------------------------------------------------------------------------
Satellite - Microwave and Transmitter portions of our - Provides a secure source
millimeter wave MMICs GaAs-based subsystems of supply and reduces the
cost of our GaAs-based
subsystems
- ----------------------------------------------------------------------------------------------------------------
Fiber Optic* - Driver amplifier MMICs OC-192 20 GHz fiber optic - Increases data capacity up
external modulator applications to 10 Gbps
- Reduces data
errors
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* Recently introduced products that have not commenced volume shipments.
26
<PAGE> 31
GaAs-based Subsystems
Our GaAs-based subsystems address the needs of wireless communication markets
for voice and data.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
MARKET SUBSYSTEM PRODUCT APPLICATIONS PRODUCT BENEFITS
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Point to Point - Power amplifiers Transmitter and receiver - Increases range
- Low noise amplifiers portion of microwave and - Reduces size of terminals
- Transceivers millimeter wave radios for - Increases integration
- Complete radio outdoor medium capacity voice and data - Increases data rates up to
units, or ODUs 44 Mbps
- ----------------------------------------------------------------------------------------------------------------
Point to Multipoint - Linear amplifiers Transmitter and receiver - Increases data capacity up
- Low noise amplifiers portion of millimeter wave to 44 Mbps
- Low phase noise radios for high capacity voice - Reduces size of terminal
sources and data - Reduces data errors
- Transceivers - Reduces sensitivity to
- Complete radio ODUs vibration
- ----------------------------------------------------------------------------------------------------------------
Wireless SONET/ SDH - Linear amplifiers Transmitter and receiver - Increases data capacity up
- Low noise amplifiers portion of millimeter wave to 610 Mbps
- Low phase noise radios for very high capacity - Reduces size of terminal
sources data - Reduces data errors
- Transceivers - Reduces sensitivity to
- Complete radio ODUs vibration
- ----------------------------------------------------------------------------------------------------------------
Defense - Amplifiers Electronic countermeasures and - Increases integration
- Transceivers warning systems
- ----------------------------------------------------------------------------------------------------------------
Satellite -- Retail - Transmit ODUs Two way satellite ground - Reduces size of terminal
terminals for point of sale - Reduces data errors
transactions and remote
monitoring
- ----------------------------------------------------------------------------------------------------------------
Satellite -- Internet - Transmit ODUs Two way satellite terminals for - Reduces size of terminal
Protocol* high capacity voice and data to - Reduces data transmission
remote Internet service errors
providers, home office and - Increases integration
basic phone
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* These products are in the prototype stage and we have not commenced commercial
shipments.
CUSTOMERS
We sell our GaAs semiconductor components and GaAs-based subsystems products
primarily to commercial OEMs, who integrate these products into both wireless
mobile handsets and broadband wireless infrastructure equipment and networks. We
also sell our subsystem products to major defense contractors.
Our largest semiconductor component customers for the fiscal year ended March
31, 2000, were Motorola, Metricom, Mitsubishi and Ericsson. Our largest
subsystem customers for the fiscal year ended March 31, 2000 were P-COM, Digital
Microwave, ITT Aerospace and Gilat Satellite.
A relatively limited number of customers have historically accounted for a
substantial portion of our sales. During the fiscal year ended March 31, 2000,
Motorola accounted for approximately 15% of net sales and P-COM accounted for
approximately 11% of net sales. In the fiscal year ended March 31, 1999, no
customer accounted for more than 10% of net sales. In fiscal 1998, P-COM,
accounted for approximately 20% of net sales. Sales to our top ten customers
accounted for approximately 61% of our net sales in fiscal
27
<PAGE> 32
2000 and 56% in fiscal 1999. We expect that sales of our products to a limited
number of customers will continue to account for a high percentage of our sales
in the foreseeable future.
Sales to international customers accounted for 22% of net sales in fiscal 2000
and 21% of net sales in fiscal 1999. In addition, many of our domestic customers
sell their products outside of the United States.
TECHNOLOGY
We utilize GaAs technology expertise, advanced integration and packaging
technologies, RF and microwave circuit design and high frequency competency to
offer what we believe are superior wireless solutions. We also employ advanced
simulation and modeling tools to offer wireless customers advanced semiconductor
RF integrated circuits, or RFICs, and power amplifier modules, as well as
GaAs-based subsystems that bring the benefits of the latest technologies to
market quickly.
Gallium Arsenide
GaAs is a semiconductor material that has an electron mobility several times
faster than silicon. As a result, it is possible to design GaAs circuits that
operate at significantly higher frequencies than silicon circuits. GaAs circuits
can be designed to consume less power, amplify with more linearity, and operate
more efficiently at lower voltages than silicon circuits. This means that
transceiver products operate with smaller batteries for a longer period of time.
Low voltage linear efficiency makes GaAs circuits well suited for power
amplifiers operating in CDMA, TDMA and 3G systems. High frequency GaAs
technology supports millimeter wave MMICs for transceivers and other components
for integration into GaAs-based subsystem products. High frequency GaAs
technology also facilitates the support of the high speed fiber optic market.
Our GaAs technology provides repeatability and control through our proprietary
0.25 micron semiconductor fabrication process.
GaAs Processes
We utilize a broad range of GaAs production processes which provides us with
flexibility in designing products to suit the needs of our customers, including
the following:
- Metal semiconductor field effect transistor, or MESFET, is a production
process characterized by lower initial wafer costs and fewer processing
steps than newer processes, such as InGaP HBT. Semiconductor products
manufactured using MESFET need two power supplies, a positive and negative,
and have a larger die size. These products are currently used in several
high volume mobile handset and infrastructure applications.
- Pseudo-morphic high electron mobility transistor, or pHEMT, is a production
process characterized by low voltage and high frequency performance which is
superior to the MESFET process. pHEMT also requires a positive and negative
power supply like MESFET. pHEMT is used in current generation CDMA power
amplifiers, high frequency MMICs for GaAs-based subsystems and our fiber
optic driver products.
- Heterojunction bipolar transistor, or HBT, processes have a bipolar
structure, similar to that used in traditional high frequency analog
applications, rather than the FET structure utilized in MESFET and pHEMT
processes. The bipolar structure of HBT enables the use of a single power
supply and can be disabled with a digital control signal in contrast with
MESFET and pHEMT, both of which require two supplies and supply switching
components. Additionally, HBT devices generally have superior linear
efficiency relative to MESFET and pHEMT. HBT devices generally involve more
processing steps than MESFET or pHEMT processes, which tend to make the cost
of processing a single wafer more expensive. However, the smaller die size
of an HBT device, and therefore the greater number of devices per wafer,
tend to offset this additional cost.
28
<PAGE> 33
InGaP HBT versus AlGaAs HBT
The most commonly utilized HBT process today uses aluminum to create aluminum
GaAs, or AlGaAs. Our HBT process uses indium and phosphide to create indium
gallium phosphide, or InGaP. The primary advantages of InGaP are the reliability
and low voltage linear efficiency. As a result, we believe InGaP is the
preferred technology for CDMA broadband applications. We believe we are the
first to offer InGaP power amplifier modules for these applications.
Integration Expertise
We have developed technologies to enhance our expertise at higher levels of
integration. We believe these technologies allow us to offer a higher level of
functionality, in smaller form factors, to our customers.
Modular Design. Our subsystem assemblies use modular building blocks to provide
high level functionality. These assemblies are produced with common system
architectures for multiple applications to enable cost effective and flexible
integration. Our module products can use a common die supply for multiple
applications allowing us to dynamically allocate material as demand changes.
Hybrid Waveguide. We have developed a proprietary millimeter wave integration
technology called Hybrid Waveguide Technology, or HWT, in which circuits are
built directly inside the waveguide. This technology enables high performance
filters and active components.
Packaging
We have developed proprietary RFIC and power module packaging techniques to
enhance the linear efficiency of our products, while using commercially
available cost effective manufacturing processes. These packaging technologies
are compatible with subcontract assembly capacity, and offer size reduced,
higher levels of functionality to our customers.
Low Phase Noise Sources
We have developed a proprietary approach to produce low phase noise sources to
support high capacity wireless data applications. The approach is designed to be
a cost effective and robust design. We believe our approach offers a technical
advantage over competing approaches, which when subjected to vibration, can
induce critical errors in high capacity data transmission at millimeter wave
frequencies.
Simulation and Modeling
We believe that our long history of solving complex integration problems gives
us a strong basis from which to address new applications. This experience is
enhanced with in-house and commercially available simulation techniques. For
example, we have an advanced non-linear model for InGaP HBT that enables better
prediction of end performance on a first design attempt.
Amplifier
Linear amplifiers amplify signals so that they will have sufficient strength to
reach the next location, but do so in such a way as to not induce distortion in
transmitted voice or data. Amplifiers are typically the most challenging
component in any RF and microwave system. They were our first product and
continue to be a core technology. Millimeter wave power amplifiers up to one
watt of power are needed for higher bandwidth voice and data applications, and
our expertise in this area enables these applications to transmit higher
capacity data. GaAs semiconductor RFICs and power amplifier modules are an
important part of the transmit chain in a handset, and we believe our leadership
in linear efficiency in this product area is a result of amplifier technology
which in turn enables higher capacity mobile voice and data solutions.
29
<PAGE> 34
Millimeter Wave
We have developed millimeter wave technologies to help simplify and improve the
performance of our components. These include careful control over the geometries
to produce GaAs MMICs with our 0.25 micron semiconductor fabrication process,
tolerance control over in-house thin film circuits, and correct circuit
implementations that allow centering of design performance to specifications.
SALES AND MARKETING
We market our products worldwide to customers in commercial markets and prime
contractors in the defense industry primarily through a network of
manufacturers' representatives managed by our internal sales force of six
people. As of March 31, 2000, we have contracts with 11 manufacturers'
representatives in the United States and 16 international representatives
located in Western Europe, the Middle East and Asia. As part of our marketing
efforts, we advertise in major trade publications and attend major industry
shows.
After we have identified key potential customers in our market segments, we make
sales calls with our manufacturers' representatives and our 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. To promote widespread acceptance of our transceiver
products and provide customers with support for their wireless transmission
needs, our sales and engineering teams work closely with our customers to
develop tailored solutions to these needs. We believe our customer engineering
support provides us with a competitive advantage.
BACKLOG
We generally include in our backlog all purchase orders and contracts for
products with requested delivery dates within one year.
Our backlog at March 31, 2000 was approximately $65 million. Generally, purchase
orders in our backlog are subject to cancellation without penalty at the option
of the customer, and from time to time we have experienced cancellation of
orders in backlog. Most of our quarterly net sales have resulted from orders
obtained in prior quarters. Our backlog is subject to fluctuations and is not
necessarily indicative of our future sales. There can be no assurance that
current backlog will necessarily lead to sales in any future period. In
addition, we may not be able to achieve the rapid expansion necessary to meet
our current orders. For example, a significant portion of our backlog as of
March 31, 2000 represents orders whose requested shipment dates have passed,
some by more than six months.
Of our current backlog, approximately 28% is attributable to orders received
from one customer. If we were to lose this or another major customer, or if
orders by major customers were to otherwise decrease or be delayed, operating
results and financial condition would be harmed.
RESEARCH AND DEVELOPMENT
Our research and development efforts are focused on the design of new GaAs
semiconductor components and GaAs-based subsystems, improvement of existing
device performance, process improvements in GaAs wafer fabrication and
improvements in packaging and integration. As of March 31, 2000, we employed 55
people to support our research and development efforts. In addition to their
design and development activities, the engineering staff participates with our
marketing department in proposal preparation and applications support for
customers. We have developed an extensive library of circuit designs and
architectures that can be integrated into higher level systems. We believe our
ability to leverage this library of modules reduces product time to market and
development costs.
30
<PAGE> 35
We have established two design centers in the United Kingdom to support
development efforts in both the semiconductor component and subsystem areas. We
opened these design centers in the United Kingdom to take advantage of the
greater availability of engineering talent in the United Kingdom, as compared to
the United States and Northern California in particular where hiring of
engineers has been difficult.
We believe our expertise in high frequency applications is well suited to higher
speed fiber optic component markets. We announced our first fiber optic product
for 10 Gbps, or OC-192, applications in the first quarter of calendar 2000. The
product is the first of a family of high speed fiber optic solutions, and
samples of our products are being distributed to potential customers. We believe
we will be in a position to initiate larger shipments in this product area at
the end of calendar 2000.
Our total expenses for research and development were $5.4 million for the fiscal
year ended March 31, 1998, $5.9 million for the fiscal year ended March 31,
1999, and $6.7 million for the fiscal year ended March 31, 2000.
MANUFACTURING
We manufacture our GaAs semiconductor components and GaAs-based subsystems and
supplement our manufacturing capacity by selectively outsourcing wafer
fabrication, assembly and test manufacturing functions to third parties. Our
manufacturing lines are designed to meet increasing customer demand without
sacrificing our high quality standards. Our manufacturing strategy consists of
five key elements:
- control and optimization of the key technologies and manufacturing processes
at all levels of vertical integration;
- multiple sourcing where possible in the supply line for outside purchased
material and strategic development of vendors;
- commonality in design to leverage common materials and processes;
- strategic use of subcontract services to optimize internal utilization and
provide additional capacity as needed; and
- use of modular manufacturing lines, using commercially available equipment,
and low risk proven processes.
We maintain manufacturing control of our products through the use of our
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. Our facility
includes clean rooms with class 10 performance for fabrication operations. A
class 10 clean room has no more than ten particles larger than 0.5 microns in
size per cubic foot of air. To maximize wafer yields and quality, we test our
products at various stages in the fabrication process, maintain reliability
monitoring, and conduct numerous quality control inspections throughout the
entire production flow using analytical manufacturing controls.
In addition to fabricating our own GaAs semiconductor components, we also
outsource a portion of the semiconductor fabrication to a subcontractor foundry.
We believe that outsourcing a portion of the fabrication allows us to achieve
benefits. For example, outsourcing provides us with a redundant source of
semiconductors. In addition, it allows us to better use our own facility by
providing us with an increased ability to manage our in-house capacity. Further,
the ability to outsource a portion of the fabrication allows us to recognize
cost efficiencies that may be present to a greater degree in the independent
subcontract fabrication facility.
We have an arrangement with an independent subcontractor to assemble some of our
GaAs-based subsystems to reduce manufacturing labor costs. Additionally, we use
three third party vendors in Asia to package our GaAs semiconductor components.
Although we strive to maintain more than one vendor for each process, this is
not always possible due to volume and quality issues. To the extent that any of
the
31
<PAGE> 36
vendors are not able to provide a sufficient level of service with an acceptable
quality level, we could have difficulty meeting our delivery commitments which
could seriously harm our business and operating results.
We use our high frequency test expertise to test our high volume RFICs, power
amplifier modules, and subsystem products. We believe our test process results
in higher throughput, shorter cycle times and overall capacity control. Test
equipment is commercially available and supports the need to scale capacity to
meet increased demand. Internal test capability is also augmented with offshore
subcontractors.
We acquire some of the components for our existing products from single sources,
and some of the other components for our products are presently available or
acquired only from a limited number of suppliers. For example, our
single-sourced components include millimeter wave components and semiconductor
packages.
COMPETITION
Our 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 our GaAs devices.
Furthermore, we currently supply components to customers that are continuously
evaluating whether to manufacture their own components or purchase them from
outside sources. We expect significantly increased competition both from
existing competitors and a number of companies that may enter the wireless
communications market.
In the semiconductor product market, we compete primarily with ANADIGICS,
Conexant Systems, RF Micro Devices, and TriQuint Semiconductor. In the area of
wireless subsystems products, we compete primarily with EndWave, MTI (Taiwan),
New Japan Radio Corporation, REMEC, SPC America and Telaxis. In the defense
segment of the subsystems market, we compete primarily with CTT and Litton
Industries.
We believe that competition in our markets is based primarily on price,
performance, sales force effectiveness, security of supply, the ability to
support rapid development cycles, and design wins. Many of our current and
potential competitors have significantly greater financial, technical,
manufacturing and marketing resources than we have and have achieved market
acceptance of their existing technologies. We cannot assure you that we will be
able to compete successfully with our existing or new competitors. If we are
unable to compete successfully in the future, our business, operating results,
and financial condition will be harmed.
GOVERNMENT REGULATION
Our products are incorporated into wireless communications systems that are
subject to various United States regulations and similar laws and regulations
adopted by regulatory authorities in other countries. Regulatory changes,
including changes in the allocation of available frequency spectrum, could
significantly impact our operations by restricting development efforts by our
customers, making obsolete current products or increasing the opportunity for
additional competition. Changes in, or the failure to comply with, applicable
domestic and international regulations could have an adverse effect on our
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 these products and services, generally
following extensive investigation of and deliberation over competing
technologies. The delays inherent in this government approval process have
caused in the past, and may cause in the future, the cancellation, postponement
or rescheduling of the installation of communications systems by our customers,
which in turn may negatively affect the sale of our products to those customers.
32
<PAGE> 37
PROPRIETARY RIGHTS
Our ability to compete will depend, in part, on our ability to obtain and
enforce intellectual property protection for our technology in the United States
and internationally. Although we have three U.S. patents, none of which are
critical to our business, expiring from 2005 to 2008, we currently rely
primarily on a combination of trade secrets, copyrights, trademarks and
contractual rights to protect our intellectual property. To protect our trade
secrets and other proprietary information, we require our employees to sign
agreements providing for maintenance of confidentiality and also the assignment
of rights to inventions made by them while in our employ.
The steps taken by us may be inadequate to deter misappropriation or impede
third party development of our technology. In addition, the laws of some foreign
countries in which our products are or may be sold do not protect our
intellectual property rights to the same extent as do the laws of the United
States. Our failure to protect our proprietary information could cause our
business and operating results to suffer.
From time to time, third parties have asserted exclusive patent, copyright and
other intellectual property rights to technologies that are used in our
business. We cannot assure you that third parties will not assert infringement
claims against us in the future, that assertions by third parties will not
result in costly litigation or that we would prevail in any litigation or be
able to license any valid and infringed patents from third parties on
commercially reasonable terms or at all. For example, we recently received a
letter from Rockwell International Corporation alleging that components supplied
to us by a third party were manufactured by that third party using a process
claimed in a Rockwell patent. These components were processed and tested by us
for use by us as part of our InGaP HBT power amplifiers. The letter from
Rockwell invited us to discuss a licensing assignment for Rockwell's patented
technology. Rockwell's patent expired in January 2000 and prior to that time we
had distributed for testing but had not sold products incorporating the third
party supplied components. We are currently reviewing this matter but do not
believe it will seriously harm our operating results or financial condition. If,
however, Rockwell files suit in connection with our use of the third party
supplied components, we cannot assure you that we will prevail. In addition,
litigation would be costly and time consuming. Litigation, regardless of its
outcome, could result in substantial cost and diversion of our resources. Any
infringement claim or other litigation against or by us could seriously harm our
business and operating results.
EMPLOYEES
As of March 31, 2000, we had a total of 339 employees including 12 in marketing,
sales and related customer support services, 55 in research and development, 251
in manufacturing and 21 in administration and finance. None of our employees is
represented by a labor union. We consider our relations with our employees to be
good.
PROPERTIES
Our 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, 2005.
We also lease an additional 25,000 square foot building in Santa Clara,
California to house our wireless subsystems manufacturing operation. We have two
facilities in the United Kingdom which house design centers, a leased facility
in Belfast, Northern Ireland and a building that we own in Lincoln, England. We
believe our existing facilities are adequate for our current needs and that
additional space will be available as needed.
33
<PAGE> 38
MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Tamer Husseini.................... 57 Chairman, President and Chief Executive Officer
Margaret E. Smith................. 52 Vice President, Finance and Chief Financial
Officer
William W. Hoppin................. 37 Vice President, Sales and Marketing
Gary J. Policky................... 58 Vice President, Engineering and Chief Technical
Officer
Richard G. Finney................. 50 Vice President, Subsystem Division
Perry A. Denning.................. 53 Vice President, Semiconductor Division
Frank Sasselli.................... 43 Vice President, Operations
Robert J. Gallagher(1)............ 56 Director
Thomas W. Hubbs(1)................ 55 Director
William D. Rasdal(2).............. 66 Director
Charles P. Waite(2)............... 70 Director
</TABLE>
- -------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Tamer Husseini, a founder of our company, has served as our Chairman of the
Board, President and Chief Executive Officer since our organization in 1984.
Prior to founding our 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., 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.
Margaret E. Smith joined us in November 1989 as Controller and served as Vice
President, Finance and Chief Financial Officer from January 1994 until December
1998. After a brief departure, Ms. Smith rejoined us in November 1999, again as
Vice President, Finance and Chief Financial Officer. Prior to joining us, Ms.
Smith was employed by Avantek from 1980 until September 1989 where she served
most recently as a Divisional Controller.
William W. Hoppin joined us in 1985 as a design engineer and has been our Vice
President, Sales and Marketing since April 1997. From January 1995 to April
1997, he was director of semiconductor sales. Prior to joining us, Mr. Hoppin
received a Bachelor of Science in Electrical Engineering from Cornell
University.
Gary J. Policky, a founder of our company, has served as Vice President, Signal
Processing Operations since our organization in 1984. In 1997, Mr. Policky was
appointed Vice President, Engineering and Chief Technical Officer. Prior to
founding our company, Mr. Policky was employed from 1969 until 1984 at Avantek
as Engineering Manager of Microwave Components and Amplifiers.
Richard G. Finney joined us in 1985 as Director of Manufacturing and has served
as Vice President, Manufacturing from January 1996 to 1997. In 1997, Mr. Finney
was appointed Vice President, Subsystem Division. Prior to joining us, 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 us in July 1997 as Vice President, Semiconductor
Division. Prior to joining us, Mr. Denning was employed by Monolithic Systems
Technology, Inc. as the Vice President of Operations. Before joining Monolithic
Systems, Mr. Denning worked for 13 years for VLSI Technology, Inc. where he
started all of its wafer manufacturing operations and managed its foundry
relations with Taiwan Semiconductor Manufacturing Corporation and Chartered
Semiconductor. Prior to VLSI, Mr. Denning
34
<PAGE> 39
worked 13 years for Texas Instruments where he was responsible for multiple high
volume manufacturing facilities.
Frank Sasselli joined us in April 1992 as Director of Engineering and has held
various positions here. He was appointed Vice President, Operations in July
1999. Prior to joining us, Mr. Sasselli was employed by Spectrian from 1987 to
1992 as Director of Engineering. Before joining Spectrian, Mr. Sasselli was
employed by Avantek from 1979 to 1987, most recently as an engineering manager.
Robert J. Gallagher was appointed to our Board of Directors in October 1998.
Since 1983, Mr. Gallagher has been employed by Acuson Corporation, a
manufacturer of medical ultrasound imaging systems. Mr. Gallagher joined Acuson
in January 1983 as Vice President, Finance and Chief Financial Officer, became
Executive Vice President in March 1991, was Chief Operating Officer from January
1994 until March 1999, and was President of Acuson from May 1995 until November
1997, when he was appointed Vice Chairman of the Board. He retired as Chief
Operating Officer in March 1999, but remained Senior Vice President until
February 2000. In February 2000, Mr. Gallagher again became President and Chief
Operating Officer of Acuson. Mr. Gallagher also serves on the Board of Directors
of Lumisys Inc.
Thomas W. Hubbs was appointed to our Board of Directors in June 1998. Since
November 1998, Mr. Hubbs has been employed by interWAVE Communications
International, Ltd., a developer of distributed systems architecture for
wireless communications. Mr. Hubbs was a consultant at interWAVE from November
1998 to June 1999, and in July 1999, he became the Executive Vice President and
Chief Financial Officer there. From April 1998 to October 1998, Mr. Hubbs served
as Senior Vice President and Chief Financial Officer of Walker Interactive
Systems, Inc., a developer of financial applications software products. From
December 1995 to April 1998, Mr. Hubbs served as Senior Vice President and Chief
Financial Officer of interWAVE. From 1987 to 1995, Mr. Hubbs served as Vice
President and Chief Financial Officer of VeriFone, Inc.
William D. Rasdal has served on our Board of Directors since our organization in
1984. Until June 1998, Mr. Rasdal served as Chairman of the Board and Chief
Executive Officer of SymmetriCom, Inc., a position he held since 1989, and
continues to serve on SymmetriCom's Board of Directors. Mr. Rasdal joined
SymmetriCom in 1985 as President and Chief Executive Officer. Prior to his
employment with SymmetriCom, Mr. Rasdal was employed by Granger Associates as
President and Chief Operating Officer. Prior to his employment with Granger
Associates, Mr. Rasdal served as Vice President and General Manager of Avantek's
Microwave Integrated Circuit and Semiconductor Operations. Mr. Rasdal also
serves on the Board of Directors of Advanced Fibre Communications, Inc.
Charles P. Waite has served on our Board of Directors since our organization in
1984. He has been with Greylock, a venture capital firm, since 1966 and is
currently a special limited partner and director. Mr. Waite also serves on the
Board of Directors of Teltone Corporation.
35
<PAGE> 40
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp., Prudential Securities Incorporated, and Needham
& Company, Inc. are acting as representatives of the underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares. Subject to the terms and conditions
of the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
CIBC World Markets Corp.....................................
Prudential Securities Incorporated..........................
Needham & Company, Inc......................................
---------
Total.................................................. 2,000,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The shares should be ready for delivery on or about , 2000
against payment in immediately available funds. The representatives have advised
us that the underwriters propose to offer the shares directly to the public at
the public offering price that appears on the cover page of this prospectus. In
addition, the representatives may offer some of the shares to other securities
dealers at such price less a concession of $ per share. The underwriters may
also allow, and such dealers may reallow, a concession not in excess of
$ per share to other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.
We have granted the underwriters an over-allotment option. This option, which is
exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 300,000 additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this option, they
will purchase shares covered by the option at the public offering price that
appears on the cover page of this prospectus, less the underwriting discount. If
this option is exercised in full, the total price to the public will be $
million, and the total proceeds to us will be $ million. The underwriters
have severally agreed that, to the extent the over-allotment option is
exercised, they will each purchase a number of additional shares proportionate
to the underwriter's initial amount reflected in the foregoing table.
The following table provides information regarding the amount of the discount to
be paid to the underwriters by us:
<TABLE>
<CAPTION>
TOTAL WITHOUT EXERCISE OF TOTAL WITH FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
- --------- ------------------------- ---------------------------
<S> <C> <C>
$ $ $
</TABLE>
We estimate that the total expenses of the offering, excluding the underwriting
discount, will be approximately $850,000.
36
<PAGE> 41
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
We, as well as our executive officers and directors, have agreed to a 90-day
"lock up" with respect to approximately 955,689 shares of common stock, and
other of our securities that they beneficially own, including securities that
are convertible into shares of common stock and securities that are exchangeable
or exercisable for shares of common stock. This means that, subject to some
exceptions, for a period of 90 days following the date of this prospectus, we
and such persons may not offer, sell, pledge or otherwise dispose of these
securities without the prior written consent of CIBC World Markets Corp.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the shares
is completed. However, the underwriters may engage in the following activities
in accordance with the rules:
- Stabilizing transactions -- The representatives may make bids or purchases
for the purposes of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
- Over-allotments and syndicate covering transactions -- The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in syndicate
covering transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option.
- Penalty bids -- If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group members
who sold those shares as part of this offering.
- Passive market making -- Market makers in the shares who are underwriters or
prospective underwriters may make bids for or purchases of shares, subject
to certain limitations, until the time, if ever, at which a stabilizing bid
is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of these transactions. The
imposition of a penalty bid might also have an effect on the price of the shares
if it discourages resales of shares.
Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or otherwise.
If these transactions are commenced, they may be discontinued without notice at
any time.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its web site at PrudentialSecurities.com. Clients of Prudential
Advisor(SM), a full service brokerage firm program, may view the offering terms
and a prospectus online and place orders through their financial advisor. Other
than the prospectus in electronic format, any other information that references
us, the information on Prudential Securities Incorporated's web site and any
other information maintained by Prudential Securities Incorporated is not a part
of this prospectus and has not been approved or endorsed by us and should not be
relied upon by prospective investors.
LEGAL MATTERS
The validity of the issuance of common stock will be passed upon for us by
Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Pillsbury Madison
& Sutro LLP, San Francisco, California, is acting as counsel for the
underwriters in connection with selected legal matters relating to the shares of
common stock offered by this prospectus.
37
<PAGE> 42
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated financial
statements at March 31, 2000 and 1999 and for each of the three years in the
period ended March 31, 2000 as set forth in their report. We have included our
financial statements in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus, which constitutes a part of a registration statement on Form
S-3 filed by us with the Commission under the Securities Act of 1933, omits some
of the information set forth in the registration statement. Reference is hereby
made to the registration statement and to the exhibits thereto for further
information with respect to us and the securities offered hereby. Copies of the
registration statement and the exhibits thereto are on file at the offices of
the Commission and may be obtained upon payment of the prescribed fee or may be
examined without charge at the public reference facilities of the Commission
described below or via the Commission's web site described below.
Statements contained in this prospectus concerning the provisions of documents
are necessarily summaries of these documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission.
We are subject to the informational requirements of the Securities Exchange Act
of 1934, and, accordingly, file reports, proxy statements and other information
with the Commission. These reports, proxy statements and other information can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington,
D.C., and at the Commission's Regional Offices located at Seven World Trade
Center, Suite 1300, New York, New York and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois. Copies of these documents may also be
obtained from the Public Reference Room of the Commission at Judiciary Plaza,
450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. Information
regarding the operation of the Public Reference Room may be obtained by calling
the Commission at 1-800-SEC-0330. The Commission maintains a web site
(http://www.sec.gov) that contains material regarding issuers that file
electronically with the Commission.
This prospectus includes statistical data that were obtained from industry
publications generated by International Data Corporation. These industry
publications generally indicate that the authors of these publications have
obtained information from sources believed to be reliable, but do not guarantee
the accuracy and completeness of their information. While we believe these
industry publications to be reliable, we have not independently verified their
data.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by us (File No. 0-10726)
with the Commission are incorporated herein by reference:
- our Annual Report on Form 10-K for the fiscal year ended March 31, 2000;
- the description of our common stock contained in our registration statement
on Form 8-A, filed on November 2, 1995, including any amendment or report
filed for the purpose of updating the description; and
- the description of our shareholder rights contained in our registration
statement on Form 8-A, filed on April 1, 1999, including any amendment or
report filed for the purpose of updating the description.
38
<PAGE> 43
- the description of our shareholder rights contained in our registration
statement on Form 8-A, filed on April 1, 1999, including any amendment or
report filed for the purpose of updating the description.
All reports and other documents subsequently filed by us pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus
and prior to the filing of a post-effective amendment which indicates that all
securities offered hereby have been sold or which deregisters all securities
remaining unsold, shall be deemed to be incorporated by reference into this
prospectus and to be a part hereof from the date of the filing of these reports
or documents. Any statement contained in a document, all or a portion of which
is incorporated by reference herein, shall be deemed to be modified or
superseded for purposes of this prospectus to the extent that a statement
contained or incorporated herein by reference modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus.
Upon written or oral request, we will provide without charge to each person,
including any beneficial owner, to whom this prospectus is delivered a copy of
any or all of these documents which are incorporated herein by reference (other
than exhibits to these documents unless these exhibits are specifically
incorporated by reference into the documents that this prospectus incorporates).
Written or oral requests for copies should be directed to Margaret E. Smith,
Chief Financial Officer, 3236 Scott Boulevard, Santa Clara, CA 95054, (408)
986-5060.
39
<PAGE> 44
CELERITEK, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 45
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, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended March 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2000 and 1999, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended March 31, 2000, in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
San Jose, California
April 25, 2000
F-2
<PAGE> 46
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31,
------------------
2000 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 8,707 $ 1,729
Short-term investments.................................... 18,009 5,904
Accounts receivable, net of allowance for doubtful
accounts of $349 and $517 at March 31, 2000 and 1999,
respectively........................................... 11,909 10,615
Inventories............................................... 14,355 11,376
Income tax refund receivable.............................. 548 2,441
Prepaid expenses and other current assets................. 634 306
Deferred tax assets....................................... -- 494
------- -------
Total current assets.............................. 54,162 32,865
Net property and equipment.................................. 9,401 7,201
Other assets................................................ 92 144
------- -------
Total assets...................................... $63,655 $40,210
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,221 $ 4,217
Accrued payroll........................................... 2,514 1,400
Accrued liabilities....................................... 2,467 2,215
Current portion of long-term debt......................... 667 1,611
Current obligations under capital leases.................. 319 162
------- -------
Total current liabilities......................... 12,188 9,605
Long-term debt, less current portion........................ 222 --
Noncurrent obligations under capital lease commitments...... 414 257
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value:
Authorized shares -- 2,000,000
Issued and outstanding -- none....................... -- --
Common stock, no par value:
Authorized shares -- 20,000,000
Issued and outstanding shares -- 9,316,927 and
7,381,396 at March 31, 2000 and 1999,
respectively........................................ 52,394 25,087
Retained earnings (accumulated deficit)................... (1,563) 5,261
------- -------
Total shareholders' equity........................ 50,831 30,348
------- -------
Total liabilities and shareholders' equity........ $63,655 $40,210
======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 47
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net sales................................................... $48,211 $41,128 $56,317
Cost of goods sold.......................................... 39,838 36,600 36,147
------- ------- -------
Gross profit................................................ 8,373 4,528 20,170
Operating expenses:
Research and development.................................. 6,659 5,927 5,389
Selling, general, and administrative...................... 8,868 8,488 8,784
------- ------- -------
Total operating expenses............................... 15,527 14,415 14,173
------- ------- -------
Income (loss) from operations............................... (7,154) (9,887) 5,997
Interest income and other................................... 561 300 475
Interest expense............................................ (231) (392) (59)
------- ------- -------
Income (loss) before income taxes........................... (6,824) (9,979) 6,413
Provision (benefit) for income taxes........................ -- (2,441) 2,422
------- ------- -------
Net income (loss)........................................... $(6,824) $(7,538) $ 3,991
======= ======= =======
Basic net income (loss) per share........................... $ (0.88) $ (1.04) $ 0.56
======= ======= =======
Diluted net income (loss) per share......................... $ (0.88) $ (1.04) $ 0.54
======= ======= =======
Shares used in net income (loss) per share calculation
Basic..................................................... 7,736 7,265 7,126
Diluted................................................... 7,736 7,265 7,450
</TABLE>
See accompanying notes.
F-4
<PAGE> 48
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS TOTAL
----------------- (ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT) EQUITY
------ ------- ------------ -------------
<S> <C> <C> <C> <C>
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 comprehensive income.................... -- -- 3,991 3,991
----- ------- ------- -------
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 comprehensive loss...................... -- -- (7,538) (7,538)
----- ------- ------- -------
BALANCE AT MARCH 31, 1999....................... 7,381 25,087 5,261 30,348
Issuance of common stock on exercise of options
under stock option plan....................... 301 1,473 -- 1,473
Issuance of common stock in connection with
private placement, net of issuance costs...... 1,500 25,316 -- 25,316
Issuance of common stock under employee stock
purchase plan................................. 132 495 -- 495
Issuance of common stock under Outside
Directors' Plan............................... 3 23 -- 23
Net and comprehensive loss...................... -- -- (6,824) (6,824)
----- ------- ------- -------
BALANCE AT MARCH 31, 2000....................... 9,317 $52,394 $(1,563) $50,831
===== ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 49
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................................... $ (6,824) $ (7,538) $ 3,991
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization............................ 2,864 3,143 2,358
Gain on disposal of property and equipment............... (27) -- --
Income tax receivable.................................... 1,893 (2,441) --
Deferred income taxes.................................... 494 1,433 306
Changes in operating assets and liabilities:
Accounts receivable................................... (1,294) 5,201 (5,705)
Inventories........................................... (2,979) (741) (3,317)
Prepaid expenses and other current assets............. (328) 56 (145)
Accounts payable, accrued payroll and accrued
liabilities......................................... 3,370 (2,294) 1,364
-------- -------- --------
Net cash used in operating activities............... (2,831) (3,181) (1,148)
INVESTING ACTIVITIES
Purchases of property and equipment........................ (4,512) (2,084) (4,029)
Increase in other assets................................... 52 -- (48)
Purchases of short-term investments........................ (24,868) (12,504) (10,180)
Proceeds from maturities of short-term investments......... 12,763 14,100 10,880
-------- -------- --------
Net cash used in investing activities............... (16,565) (488) (3,377)
FINANCING ACTIVITIES
Principal payments on long-term debt....................... (722) (389) --
Borrowings on long-term debt............................... -- 1,000 1,000
Principal payments on obligations under capital leases..... (211) (108) (24)
Net proceeds from issuance of common stock................. 27,307 873 538
-------- -------- --------
Net cash provided by financing activities........... 26,374 1,376 1,514
-------- -------- --------
Increase (decrease) in cash and cash equivalents........... 6,978 (2,293) (3,011)
Cash and cash equivalents at beginning of period........... 1,729 4,022 7,033
-------- -------- --------
Cash and cash equivalents at end of period................. $ 8,707 $ 1,729 $ 4,022
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITIES Celeritek, Inc. (the Company) designs and manufactures
gallium arsenide, or GaAs, semiconductor components and GaAs-based subsystems
used in the transmission of voice, video and data over wireless communication
networks. The Company's products are designed to facilitate broadband voice and
data transmission in mobile handsets and wireless communication network
infrastructures.
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 generally
consists of a fifty-two week period ending on the Sunday closest to the calendar
month end, however, the fiscal year 2000 reporting period consisted of
fifty-three weeks. Fiscal years 2000, 1999, and 1998 ended April 2, March 28,
and March 29, respectively. For convenience, the accompanying financial
statements have been presented 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 Inventories are stated at the lower of standard cost (which
approximates actual cost on a first-in, first-out method) 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 Revenue related to product sales are recognized when the
products are shipped to the customer, title has transferred, and no obligations
remain. In circumstances where the customer has delayed its acceptance of our
product, we defer recognition of the revenue until acceptance. To date, the
Company has not had customers delay acceptance of its products. Generally, the
Company's customers do not have rights to return and to date, returns have not
been material.
WARRANTY The Company provides for estimated normal warranty costs to repair or
replace products for a period of one year 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.
F-7
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ADVERTISING The Company accounts for advertising costs as expense in the period
in which they are incurred. Advertising expense for all years presented was
immaterial.
EARNINGS PER SHARE In accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share," (SFAS 128) basic net income (loss) per
common share is computed using the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share incorporates
the incremental shares issuable upon the assumed exercise of stock options and
warrants and assumed conversions of preferred stock, if dilutive.
COMPREHENSIVE INCOME (LOSS) Under Statement of Financial Accounting Standards
No. 130, (SFAS 130), "Reporting Comprehensive Income", the Company is required
to display comprehensive income and its components as part of the Company's full
set of financial statements. 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 to be included in accumulated other comprehensive income. There is no
material difference between net income (loss) and comprehensive income (loss)
for all periods presented. Comprehensive income (loss) in fiscal 2000, 1999, and
1998 has been reflected in the Consolidated Statements of Shareholders' Equity.
RECENTLY ISSUED PRONOUNCEMENTS In December 1999, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition"
(SAB 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
believes that its revenue recognition policy is in compliance with the
provisions of SAB 101 and that the adoption of SAB 101 should have no material
effect on the financial position or results of operations.
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>
YEARS ENDED MARCH 31,
------------------------------------------
2000 1999 1998
----------- ----------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Numerator:
Net income (loss).................................. $(6,824) $(7,538) $3,991
Denominator:
Denominator for basic net income (loss) per
share -- weighted average common shares......... 7,736 7,265 7,126
Effect of dilutive securities:
Stock options...................................... -- -- 324
------- ------- ------
Denominator for diluted net income (loss) per
share -- weighted average common and potentially
dilutive securities............................. 7,736 7,265 7,450
======= ======= ======
Basic net income (loss) per share.................... $ (0.88) $ (1.04) $ 0.56
======= ======= ======
Diluted net income (loss) per share.................. $ (0.88) $ (1.04) $ 0.54
======= ======= ======
</TABLE>
The Company has excluded outstanding stock options from the calculation of
diluted net loss per share for the years ended March 31, 2000 and 1999 because
these securities are antidilutive. Options to purchase 1,078,320 and 1,019,563
shares of common stock at average exercise prices of $6.31 and $5.10,
F-8
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively, have been excluded from the calculation of diluted net loss per
share for the years ended March 31, 2000 and 1999, respectively.
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, 2000 and 1999, all short-term investments were
available-for-sale securities. None of the debt securities have contractual
maturities greater than one year for all periods presented.
Available-for-sale securities are carried at fair value, and the unrealized
gains and losses, net of taxes, are reported in a separate component of
shareholders' equity, when 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 dividends on
securities classified as available-for-sale are included in income. The
following is a summary of available-for-sale securities at cost, which
approximates fair value:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
2000 1999
------- ------
(in thousands)
<S> <C> <C>
Money market funds.......................................... $ 1,003 $1,290
Preferred stock............................................. 5,050 1,600
Investment trusts........................................... -- 800
Corporate debt securities................................... 20,198 3,504
------- ------
Total.................................................. $26,251 $7,194
======= ======
</TABLE>
Above amounts are included in the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
2000 1999
------- ------
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................... $ 8,242 $1,290
Short-term investments...................................... 18,009 5,904
------- ------
Total.................................................. $26,251 $7,194
======= ======
</TABLE>
Following is a reconciliation of cash and cash equivalents:
<TABLE>
<CAPTION>
MARCH 31,
----------------
2000 1999
------ ------
(in thousands)
<S> <C> <C>
Available-for-sale securities............................... $8,242 $1,290
Cash and bank accounts...................................... 465 439
------ ------
Total.................................................. $8,707 $1,729
====== ======
</TABLE>
The gross realized gains and losses on available-for-sale securities for the
fiscal years ended March 31, 2000, 1999 and 1998 were not material.
F-9
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
MARCH 31,
------------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Raw materials............................................... $ 3,193 $ 3,054
Work-in-process............................................. 11,162 8,322
------- -------
$14,355 $11,376
======= =======
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
MARCH 31,
--------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Equipment................................................... $ 26,737 $ 22,544
Furniture and fixtures...................................... 626 621
Leasehold improvements...................................... 5,026 4,813
-------- --------
32,389 27,978
Accumulated depreciation and amortization................... (22,988) (20,777)
-------- --------
Net property and equipment.................................. $ 9,401 $ 7,201
======== ========
</TABLE>
NOTE 6. ACCRUED LIABILITIES
Significant components of accrued liabilities are:
<TABLE>
<CAPTION>
MARCH 31,
----------------
2000 1999
------ ------
(in thousands)
<S> <C> <C>
Accrued commission.......................................... $ 811 $ 684
Warranty accrual............................................ 501 353
Other....................................................... 1,155 1,178
------ ------
$2,467 $2,215
====== ======
</TABLE>
NOTE 7. LEASES
The Company leases equipment under capital and operating leases. The Company
also leases certain facilities used in operations under non-cancellable
operating leases that expire at various times through the year 2005. Property
and equipment include the following amounts for leases that have been
capitalized:
<TABLE>
<CAPTION>
MARCH 31,
---------------
2000 1999
------ -----
(in thousands)
<S> <C> <C>
Equipment................................................... $1,078 $ 551
Less accumulated amortization............................... (242) (154)
------ -----
$ 836 $ 397
====== =====
</TABLE>
F-10
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-cancellable operating
leases with initial terms of one year or more consisted of the following at
March 31, 2000:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(in thousands)
<S> <C> <C>
2001........................................................ $ 357 $ 4,297
2002........................................................ 308 3,055
2003........................................................ 141 2,277
2004........................................................ -- 2,071
2005........................................................ -- 1,563
Thereafter.................................................. -- 668
----- -------
Total minimum lease payments........................... 806 $13,931
=======
Less amounts representing interest.......................... (73)
-----
Present value of net minimum lease payments................. 733
Less current portion........................................ (319)
-----
$ 414
=====
</TABLE>
Rent expense was approximately $4.5 million, $3.4 million, and $2.4 million for
the years ended March 31, 2000, 1999, and 1998, respectively.
NOTE 8. LONG-TERM DEBT
On October 25, 1999, the Company renewed its Master Loan Agreement which will
expire October 31, 2000. Under that agreement, the Company has available credit
facilities, consisting of a line of credit and letters of credit, of up to $6.0
million, subject to a borrowing base test related to its accounts receivable. As
of March 31, 2000, the Company had no balance outstanding under its line of
credit. Borrowings under the line of credit bear interest at the bank's
reference rate (9% per annum as of March 31, 2000) plus 0.5%. Additionally, the
Company had $725,000 in outstanding letters of credit, leaving a balance of up
to $5.3 million available under the credit facility as of March 31, 2000. The
credit facilities are secured by its assets.
Under the Master Loan Agreement, the Company has two term loans outstanding,
which expire in March and November 2001. The term loans bear interest at the
bank's reference rate plus 0.5%. As of March 31, 2000, the Company had
borrowings of $889,000 outstanding against the term loans. As part of the
agreement, the Company is required to maintain various covenants. The covenants
pertain to the maintenance of financial ratios, liquidity levels and minimum
tangible net worth and prohibit the payment of dividends. At March 31, 2000, the
Company was in compliance with all covenants under the Master Loan Agreement.
F-11
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------
2000 1999 1998
----- ------- ------
(in thousands)
<S> <C> <C> <C>
Current:
Federal................................................ $(468) $(3,363) $1,892
State.................................................. (80) (348) 224
----- ------- ------
Total current....................................... (548) (3,711) 2,116
Deferred:
Federal................................................ $ 468 922 266
State.................................................. 80 348 40
----- ------- ------
Total deferred...................................... 548 1,270 306
----- ------- ------
Provision (benefit) for income taxes..................... $ -- $(2,441) $2,422
===== ======= ======
</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>
YEARS ENDED MARCH 31,
----------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------ -------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
At U.S. statutory rate.................... $(2,320) (34.0)% $(3,393) (34.0)% $2,180 34.0%
State income tax, net of federal tax
benefit................................. -- -- -- -- 174 2.7
Change in valuation allowance............. 2,407 35.2 1,162 11.7 -- --
Research and development tax credits...... -- -- (172) (1.7) -- --
Other..................................... (87) (1.2) (38) (0.5) 68 1.1
------- ----- ------- ----- ------ ----
$ -- 0.0% $(2,441) (24.5)% $2,422 37.8%
======= ===== ======= ===== ====== ====
</TABLE>
F-12
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
------------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Tax depreciation in excess of financial statement
depreciation.............................................. $ -- $ 132
------- -------
Total deferred tax liabilities......................... -- 132
DEFERRED TAX ASSETS:
Inventory valuation......................................... 1,978 1,916
Accruals and reserves not deductible for tax purposes..... 786 694
Net operating loss carryforwards.......................... 2,657 208
Tax credit carryforwards.................................. 1,781 828
Other..................................................... 123 122
------- -------
Deferred tax assets......................................... 7,325 3,768
Valuation allowance......................................... (7,325) (3,088)
------- -------
Total deferred tax assets.............................. -- 680
------- -------
Net deferred tax assets................................ $ -- $ 548
======= =======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, the timing
and amount of which are uncertain. Accordingly, deferred tax assets have been
fully offset by a valuation allowance to reflect these uncertainties. The
valuation allowance for deferred tax assets increased by approximately $4.2
million during the year ended March 31, 2000.
As of March 31, 2000 the Company had federal and state net operating loss
carryforwards of approximately $6.7 million and $7.0 million, respectively. The
Company also had federal and state tax credit carryforwards of approximately
$795,000 and $985,000, respectively. If not utilized, the carryforwards will
expire beginning in 2004.
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
$128,000 in fiscal 2000, $159,000 in fiscal 1999, and $73,000 in fiscal 1998.
Administrative expenses relating to the Plan are insignificant.
NOTE 11. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
shareholders, to issue up to 2,000,000 shares of preferred stock in one or more
series and to fix the designations, powers, preferences, privileges, and
relative participation, optional, or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the common stock.
F-13
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Under the Company's Employee Qualified Stock Purchase Plan (the ESPP), 500,000
shares of common stock have been reserved for issuance to employees of the
Company. During the fiscal year ended March 31, 2000, 1999, and 1998, 131,895,
122,307, and 47,450 shares of common stock, respectively, were purchased under
the ESPP. The Company has reserved 153,783 shares for future issuance under this
Plan.
STOCK OPTION PLAN
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 to certain employees and consultants
as designated by the Board of Directors. 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 Plan by an additional 250,000 shares. The
shareholders also approved an amendment to the 1994 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. The
Company has reserved 250,086 shares for future issuance under the 1994 Plan.
Activity under the 1994 Plan is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED
SHARES --------------------------- AVERAGE
AVAILABLE NUMBER OF PRICE PER EXERCISE
FOR GRANT SHARES SHARE PRICE
---------- --------- --------------- --------
<S> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1997............................... 119,680 769,124 $ 1.50 - $14.00 $ 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 13.25
Options exercised..................................... -- (32,005) 1.50 - 13.88 4.19
Options canceled and expired.......................... 36,522 (37,831) 1.50 - 13.88 11.72
---------- --------- --------------- ------
BALANCE AT MARCH 31, 1998............................... 174,564 851,288 $ 3.00 - $16.00 $ 8.71
Additional shares authorized for 1994 Plan............ 215,260 -- -- --
Options granted....................................... (1,119,000) 1,119,000 3.88 - 10.00 6.51
Options exercised..................................... -- (83,508) 3.00 - 10.00 5.01
Options canceled and expired.......................... 867,217 (867,217) 3.00 - 16.00 10.46
---------- --------- --------------- ------
BALANCE AT MARCH 31, 1999............................... 138,041 1,019,563 $ 3.00 - $ 6.94 $ 5.10
Additional shares authorized for 1994 Plan............ 471,440 -- -- --
Options granted....................................... (453,500) 453,500 4.00 - 61.75 7.95
Options exercised..................................... -- (300,638) 3.00 - 6.94 4.90
Options canceled and expired.......................... 94,105 (94,105) 3.00 - 6.63 5.56
---------- --------- --------------- ------
BALANCE AT MARCH 31, 2000............................... 250,086 1,078,320 $ 3.00 - $61.75 $ 6.31
</TABLE>
F-14
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At March 31, 1999 and 1998, outstanding options covering 531,235 and 395,764
shares were exercisable.
The following table summarizes information about stock options outstanding and
exercisable at March 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.00 - $ 5.44 359,128 7.43 years $ 3.76 172,041 $3.30
$5.63 - $ 5.63 485,278 7.11 years $ 5.63 285,063 $5.63
$5.88 - $61.75 233,914 9.53 years $11.66 22,116 $6.24
--------- -------
1,078,320 7.74 years $ 6.31 479,220 $4.82
========= =======
</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
firm market value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS
123), requires use of option valuation models that were not developed for use in
valuing stock options. Under APB 25, if the exercise price of the Company's
stock options is equal to the market price of the underlying stock on the date
of grant, no expense is recognized.
Pro forma information regarding net income and net income per share is required
by SFAS 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:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate................................. 5.6% 5.4% 5.9%
Dividend yield.......................................... 0.0% 0.0% 0.0%
Volatility.............................................. 83.1% 77.9% 72.9%
Expected life of options................................ 5 years 5 years 5 years
</TABLE>
The Company used the following weighted average assumptions for its ESPP:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate............................ 5.4% 5.4% 5.4%
Dividend yield..................................... 0.0% 0.0% 0.0%
Volatility......................................... 83.1% 77.9% 72.9%
Expected life of options........................... 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.
F-15
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and
ESPP awards is amortized to expense over the options vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- -------- ------
<S> <C> <C> <C>
Pro forma net income (loss)........................... $(8,567) $(10,075) $3,066
Pro forma basic net income (loss) per share........... $ (1.11) $ (1.39) $ 0.43
Pro forma diluted net income (loss) per share......... $ (1.11) $ (1.39) $ 0.41
</TABLE>
The weighted average grant date fair value of options granted during the fiscal
years ended March 31, 2000, 1999, and 1998 was $5.52, $2.63, and $7.96,
respectively. The weighted average grant date fair value of ESPP shares granted
during the fiscal years ended March 31, 2000, 1999, and 1998 was $2.20, $1.88,
and $4.61, respectively.
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 nonemployee members of the Board of Directors at an
exercise price equal to 100% of the fair market value of the common stock on the
date of grant. Such options have a maximum term of 10 years. New directors are
automatically granted options to purchase 6,000 shares of common stock at their
date of election or appointment to the Board. On the fifth anniversary of
serving on the Board, each director is automatically granted an additional 1,500
options to purchase shares of common stock. During the fiscal year ended March
31, 2000, 3,000 options to purchase shares of common stock were granted. At
March 31, 2000, options to purchase 27,000 shares of common stock were
outstanding of which 15,000 options were exercisable at weighted average
exercise prices of $7.93 and $7.50, respectively. The Company has 45,000 shares
reserved for future issuance under the Directors' Plan.
NONSTATUTORY STOCK OPTION PLAN
On March 23, 2000, the Board of Directors approved the 2000 Nonstatutory Stock
Option Plan under which 200,000 shares of common stock have been reserved for
issuance to employees and consultants. As of March 31, 2000, no shares have been
issued under this plan.
PURCHASE RIGHTS
The Board of Directors declared a dividend of one right for each share of common
stock (the Right) to be paid on April 8, 1999, to shareholders of record at such
date. Each Right represents the right to purchase one one-thousandth of a share
of preferred stock at an exercise price of $45.00 per Right. All common stock
issued after April 9, 1999 contains the Right.
F-16
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. BUSINESS SEGMENT DATA AND RELATED INFORMATION
For purposes of the disclosure required by Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information", the Company operates in one business segment, the sale of
GaAs-based products for the wireless communications market to semiconductor and
subsystems customers.
The chief operating decision-maker has been identified as the Chief Executive
Officer (CEO). Discrete financial information for each customer market segment,
other than revenues, is not provided to the CEO.
In fiscal 2000, one customer accounted for 15% of net sales and another
accounted for 11%. 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.
The following is a summary of operations by geographic region:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Net sales to customers:
United States....................................... $37,526 $32,684 $43,380
Europe.............................................. 4,814 4,309 6,848
Japan............................................... 2,462 2,401 2,154
Other............................................... 3,409 1,734 3,935
------- ------- -------
$48,211 $41,128 $56,317
======= ======= =======
Net property and equipment:
United States....................................... 7,013 6,500 8,042
Philippines......................................... 1,682 475 --
Other............................................... 706 226 --
------- ------- -------
$ 9,401 $ 7,201 $ 8,042
======= ======= =======
</TABLE>
Net sales to customers are based on the customers' billing location. Long-lived
assets are those assets used in each geographical area.
NOTE 13. CONTINGENCIES
The Company operates in the semiconductor industry and may from time to time
become party to litigation. Management is currently not aware of any potential
or pending litigation that could reasonably be expected to have a material
adverse affect on the Company.
NOTE 14. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------
2000 1999 1998
---- ---- ------
(in thousands)
<S> <C> <C> <C>
Cash paid for interest...................................... $235 $386 $ 59
Cash paid for income taxes.................................. -- 151 2,226
Capital lease obligations incurred to acquire equipment..... 525 218 333
</TABLE>
F-17
<PAGE> 61
- --------------------------------------------------------------------------------
[INSERT LOGO]
CELERITEK, INC.
2,000,000 SHARES
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
, 2000
CIBC WORLD MARKETS
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
NEEDHAM & COMPANY, INC.
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO DEALER,
SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS NOT
CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will pay all reasonable expenses incident to the registration of the
shares other than any commissions and discounts of underwriters, dealers or
agents. These expenses are set forth in the following table. All of the amounts
shown are estimates except the SEC registration fee, NASD filing fee and Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC registration fee........................................ $ 33,433
NASD filing fee............................................. 13,164
Nasdaq National Market listing fee.......................... 17,500
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 200,000
Printing fees and expenses.................................. 150,000
Miscellaneous expenses...................................... 85,903
--------
Total.................................................. $850,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation limit the liability of directors for
monetary damages to the maximum extent permitted by California law. This
limitation of liability has no effect on the availability of equitable remedies,
such as injunctive relief or rescission.
The Company's Bylaws provide that the Company will indemnify its directors and
officers and may indemnify its employees and agents (other than officers and
directors) against liabilities to the fullest extent permitted by California
law. The Company is also empowered under its Bylaws to enter into
indemnification agreements with its directors and officers and to purchase
insurance on behalf of any person whom it is required or permitted to indemnify.
The Company has entered into indemnification agreements with each of its current
directors and officers which provide for indemnification of, and advancement of
expenses to, such persons to the greatest extent permitted by California law,
including by reason of action or inaction occurring in the past and
circumstances in which indemnification and advancement of expenses are
discretionary under California law. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
underwriters of the Company, our directors and officers, and by the Company of
the underwriters, for certain liabilities arising under the Securities Act and
affords certain rights of contribution with respect thereto.
II-1
<PAGE> 63
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
4.1(1) Restated Articles of Incorporation of Registrant
4.2(1) Bylaws of Registrant, as amended to date.
4.3(1) Form of Registrant's Stock Certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-3)
</TABLE>
- ---------------------------
(1) Incorporated by reference from the Company's Registration Statement of Form
S-1 (Commission File No. 33-98854), which became effective on December 19,
1995.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 64
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Santa Clara, State of California, on May 17, 2000.
CELERITEK, INC.
By: /s/ TAMER HUSSEINI
------------------------------------
Tamer Husseini
Chairman, President and Chief
Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Celeritek, Inc. hereby constitute
Tamer Husseini and Margaret E. Smith, and each of them individually, our true
and lawful attorney-in-fact, with full power of substitution, to sign for us and
in our names in the capacities indicated below the Registration Statement and
any and all amendments to said Registration Statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, and, in
connection with any registration of additional securities pursuant to Rule
462(b) under the Securities Act of 1933, as amended, to sign any abbreviated
registration statement and any and all amendments thereto, and to file the same,
with all exhibits thereto and other documents in connection therewith, in each
case, with the Securities and Exchange Commission, and generally to do all such
things in our name and behalf in our capacities as officers and directors to
enable Celeritek, Inc. to comply with the provisions of the Securities Act of
1933, as amended, and all requirements of the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be signed
by our said attorney to said Registration Statement and any and all amendments
thereto.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement and Power of Attorney has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ TAMER HUSSEINI Chairman, President and Chief May 17, 2000
- ----------------------------------------------------- Executive Officer
Tamer Husseini (Principal Executive Officer)
/s/ MARGARET E. SMITH Chief Financial Officer and May 17, 2000
- ----------------------------------------------------- Assistant Secretary
Margaret E. Smith (Principal Financial and
Accounting Officer)
/s/ ROBERT J. GALLAGHER Director May 17, 2000
- -----------------------------------------------------
Robert J. Gallagher
/s/ THOMAS W. HUBBS Director May 17, 2000
- -----------------------------------------------------
Thomas W. Hubbs
/s/ WILLIAM D. RASDAL Director May 17, 2000
- -----------------------------------------------------
William D. Rasdal
/s/ CHARLES P. WAITE Director May 17, 2000
- -----------------------------------------------------
Charles P. Waite
</TABLE>
II-3
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
4.1(1) Restated Articles of Incorporation of Registrant
4.2(1) Bylaws of Registrant, as amended to date.
4.3(1) Form of Registrant's Stock Certificate
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-3)
</TABLE>
- ---------------------------
(1) Incorporated by reference from the Company's Registration Statement of Form
S-1 (Commission File No. 33-98854), which became effective on December 19,
1995.
<PAGE> 1
EXHIBIT 1.1
2,000,000 Shares
CELERITEK, INC.
Common Stock
UNDERWRITING AGREEMENT
May __, 2000
CIBC World Markets Corp.
Prudential Securities Incorporated
Needham & Company, Inc.
c/o CIBC World Markets Corp.
One World Financial Center
New York, New York 10281
On behalf of the Several Underwriters named on Schedule I attached hereto.
Ladies and Gentlemen:
Celeritek, Inc., a California corporation (the "Company"), proposes,
subject to the terms and conditions contained herein, to sell to you and the
other underwriters named on Schedule I to this Agreement (the "Underwriters"),
for whom you are acting as Representatives (the "Representatives"), an aggregate
of 2,000,000 shares (the "Firm Shares") of the Company's Common Stock, no par
value (the "Common Stock"). The respective amounts of the Firm Shares to be
purchased by each of the several Underwriters are set forth opposite their names
on Schedule I hereto. In addition, the Company proposes to grant to the
Underwriters an option to purchase up to an additional 300,000 shares (the
"Option Shares") of Common Stock from it for the purpose of covering
over-allotments in connection with the sale of the Firm Shares. The Firm Shares
and the Option Shares are together called the "Shares."
1. Sale and Purchase of the Shares.
On the basis of the representations, warranties and agreements contained
in, and subject to the terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company, at a price of [$_____] per share (the "Initial Price"), the number of
Firm Shares set forth opposite the name of such Underwriter under the column
"Number of Firm Shares to be
-1-
<PAGE> 2
Purchased" on Schedule I to this Agreement, subject to adjustment in accordance
with Section 10 hereof.
(b) The Company grants to the several Underwriters an option to
purchase, severally and not jointly, all or any part of the Option Shares at the
Initial Price. The number of Option Shares to be purchased by each Underwriter
shall be the same percentage (adjusted by the Representatives to eliminate
fractions) of the total number of Option Shares to be purchased by the
Underwriters as such Underwriter is purchasing of the Firm Shares. Such option
may be exercised only to cover over-allotments in the sales of the Firm Shares
by the Underwriters and may be exercised in whole or in part at any time on or
before 12:00 noon, New York City time, on the business day before the Firm
Shares Closing Date (as defined below), and from time to time thereafter within
30 days after the date of this Agreement, in each case upon written, facsimile
or telegraphic notice, or verbal or telephonic notice confirmed by written,
facsimile or telegraphic notice, by the Representatives to the Company no later
than 12:00 noon, New York City time, on the business day before the Firm Shares
Closing Date or at least two business days before the Option Shares Closing Date
(as defined below), as the case may be, setting forth the number of Option
Shares to be purchased and the time and date (if other than the Firm Shares
Closing Date) of such purchase.
2. Delivery and Payment. Delivery by the Company of the Firm Shares to
the Representatives for the respective accounts of the Underwriters, and payment
of the purchase price by certified or official bank check or checks payable in
New York Clearing House (same day) funds drawn to the order of the Company
against delivery of the certificates therefor to the Representatives, shall take
place at the offices of CIBC World Markets Corp., One World Financial Center,
New York, New York 10281, at 10:00 a.m., New York City time, on the third
business day following the date of this Agreement, or at such time on such other
date, not later than 10 business days after the date of this Agreement, as shall
be agreed upon by the Company and the Representatives (such time and date of
delivery and payment are called the "Firm Shares Closing Date").
In the event the option with respect to the Option Shares is exercised in
whole or in part on one or more occasions, delivery by the Company of the Option
Shares to the Representatives for the respective accounts of the Underwriters
and payment of the purchase price thereof in immediately available funds by wire
transfer or by certified or official bank check or checks payable in New York
Clearing House (same day) funds to the Company shall take place at the offices
of CIBC World Markets Corp. specified above at the time and on the date (which
may be the same date as, but in no event shall be earlier than, the Firm Shares
Closing Date) specified in the notice referred to in Section 1(b) (such time and
date of delivery and payment are called the "Option Shares Closing Date"). The
Firm Shares Closing Date and the Option Shares Closing Date are called,
individually, a "Closing Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such names and
shall be in such denominations as the Representatives shall request at least two
full business days before the Firm Shares Closing Date or, in the case of Option
Shares, on the day of notice of exercise of the option as described in Section
l(b) and shall be made available to the Representatives for checking
-2-
<PAGE> 3
and packaging, at such place as is designated by the Representatives, on the
full business day before the Firm Shares Closing Date (or the Option Shares
Closing Date in the case of the Option Shares).
3. Registration Statement and Prospectus; Public Offering. The Company
has prepared and filed in conformity with the requirements of the Securities Act
of 1933, as amended (the "Securities Act"), and the published rules and
regulations thereunder (the "Rules") adopted by the Securities and Exchange
Commission (the "Commission") a Registration Statement (as hereinafter defined)
on Form S-3 (No. 333-_____), including a preliminary prospectus relating to the
Shares, and such amendments thereof as may have been required to the date of
this Agreement. Copies of such Registration Statement (including all amendments
thereof) and of the related Preliminary Prospectus (as hereinafter defined) have
heretofore been delivered by the Company to you. The term "Preliminary
Prospectus" means any preliminary prospectus (as described in Rule 430 of the
Rules) included at any time as a part of the Registration Statement or filed
with the Commission by the Company with the consent of the Representatives
pursuant to Rule 424(a) of the Rules. The term "Registration Statement" as used
in this Agreement means the initial registration statement (including all
exhibits, financial schedules and information deemed to be a part of the
Registration Statement through incorporation by reference or otherwise), as
amended at the time and on the date it becomes effective (the "Effective Date")
including the information (if any) deemed to be part thereof at the time of
effectiveness pursuant to Rule 430A of the Rules. If the Company has filed an
abbreviated registration statement to register additional Shares pursuant to
Rule 462(b) under the Rules (the "462(b) Registration Statement") then any
reference herein to the Registration Statement shall also be deemed to include
such 462(b) Registration Statement. The term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement at the time of effectiveness or, if Rule 430A of the Rules is relied
on, the term Prospectus shall also include the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules.
The Company understands that the Underwriters propose to make a public
offering of the Shares, as set forth in and pursuant to the Prospectus, as soon
after the Effective Date and the date of this Agreement as the Representatives
deem advisable. The Company hereby confirms that the Underwriters and dealers
have been authorized to distribute or cause to be distributed each Preliminary
Prospectus and are authorized to distribute the Prospectus (as from time to time
amended or supplemented if the Company furnishes amendments or supplements
thereto to the Underwriters).
4. Representations and Warranties of the Company. The Company hereby
represents and warrants to each Underwriter as follows:
(a) On the Effective Date, the Registration Statement complied, and
on the date of the Prospectus, the date any post-effective amendment to the
Registration Statement becomes effective, the date any supplement or amendment
to the Prospectus is filed with the Commission and each Closing Date, the
Registration Statement and the Prospectus (and any amendment thereof or
supplement thereto) will comply, in all material respects, with the applicable
provisions of the Securities Act and the Rules and the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and
-3-
<PAGE> 4
regulations of the Commission thereunder. The Registration Statement did not, as
of the Effective Date, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein not misleading; and on the Effective Date and the
other dates referred to above neither the Registration Statement nor the
Prospectus, nor any amendment thereof or supplement thereto, will contain any
untrue statement of a material fact or will omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. When any related preliminary prospectus was first filed
with the Commission (whether filed as part of the Registration Statement or any
amendment thereto or pursuant to Rule 424(a) of the Rules) and when any
amendment thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus as amended or supplemented complied in all material
respects with the applicable provisions of the Securities Act and the Rules and
did not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. Notwithstanding the foregoing, none of the
representations and warranties in this paragraph 4(a) shall apply to statements
in, or omissions from, the Registration Statement or the Prospectus made in
reliance upon, and in conformity with, information herein or otherwise furnished
in writing by the Representatives on behalf of the several Underwriters for use
in the Registration Statement or the Prospectus. With respect to the preceding
sentence, the Company acknowledges that the only information furnished in
writing by the Representatives on behalf of the several Underwriters for use in
the Registration Statement or the Prospectus is the paragraph with respect to
stabilization on the inside front cover page of the Prospectus and the
statements contained under the caption "Underwriting" in the Prospectus.
(b) The Registration Statement is effective under the Securities Act
and no stop order preventing or suspending the effectiveness of the Registration
Statement or suspending or preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been instituted or are threatened under
the Securities Act. Any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) of the Rules has been or will be made in the
manner and within the time period required by such Rule 424(b).
(c) The documents incorporated by reference in the Registration
Statement and the Prospectus, at the time they were filed with the Commission,
complied in all material respects with the requirements of the Exchange Act and,
when read together and with the other information in the Registration Statement
and the Prospectus, do not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(d) The financial statements of the Company (including all notes and
schedules thereto) included or incorporated by reference in the Registration
Statement and Prospectus present fairly the financial position, the results of
operations, the statements of cash flows and the statements of shareholders'
equity and the other
-4-
<PAGE> 5
information purported to be shown therein of the Company at the respective dates
and for the respective periods to which they apply; and such financial
statements and related schedules and notes have been prepared in conformity with
generally accepted accounting principles, consistently applied throughout the
periods involved, and all adjustments necessary for a fair presentation of the
results for such periods have been made. The summary and selected financial data
included in the Prospectus present fairly the information shown therein as at
the respective dates and for the respective periods specified and the summary
and selected financial data have been presented on a basis consistent with the
consolidated financial statements so set forth in the Prospectus and other
financial information.
(e) Ernst & Young LLP, whose reports are filed with the Commission as
a part of the Registration Statement, are and, during the periods covered by
their reports, were independent public accountants as required by the Securities
Act and the Rules.
(f) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of California. Except for the
Subsidiary (as that term is hereinafter defined), there is no other corporation
or other entity (whether foreign or domestic) controlled directly or indirectly
by the Company. The Company's sole subsidiary, Celeritek UK Limited (the
"Subsidiary"), a company formed under The Companies (Northern Ireland) Order
1986 to 1990, is duly organized, validly existing, and in good standing under
the laws of the United Kingdom. The Company and the Subsidiary are duly
qualified to do business and are in good standing as a foreign corporation in
each jurisdiction in which the nature of the business conducted by them or
location of the assets or properties owned, leased or licensed by them requires
such qualification, except for such jurisdictions where the failure to so
qualify would not have a material adverse effect on the assets or properties,
business, results of operations or financial condition of the Company (a
"Material Adverse Effect"). The Company and the Subsidiary have all requisite
corporate power and authority, and all necessary authorizations, approvals,
consents, orders, licenses, certificates and permits of and from all
governmental or regulatory bodies or any other person or entity (collectively,
the "Permits"), to own, lease and license their assets and properties and
conduct their business, all of which are valid and in full force and effect, as
described in the Registration Statement and the Prospectus, except where the
lack of such Permits, individually or in the aggregate, would not have a
Material Adverse Effect. The Company and the Subsidiary have fulfilled and
performed in all material respects all of their material obligations with
respect to such Permits and no event has occurred that allows, or after notice
or lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the Company or the Subsidiary
thereunder. Except as may be required under the Securities Act and state and
foreign Blue Sky laws, no other Permits are required to enter into, deliver and
perform this Agreement and to issue and sell the Shares.
(g) The Company and the Subsidiary own or possess adequate and
enforceable rights to use all trademarks, trademark applications, trade names,
service marks, copyrights, copyright applications, licenses, know-how and other
similar rights
-5-
<PAGE> 6
and proprietary knowledge (collectively, "Intangibles") described in the
Prospectus as being owned by them necessary for the conduct of their business.
Neither the Company nor the Subsidiary has received any notice of, or is aware
of, any infringement of or conflict with asserted rights of others with respect
to any Intangibles.
(h) The Company and the Subsidiary have good and marketable title in
fee simple to all items of real property and good and marketable title to all
personal property described in the Prospectuses as being owned by them. Any real
property and buildings described in the Prospectuses as being held under lease
by the Company and the Subsidiary is held by them under valid, existing and
enforceable leases, free and clear of all liens, encumbrances, claims, security
interests and defects, except such as are described in the Registration
Statement and the Prospectus or would not have a Material Adverse Effect.
(i) There is no litigation or governmental proceedings to which the
Company or the Subsidiary are subject or which is pending or, to the knowledge
of the Company, threatened, against the Company or the Subsidiary, which,
individually or in the aggregate, might have a Material Adverse Effect, affect
the consummation of this Agreement or which is required to be disclosed in the
Registration Statement and the Prospectus that is not so disclosed.
(j) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as described
therein:
(i) there has not been any material adverse change with regard
to the assets or properties, business, results of operations or financial
condition of the Company;
(ii) neither the Company nor the Subsidiary has sustained any
loss or interference with its assets, businesses or properties (whether owned or
leased) from fire, explosion, earthquake, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or any court or legislative
or other governmental action, order or decree which would have a Material
Adverse Effect; and
(iii) since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, except as reflected therein, neither
the Company nor the Subsidiary has
(A) issued any securities or incurred any liability or
obligation, direct or contingent, for borrowed money, except such liabilities or
obligations incurred in the ordinary course of business,
(B) entered into any transaction not in the ordinary course
of business or
-6-
<PAGE> 7
(C) declared or paid any dividend or made any distribution
on any shares of its stock or redeemed, purchased or otherwise acquired or
agreed to redeem, purchase or otherwise acquire any shares of its stock.
(k) There is no document, contract or other agreement of a character
required to be described in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which is not described or
filed as required by the Securities Act or Rules. Each description of a
contract, document or other agreement in the Registration Statement and the
Prospectus accurately reflects in all respects the terms of the underlying
document, contract or agreement. Each agreement described in the Registration
Statement and Prospectus or listed in the Exhibits to the Registration Statement
or incorporated by reference is in full force and effect and is valid and
enforceable by and against the Company or the Subsidiary, as the case may be, in
accordance with its terms. Neither the Company nor the Subsidiary, if the
Subsidiary is a party, nor to the Company's knowledge, any other party is in
default in the observance or performance of any term or obligation to be
performed by it under any such agreement, and no event has occurred which with
notice or lapse of time or both would constitute such a default, in any such
case which default or event, individually or in the aggregate, would have a
Material Adverse Effect. No default exists, and no event has occurred which with
notice or lapse of time or both would constitute a default, in the due
performance and observance of any term, covenant or condition, by the Company or
the Subsidiary, if the Subsidiary is a party thereto, of any other agreement or
instrument to which the Company or the Subsidiary are a party or by which the
Company, the Subsidiary or their properties or business may be bound or affected
which default or event, individually or in the aggregate, would have a Material
Adverse Effect.
(l) Neither the Company nor the Subsidiary is in violation of any
term or provision of its charter or by-laws or of any franchise, license,
permit, judgment, decree, order, statute, rule or regulation, where the
consequences of such violation, individually or in the aggregate, would have a
Material Adverse Effect.
(m) Neither the execution, delivery and performance of this Agreement
by the Company nor the consummation of any of the transactions contemplated
hereby (including, without limitation, the issuance and sale by the Company of
the Shares) will give rise to a right to terminate or accelerate the due date of
any payment due under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with notice or lapse of
time or both would constitute a default) under, or require any consent or waiver
under, or result in the execution or imposition of any lien, charge or
encumbrance upon any properties or assets of the Company or the Subsidiary
pursuant to the terms of, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or the Subsidiary are a party or by
which it either the Company or the Subsidiary or any of their properties or
businesses are bound, or any franchise, license, permit, judgment, decree,
order, statute, rule or regulation applicable to the Company or the Subsidiary
or violate any provision of the charter or by-laws of the Company or the
Subsidiary, except for such consents or waivers which have already been obtained
and are in full force and effect.
-7-
<PAGE> 8
(n) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus. The certificates
evidencing the Shares are in due and proper legal form and have been duly
authorized for issuance by the Company. All of the issued and outstanding shares
of Common Stock have been duly and validly issued and are fully paid and
nonassessable. There are no statutory preemptive or other similar rights to
subscribe for or to purchase or acquire any shares of Common Stock of the
Company or the Subsidiary or any such rights pursuant to its Articles of
Incorporation or by-laws or any agreement or instrument to or by which the
Company or the Subsidiary is a party or bound. The Shares, when issued and sold
pursuant to this Agreement, will be duly and validly issued, fully paid and
nonassessable and none of them will be issued in violation of any preemptive or
other similar right. Except as disclosed in the Registration Statement and the
Prospectus, there is no outstanding option, warrant or other right calling for
the issuance of, and there is no commitment, plan or arrangement to issue, any
share of stock of the Company or the Subsidiary or any security convertible
into, or exercisable or exchangeable for, such stock. The Common Stock and the
Shares conform in all material respects to all statements in relation thereto
contained in the Registration Statement and the Prospectus. All outstanding
shares of capital stock of the Subsidiary have been duly authorized and validly
issued, and are fully paid and nonassessable and are owned directly by the
Company free and clear of any security interests, liens, encumbrances, equities
or claims, other than those described in the Prospectus.
(o) No holder of any security of the Company has the right to have
any security owned by such holder included in the Registration Statement or to
demand registration of any security owned by such holder during the period
ending 180 days after the date of this Agreement. Each director and executive
officer of the Company has delivered to the Representatives his or her
enforceable written lock-up agreement in the form attached to this Agreement
("Lock-Up Agreement").
(p) All necessary corporate action has been duly and validly taken by
the Company to authorize the execution, delivery and performance of this
Agreement and the issuance and sale of the Shares by the Company. This Agreement
has been duly and validly authorized, executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally and
by general equitable principles.
(q) Neither the Company nor the Subsidiary is involved in any labor
dispute nor, to the knowledge of the Company, is any such dispute threatened,
which dispute would have a Material Adverse Effect. The Company is not aware of
any existing or imminent labor disturbance by the employees of any of its
principal suppliers or contractors which would have a Material Adverse Effect.
The Company is not aware of any threatened or pending litigation between the
Company or the Subsidiary and any of its executive officers which, if adversely
determined, could have a Material Adverse
-8-
<PAGE> 9
Effect and has no reason to believe that such officers will not remain in the
employment of the Company.
(r) No transaction has occurred between or among the Company and any
of its officers or directors or five percent or greater shareholders or any
affiliate or affiliates of any such officer or director or five percent or
greater shareholders that is required to be described in and is not described in
the Registration Statement and the Prospectus.
(s) The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of any of the Shares.
(t) The Company and the Subsidiary have filed all Federal, state,
local and foreign tax returns which are required to be filed through the date
hereof, or has received extensions thereof, and have paid all taxes shown on
such returns and all assessments received by them to the extent that the same
are material and have become due. There are no tax audits or investigations
pending, which if adversely determined would have a Material Adverse Effect; nor
are there any material proposed additional tax assessments against the Company
or the Subsidiary.
(u) The Shares have been duly authorized for quotation on the
National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market System, subject to official Notice of Issuance.
(v) The Company has complied with all of the requirements and filed
the required forms as specified in Florida Statutes Section 517.075.
(w) The books, records and accounts of the Company and the Subsidiary
accurately and fairly reflect, in reasonable detail, the transactions in, and
dispositions of, the assets of, and the results of operations of, the Company
and the Subsidiary. The Company and the Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurances that:
(i) transactions are executed in accordance with management's
general or specific authorizations;
(ii) transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with
management's general or specific authorization; and
-9-
<PAGE> 10
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(x) The Company and the Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are customary in the businesses in which they are engaged or propose
to engage after giving effect to the transactions described in the Prospectus;
all policies of insurance and fidelity or surety bonds insuring the Company or
the Subsidiary or the Company's or the Subsidiary's respective businesses,
assets, employees, officers and directors are in full force and effect; the
Company and the Subsidiary are in compliance with the terms of such policies and
instruments in all material respects; and neither the Company nor the Subsidiary
has reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect. Neither the Company nor the Subsidiary
has been denied any insurance coverage which it has sought or for which it has
applied.
(y) Each approval, consent, order, authorization, designation,
declaration or filing of, by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated required to be obtained or performed by the Company (except such
additional steps as may be required by the National Association of Securities
Dealers, Inc. (the "NASD") or may be necessary to qualify the Shares for public
offering by the Underwriters under the state securities or Blue Sky laws) has
been obtained or made and is in full force and effect.
(z) There are no affiliations with the NASD among the Company's
officers, directors or, to the best of the knowledge of the Company, any five
percent or greater shareholder of the Company, except as set forth in the
Registration Statement or otherwise disclosed in writing to the Representatives.
(aa) (i) The Company and the Subsidiary are in compliance in all
material respects with all rules, laws and regulations relating to the use,
treatment, storage and disposal of toxic substances and protection of health or
the environment ("Environmental Law") which are applicable to their business;
(ii) neither the Company nor the Subsidiary has received any notice from any
governmental authority or third party of an asserted claim under Environmental
Laws; (iii) the Company and the Subsidiary have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their business and is in compliance with all terms and conditions of any
such permit, license or approval; (iv) to the Company's knowledge, no facts
currently exist that will require the Company or the Subsidiary to make future
material capital expenditures to comply with Environmental Laws; and (v) no
property which is or has been owned, leased or occupied by the Company or the
Subsidiary has been designated as a Superfund site pursuant to the Comprehensive
Environmental Response, Compensation of Liability Act of 1980, as amended (42
U.S.C. Section 9601, et. seq.) or otherwise
-10-
<PAGE> 11
designated as a contaminated site under applicable state or local law. Neither
the Company nor the Subsidiary has been named as a "potentially responsible
party" under the CER, CLA 1980.
(bb) In the ordinary course of its business, the Company periodically
reviews the effect of Environmental Laws on the business, operations and
properties of the Company and the Subsidiary, in the course of which the Company
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws, or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, have a Material Adverse Effect.
(cc) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of proceeds thereof as described in the
Prospectus, will not be an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act").
(dd) The Company the Subsidiary or any other person associated with or
acting on behalf of the Company or the Subsidiary including, without limitation,
any director, officer, agent or employee of the Company or the Subsidiary have
not, directly or indirectly, while acting on behalf of the Company or the
Subsidiary:
(i) used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses relating to political activity;
(ii) made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political parties or campaigns
from corporate funds;
(iii) violated any provision of the Foreign Corrupt Practices Act
of 1977, as amended; or
(iv) made any other unlawful payment.
(ee) The Company has reviewed its operations and those of the
Subsidiary to evaluate the extent to which the business or operations of the
Company or the Subsidiary have been or will be affected by the Year 2000 Problem
(that is, any significant risk that computer hardware or software applications
used by the Company and the Subsidiary will not, in the case of dates or time
periods occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1, 2000); as a
result of such review,
(i) the Company has no reason to believe, and does not believe,
that
-11-
<PAGE> 12
(A) there are any issues related to the Year 2000 Problem
that are of a character required to be described or referred to in the
Registration Statement or Prospectus which have not been accurately described in
the Registration Statement or Prospectus; and
(B) the Year 2000 Problem has had or will have a Material
Adverse Effect, or has resulted or will result in any material loss or
interference with the business or operations of the Company and the Subsidiary,
taken as a whole;
(ii) the Company reasonably believes, after due inquiry, that
the suppliers, vendors, customers or other material third parties used or served
by the Company and the Subsidiary have addressed the Year 2000 Problem prior to
December 31, 1999, except to the extent that a failure to address the Year 2000
by a supplier, vendor, customer or material third party would not have a
Material Adverse Effect; and
(iii) the Company has not expended and does not anticipate
expending funds in the aggregate in excess of $_____ as a result of or related
to the evaluation and remediation of any Year 2000 Problems.
5. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters under this Agreement are several and not joint. The respective
obligations of the Underwriters to purchase the Shares are subject to each of
the following terms and conditions:
(a) Notification that the Registration Statement has become effective
shall have been received by the Representatives and the Prospectus shall have
been timely filed with the Commission in accordance with Section 6(a) of this
Agreement.
(b) No order preventing or suspending the use of any preliminary
prospectus or the Prospectus shall have been or shall be in effect and no order
suspending the effectiveness of the Registration Statement shall be in effect
and no proceedings for such purpose shall be pending before or threatened by the
Commission, and any requests for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the Commission
and the Representatives.
(c) The Representatives shall have received on each Closing Date a
certificate, addressed to the Representatives and dated such Closing Date, of
the chief executive officer and the chief financial officer of the Company to
the effect that
(i) the signers of such certificate have carefully examined the
Registration Statement, the Prospectus and this Agreement and that the
representations and warranties of the Company in this Agreement are true and
correct on and as of such Closing Date with the same effect as if made on such
Closing Date and the Company has performed all covenants and agreements and
-12-
<PAGE> 13
satisfied all conditions contained in this Agreement required to be performed or
satisfied by it at or prior to such Closing Date, and
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and to the best of their knowledge, no
proceedings for that purpose have been instituted or are pending under the
Securities Act.
(d) The Representatives shall have received, at the time this
Agreement is executed and on each Closing Date a signed letter from Ernst &
Young LLP addressed to the Representatives and dated, respectively, the date of
this Agreement and each such Closing Date, in form and substance reasonably
satisfactory to the Representatives, confirming that they are independent
accountants within the meaning of the Securities Act and the Rules, that the
response to Item 10 of the Registration Statement is correct insofar as it
relates to them and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included or incorporated by reference in the
Registration Statement and the Prospectus and reported on by them comply as to
form in all material respects with the applicable accounting requirements of the
Securities Act and the Rules;
(ii) on the basis of a reading of the amounts included in the
Registration Statement and the Prospectus under the headings "Summary Financial
Information" and "Selected Financial Data," carrying out certain procedures (but
not an examination in accordance with generally accepted auditing standards)
which would not necessarily reveal matters of significance with respect to the
comments set forth in such letter, a reading of the minutes of the meetings of
the shareholders and directors of the Company, and inquiries of certain
officials of the Company who have responsibility for financial and accounting
matters of the Company as to transactions and events subsequent to the date of
the latest audited financial statements, except as disclosed in the Registration
Statement and the Prospectus, nothing came to their attention which caused them
to believe that:
(A) the amounts in "Summary Financial Information," and
"Selected Financial Data" included in the Registration Statement and the
Prospectus do not agree with the corresponding amounts in the audited from which
such amounts were derived; or
(B) with respect to the Company, there were, at a specified
date not more than three business days prior to the date of the letter, any
increases in the current liabilities and long-term liabilities of the Company or
any decreases in net income or in working capital or the shareholders' equity in
the Company, as compared with the amounts shown on the Company's audited balance
sheet for the fiscal year ended ______ and the _____ months ended _____ included
in the Registration Statement;
-13-
<PAGE> 14
(iii) they have performed certain other procedures as may be
permitted under Generally Acceptable Auditing Standards as a result of which
they determined that certain information of an accounting, financial or
statistical nature (which is limited to accounting, financial or statistical
information derived from the general accounting records of the Company) set
forth in the Registration Statement and the Prospectus and reasonably specified
by the Representatives agrees with the accounting records of the Company; and
(iv) based upon the procedures set forth in clauses (ii)
and (iii) above and a reading of the amounts included in the Registration
Statement under the headings "Summary Financial and Other Data" and "Selected
Financial Data" included in the Registration Statement and Prospectus and a
reading of the financial statements from which certain of such data were
derived, nothing has come to their attention that gives them reason to believe
that the "Summary Financial and Other Data" and "Selected Financial Data"
included in the Registration Statement and Prospectus do not comply as to the
form in all material respects with the applicable accounting requirements of the
Securities Act and the Rules or that the information set forth therein is not
fairly stated in relation to the financial statements included in the
Registration Statement or Prospectus from which certain of such data were
derived are not in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements included in the Registration Statement and Prospectus.
References to the Registration Statement and the Prospectus in this paragraph
(d) are to such documents as amended and supplemented at the date of the letter.
(e) The Representatives shall have received on each Closing Date from
Wilson Sonsini Goodrich & Rosati, counsel for the Company, an opinion, addressed
to the Representatives and dated such Closing Date, and stating in effect that:
(i) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of California. The
Subsidiary has been duly organized and is validly existing as a company in good
standing under the laws of the United Kingdom. The Company and the Subsidiary
are duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its assets or properties
(owned, leased or licensed) or the nature of its businesses makes such
qualification necessary, except for such jurisdictions where the failure to so
qualify, individually or in the aggregate, would not have a Material Adverse
Effect.
-14-
<PAGE> 15
(ii) The Company and the Subsidiary have all requisite corporate
power and authority to own, lease and license their assets and properties and
conduct their business as now being conducted and as described in the
Registration Statement and the Prospectus and with respect to the Company to
enter into, deliver and perform this Agreement and to issue and sell the Shares
other than those required under the state and foreign Blue Sky laws.
(iii) The Company has authorized and issued capital stock as set
forth in the Registration Statement and the Prospectus under the caption
"Capitalization"; the certificates evidencing the Shares are in due and proper
legal form and have been duly authorized for issuance by the Company; all of the
outstanding shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid and nonassessable and none of them was
issued in violation of any preemptive or other similar right. The Shares when
issued and sold pursuant to this Agreement will be duly and validly issued,
outstanding, fully paid and nonassessable and none of them will have been issued
in violation of any preemptive or other similar right. To the best of such
counsel's knowledge, except as disclosed in the Registration Statement and the
Prospectus, there are no preemptive or other rights to subscribe for or to
purchase or any restriction upon the voting or transfer of any securities of the
Company pursuant to the Company's Articles of Incorporation or by-laws or other
governing documents or any agreements or other instruments to which the Company
is a party or by which it is bound. To the best of such counsel's knowledge,
except as disclosed in the Registration Statement and the Prospectus, there is
no outstanding option, warrant or other right calling for the issuance of, and
no commitment, plan or arrangement to issue, any share of stock of the Company
or any security convertible into, exercisable for, or exchangeable for stock of
the Company. The Common Stock and the Shares conform in all material respects to
the descriptions thereof incorporated by reference or contained in the
Registration Statement and the Prospectus. The issued and outstanding shares of
capital stock of the Subsidiary have been duly authorized and validly issued,
are fully paid and nonassessable and are owned by the Company, free and clear of
any perfected security interest or, to the knowledge of such counsel, any other
security interests, liens, encumbrances, equities or claims, other than those
contained in the Registration Statement and the Prospectus.
(iv) Each of the Lock-Up Agreements executed by the Company's
directors and officers has been duly and validly delivered by such persons and
constitutes the legal, valid and binding obligation of each such person
enforceable against each such person in accordance with its terms, except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles.
(v) All necessary corporate action has been duly and validly
taken by the Company to authorize the execution, delivery and performance of
this
-15-
<PAGE> 16
Agreement and the issuance and sale of the Shares. This Agreement has been duly
and validly authorized, executed and delivered by the Company.
(vi) Neither the execution, delivery and performance of this
Agreement by the Company nor the consummation of any of the transactions
contemplated hereby (including, without limitation, the issuance and sale by the
Company of the Shares) will give rise to a right to terminate or accelerate the
due date of any payment due under, or conflict with or result in the breach of
any term or provision of, or constitute a default (or any event which with
notice or lapse of time, or both, would constitute a default) under, or require
consent or waiver under, or result in the execution or imposition of any lien,
charge, claim, security interest or encumbrance upon any properties or assets of
the Company or the Subsidiary pursuant to the terms of any indenture, mortgage,
deed trust, note or other agreement or instrument of which such counsel is aware
and to which the Company or the Subsidiary is a party or by which it either the
Company or the Subsidiary or any of its properties or businesses is bound, or
any franchise, license, permit, judgment, decree, order, statute, rule or
regulation of which such counsel is aware or violate any provision of the
charter or by-laws of the Company or the Subsidiary.
(vii) To the best of such counsel's knowledge, no default exists,
and no event has occurred which with notice or lapse of time, or both, would
constitute a default, in the due performance and observance of any term,
covenant or condition by the Company of any indenture, mortgage, deed of trust,
note or any other agreement or instrument to which the Company is a party or by
which it or any of its assets or properties or businesses may be bound or
affected, where the consequences of such default, individually or in the
aggregate, would have a Material Adverse Effect.
(viii) To the best of such counsel's knowledge, the Company and
the Subsidiary are not in violation of any term or provision of its charter or
by-laws or any franchise, license, permit, judgment, decree, order, statute,
rule or regulation, where the consequences of such violation, individually or in
the aggregate, would have a Material Adverse Effect.
(ix) No consent, approval, authorization or order of any court
or governmental agency or regulatory body is required for the execution,
delivery or performance of this Agreement by the Company or the consummation of
the transactions contemplated hereby or thereby, except such as have been
obtained under the Securities Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the several Underwriters.
(x) To the best of such counsel's knowledge, there is no
litigation or governmental or other proceeding or investigation, before any
court or before or by any public body or board pending or threatened against, or
involving the
-16-
<PAGE> 17
assets, properties or businesses of, the Company which would have a Material
Adverse Effect.
(xi) The statements in the Prospectus under the captions
"Description of Capital Stock" and "Liquidity and Capital Resources," insofar as
such statements constitute a summary of documents referred to therein or matters
of law, are fair summaries in all material respects and accurately present the
information called for with respect to such documents and matters. Accurate
copies of all contracts and other documents required to be filed as exhibits to,
or described in, the Registration Statement have been so filed with the
Commission or are fairly described in the Registration Statement, as the case
may be.
(xii) The Registration Statement, all preliminary prospectuses
and the Prospectus and each amendment or supplement thereto (except for the
financial statements and schedules and other financial and statistical data
included therein, as to which such counsel expresses no opinion) comply as to
form in all material respects with the requirements of the Securities Act and
the Rules.
(xiii) The Registration Statement is effective under the
Securities Act, and no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are threatened, pending or contemplated. Any required filing
of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the
Securities Act has been made in the manner and within the time period required
by such Rule 424(b).
(xiv) The Shares have been approved for listing on the Nasdaq
National Market.
(xv) The capital stock of the Company conforms in all material
respects to the description thereof contained or incorporated by reference in
the Prospectus under the caption "Description of Capital Stock."
(xvi) The Company is not an "investment company" or an entity
controlled by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
To the extent deemed advisable by such counsel, they may rely as to matters
of fact on certificates of responsible officers of the Company and public
officials and on the opinions of other counsel satisfactory to the
Representatives as to matters which are governed by laws other than the laws of
the State of California and the Federal laws of the United States; provided that
such counsel shall state that in their opinion the Underwriters and they are
justified in relying on such other opinions. Copies of such certificates and
other opinions shall be furnished to the Representatives and counsel for the
Underwriters.
In addition, such counsel shall state that such counsel has participated in
conferences with officers and other representatives of the Company,
representatives of
-17-
<PAGE> 18
the Representatives and representatives of the independent certified public
accountants of the Company, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (except as specified
in the foregoing opinion), on the basis of the foregoing, no facts have come to
the attention of such counsel which lead such counsel to believe that the
Registration Statement at the time it became effective (except with respect to
the financial statements and notes and schedules thereto and other financial
data, as to which such counsel need express no belief) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus as amended or supplemented (except with respect to the
financial statements, notes and schedules thereto and other financial data, as
to which such counsel need make no statement) on the date thereof contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(f) All proceedings taken in connection with the sale of the Firm
Shares and the Option Shares as herein contemplated shall be reasonably
satisfactory in form and substance to the Representatives, and their counsel and
the Underwriters shall have received from Pillsbury Madison & Sutro LLP a
favorable opinion, addressed to the Representatives and dated such Closing Date,
with respect to the Shares, the Registration Statement and the Prospectus, and
such other related matters, as the Representatives may reasonably request, and
the Company shall have furnished to Pillsbury Madison & Sutro LLP such documents
as they may reasonably request for the purpose of enabling them to pass upon
such matters.
(g) The Representatives shall have received copies of the Lock-up
Agreements executed by each person described in Section 4(o).
(h) The Company shall have furnished or caused to be furnished to the
Representatives such further certificates or documents as the Representatives
shall have reasonably requested.
6. Covenants of the Company.
(a) The Company covenants and agrees as follows:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the time of execution of this
Agreement, and any amendments thereto, to become effective as promptly as
possible. The Company shall prepare the Prospectus in a form approved by the
Representatives and file such Prospectus pursuant to Rule 424(b) under the
Securities Act not later than the Commission's close of business on the second
business day following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the
Securities Act.
-18-
<PAGE> 19
(ii) The Company shall promptly advise the Representatives in
writing
(A) when any amendment to the Registration Statement shall
have become effective;
(B) of any request by the Commission for any amendment of
the Registration Statement or the Prospectus or for any additional information;
(C) of the prevention or suspension of the use of any
preliminary prospectus or the Prospectus or of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose; and
(D) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose.
The Company shall not file any amendment of the Registration Statement or
supplement to the Prospectus unless the Company has furnished the
Representatives a copy for its review prior to filing and shall not file any
such proposed amendment or supplement to which the Representatives reasonably
object. The Company shall use its best efforts to prevent the issuance of any
such stop order and, if issued, to obtain as soon as possible the withdrawal
thereof.
(iii) If, at any time when a prospectus relating to the Shares is
required to be delivered under the Securities Act and the Rules, any event
occurs as a result of which the Prospectus as then amended or supplemented would
include any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the circumstances
under which they were made not misleading, or if it shall be necessary to amend
or supplement the Prospectus to comply with the Securities Act or the Rules, the
Company promptly shall prepare and file with the Commission, subject to the
second sentence of paragraph (ii) of this Section 6(a), an amendment or
supplement which shall correct such statement or omission or an amendment which
shall effect such compliance.
(iv) The Company shall make generally available to its security
holders and to the Representatives as soon as practicable, but not later than 45
days after the end of the 12-month period beginning at the end of the fiscal
quarter of the Company during which the Effective Date occurs (or 90 days if
such 12-month period coincides with the Company's fiscal year), an earning
statement (which need not be audited) of the Company, covering such 12-month
period, which shall
-19-
<PAGE> 20
satisfy the provisions of Section 11(a) of the Securities Act or Rule 158 of the
Rules.
(v) The Company shall furnish to the Representatives and
counsel for the Underwriters, without charge, signed copies of the Registration
Statement (including all exhibits thereto and amendments thereof) and to each
other Underwriter a copy of the Registration Statement (without exhibits
thereto) and all amendments thereof and, so long as delivery of a prospectus by
an Underwriter or dealer may be required by the Securities Act or the Rules, as
many copies of any preliminary prospectus and the Prospectus and any amendments
thereof and supplements thereto as the Representatives may reasonably request.
(vi) The Company shall cooperate with the Representatives and
their counsel in endeavoring to qualify the Shares for offer and sale in
connection with the offering under the laws of such jurisdictions as the
Representatives may designate and shall maintain such qualifications in effect
so long as required for the distribution of the Shares; provided, however, that
the Company shall not be required in connection therewith, as a condition
thereof, to qualify as a foreign corporation or to execute a general consent to
service of process in any jurisdiction or subject itself to taxation as doing
business in any jurisdiction.
(vii) Without the prior written consent of CIBC World Markets
Corp., for a period of 90 days after the date of this Agreement, the Company and
each of its individual directors and executive officers shall not issue, sell or
register with the Commission (other than on Form S-8 or on any successor form),
or otherwise dispose of, directly or indirectly, any equity securities of the
Company (or any securities convertible into, exercisable for or exchangeable for
equity securities of the Company), except for the issuance of the Shares
pursuant to the Registration Statement and the issuance of shares pursuant to
the Company's existing stock option plan or bonus plan as described in the
Registration Statement and the Prospectus. In the event that during this period,
(A) any shares are issued pursuant to the Company's existing stock option plan
or bonus plan that are exercisable during such 90 day period or (B) any
registration is effected on Form S-8 or on any successor form relating to shares
that are exercisable during such 90 period, the Company shall obtain the written
agreement of such grantee or purchaser or holder of such registered securities
(assuming such grantee, purchaser or holder is likewise an executive officer or
director of the Company) that, for a period of 90 days after the date of this
Agreement, such person will not, without the prior written consent of CIBC World
Markets Corp., offer for sale, sell, distribute, grant any option for the sale
of, or otherwise dispose of, directly or indirectly, or exercise any
registration rights with respect to, any shares of Common Stock (or any
securities convertible into, exercisable for, or exchangeable for any shares of
Common Stock) owned by such person.
-20-
<PAGE> 21
(viii) On or before completion of this offering, the Company
shall make all filings required under applicable securities laws and by the
Nasdaq National Market (including any required registration under the Exchange
Act).
(ix) The Company shall file timely and accurate reports in
accordance with the provisions of Florida Statutes Section 517.075, or any
successor provision, and any regulation promulgated thereunder, if at any time
after the Effective Date, the Company or any of its affiliates commences
engaging in business with the government of Cuba or any person or affiliate
located in Cuba.
(x) The Company will apply the net proceeds from the offering
of the Shares in the manner set forth under "Use of Proceeds" in the Prospectus.
(b) The Company agrees to pay, or reimburse if paid by the
Representatives, whether or not the transactions contemplated hereby are
consummated or this Agreement is terminated, all costs and expenses incident to
the public offering of the Shares and the performance of the obligations of the
Company under this Agreement including those relating to:
(i) the preparation, printing, filing and distribution of the
Registration Statement including all exhibits thereto, each preliminary
prospectus, the Prospectus, all amendments and supplements to the Registration
Statement and the Prospectus, and the printing, filing and distribution of this
Agreement;
(ii) the preparation and delivery of certificates for the Shares
to the Underwriters;
(iii) the registration or qualification of the Shares for offer
and sale under the securities or Blue Sky laws of the various jurisdictions
referred to in Section 7(a)(vi), including the reasonable fees and disbursements
of counsel for the Underwriters in connection with such registration and
qualification and the preparation, printing, distribution and shipment of
preliminary and supplementary Blue Sky memoranda;
(iv) the furnishing (including costs of shipping and mailing) to
the Representatives and to the Underwriters of copies of each preliminary
prospectus, the Prospectus and all amendments or supplements to the Prospectus,
and of the several documents required by this Section to be so furnished, as may
be reasonably requested for use in connection with the offering and sale of the
Shares by the Underwriters or by dealers to whom Shares may be sold;
(v) the filing fees of the NASD in connection with its review
of the terms of the public offering and reasonable fees and disbursements of
counsel for the Underwriters in connection with such review;
(vi) inclusion of the Shares for quotation on the Nasdaq
National Market; and
-21-
<PAGE> 22
(vii) all transfer taxes, if any, with respect to the sale and
delivery of the Shares by the Company to the Underwriters. Subject to the
provisions of Section 10, the Underwriters agree to pay, whether or not the
transactions contemplated hereby are consummated or this Agreement is
terminated, all costs and expenses incident to the performance of the
obligations of the Underwriters under this Agreement not payable by the Company
pursuant to the preceding sentence, including, without limitation, the fees and
disbursements of counsel for the Underwriters.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
against any and all losses, claims, damages and liabilities, joint or several
(including any reasonable investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they, or any of them, may become
subject under the Securities Act, the Exchange Act or other Federal or state law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon
(i) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment thereof or supplement thereto, or
in any Blue Sky application or other information or other documents executed by
the Company filed in any state or other jurisdiction to qualify any or all of
the Shares under the securities laws thereof (any such application, document or
information being hereinafter referred to as a "Blue Sky Application") or arise
out of or are based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading,
(ii) in whole or in part upon any breach of the representations
and warranties set forth in Section 4 hereof, or
(iii) in whole or in part upon any failure of the Company to
perform any of its obligations hereunder or under law; provided, however, that
such indemnity shall not inure to the benefit of any Underwriter (or any person
controlling such Underwriter) on account of any losses, claims, damages or
liabilities arising from the sale of the Shares to any person by such
Underwriter if such untrue statement or omission or alleged untrue statement or
omission was made in such preliminary prospectus, the Registration Statement or
the Prospectus, or such amendment or supplement thereto, or in any Blue Sky
Application in reliance upon and in conformity with information furnished in
writing to the Company by the Representatives on behalf of any Underwriter
specifically for use therein.
-22-
<PAGE> 23
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, each director of the Company, and each officer of the Company who
signs the Registration Statement, to the same extent as the foregoing indemnity
from the Company to each Underwriter, but only insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which was made in any
preliminary prospectus, the Registration Statement or the Prospectus, or any
amendment thereof or supplement thereto, contained in the (i) concession and
reallowance figures appearing under the caption "Underwriting" and (ii) the
stabilization information contained under the caption "Underwriting" in the
Prospectus; provided, however, that the obligation of each Underwriter to
indemnify the Company (including any controlling person, director or officer
thereof) shall be limited to the net proceeds received by the Company from such
Underwriter.
(c) Any party that proposes to assert the right to be indemnified
under this Section will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section, notify each
such indemnifying party of the commencement of such action, suit or proceeding,
enclosing a copy of all papers served. No indemnification provided for in
Section 7(a) or 7(b) shall be available to any party who shall fail to give
notice as provided in this Section 7(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related and
was prejudiced by the failure to give such notice but the omission so to notify
such indemnifying party of any such action, suit or proceeding shall not relieve
it from any liability that it may have to any indemnified party for contribution
or otherwise than under this Section. In case any such action, suit or
proceeding shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate in, and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof and the approval by the indemnified
party of such counsel, the indemnifying party shall not be liable to such
indemnified party for any legal or other expenses, except as provided below and
except for the reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The indemnified party
shall have the right to employ its counsel in any such action, but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless (i) the employment of counsel by such indemnified party has been
authorized in writing by the indemnifying parties, (ii) the indemnified party
shall have been advised by counsel that there may be one or more legal defenses
available to it which are different from or in addition to those available to
the indemnifying party (in which case the indemnifying parties shall not have
the right to direct the defense of such action on behalf of the indemnified
party) or (iii) the indemnifying parties shall not have employed counsel to
assume the defense of such action within a reasonable time after notice of the
-23-
<PAGE> 24
commencement thereof, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying parties. An indemnifying party shall
not be liable for any settlement of any action, suit, proceeding or claim
effected without its written consent, which consent shall not be unreasonably
withheld or delayed.
8. Contribution. In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in Section 7(a) or
7(b) is due in accordance with its terms but for any reason is held to be
unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or 7(b), then each indemnifying party shall contribute to the
aggregate losses, claims, damages and liabilities (including any investigation,
legal and other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claims asserted,
but after deducting any contribution received by any person entitled hereunder
to contribution from any person who may be liable for contribution) to which the
indemnified party may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares or, if such allocation
is not permitted by applicable law or indemnification is not available as a
result of the indemnifying party not having received notice as provided in
Section 7 hereof, in such proportion as is appropriate to reflect not only the
relative benefits referred to above but also the relative fault of the Company
on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Underwriters shall be
deemed to be in the same proportion as (x) the total proceeds from the offering
(net of underwriting discounts but before deducting expenses) received by the
Company, as set forth in the table on the cover page of the Prospectus, bear to
(y) the underwriting discounts received by the Underwriters, as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company or
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact related to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 8
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above. Notwithstanding
the provisions of this Section 8, (i) in no case shall any Underwriter (except
as may be provided in the Agreement Among Underwriters) be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder; and (ii) the Company shall be liable
and responsible for any amount in excess of such underwriting discount;
provided, however, that no person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Exchange Act shall have the same rights to contribution
as such Underwriter, and each person, if any, who controls the Company within
the meaning of the Section 15 of the Securities Act or Section 20(a) of the
Exchange Act, each officer of the
-24-
<PAGE> 25
Company who shall have signed the Registration Statement and each director of
the Company shall have the same rights to contribution as the Company, subject
in each case to clauses (i) and (ii) in the immediately preceding sentence of
this Section 8. Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect of which a claim for contribution may be made against another party
or parties under this Section, notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
from whom contribution may be sought shall not relieve the party or parties from
whom contribution may be sought from any other obligation it or they may have
hereunder or otherwise than under this Section. No party shall be liable for
contribution with respect to any action, suit, proceeding or claim settled
without its written consent. The Underwriter's obligations to contribute
pursuant to this Section 8 are several in proportion to their respective
underwriting commitments and not joint.
9. Termination. This Agreement may be terminated with respect to the
Shares to be purchased on a Closing Date by the Representatives by notifying the
Company
(a) in the absolute discretion of the Representatives at or before
any Closing Date:
(i) if on or prior to such date, any domestic or international
event or act or occurrence has materially disrupted, or in the opinion of the
Representatives will in the future materially disrupt, the securities markets;
(ii) if there has occurred any new outbreak or material
escalation of hostilities or other calamity or crisis the effect of which on the
financial markets of the United States is such as to make it, in the judgment of
the Representatives, inadvisable to proceed with the offering;
(iii) if there shall be such a material adverse change in general
financial, political or economic conditions or the effect of international
conditions on the financial markets in the United States is such as to make it,
in the judgment of the Representatives, inadvisable or impracticable to market
the Shares;
(iv) if trading in the Shares has been suspended by the
Commission or trading generally on the New York Stock Exchange, Inc., on the
American Stock Exchange, Inc. or the Nasdaq National Market has been suspended
or limited, or minimum or maximum ranges for prices for securities shall have
been fixed, or maximum ranges for prices for securities have been required, by
said exchanges or by order of the Commission, the National Association of
Securities Dealers, Inc., or any other governmental or regulatory authority;
(v) if a banking moratorium has been declared by any state or
Federal authority;
(vi) if, in the judgment of the Representatives, there has
occurred a Material Adverse Effect, or
-25-
<PAGE> 26
(b) at or before any Closing Date, that any of the conditions
specified in Section 5 shall not have been fulfilled when and as required by
this Agreement.
If this Agreement is terminated pursuant to any of its provisions, the
Company shall not be under any liability to any Underwriter, and no Underwriter
shall be under any liability to the Company, except that (y) if this Agreement
is terminated by the Representatives or the Underwriters because of any failure,
refusal or inability on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company will reimburse the
Underwriters for all out-of-pocket expenses (including the reasonable fees and
disbursements of their counsel) incurred by them in connection with the proposed
purchase and sale of the Shares or in contemplation of performing their
obligations hereunder and (z) no Underwriter who shall have failed or refused to
purchase the Shares agreed to be purchased by it under this Agreement, without
some reason sufficient hereunder to justify cancellation or termination of its
obligations under this Agreement, shall be relieved of liability to the Company
or to the other Underwriters for damages occasioned by its failure or refusal.
10. Substitution of Underwriters. If one or more of the Underwriters shall
fail (other than for a reason sufficient to justify the cancellation or
termination of this Agreement under Section 9) to purchase on any Closing Date
the Shares agreed to be purchased on such Closing Date by such Underwriter or
Underwriters, the Representatives may find one or more substitute underwriters
to purchase such Shares or make such other arrangements as the Representatives
may deem advisable or one or more of the remaining Underwriters may agree to
purchase such Shares in such proportions as may be approved by the
Representatives, in each case upon the terms set forth in this Agreement. If no
such arrangements have been made by the close of business on the business day
following such Closing Date,
(a) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall not exceed ten percent of the Shares
that all the Underwriters are obligated to purchase on such Closing Date, then
each of the nondefaulting Underwriters shall be obligated to purchase such
Shares on the terms herein set forth in proportion to their respective
obligations hereunder; provided, that in no event shall the maximum number of
Shares that any Underwriter has agreed to purchase pursuant to Section 1 be
increased pursuant to this Section 10 by more than one-ninth of such number of
Shares without the written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the defaulting
Underwriters on such Closing Date shall exceed ten percent of the Shares that
all the Underwriters are obligated to purchase on such Closing Date, then the
Company shall be entitled to one additional business day within which it may,
but is not obligated to, find one or more substitute underwriters reasonably
satisfactory to the Representatives to purchase such Shares upon the terms set
forth in this Agreement.
In any such case, either the Representatives or the Company shall have the
right to postpone the applicable Closing Date for a period of not more than five
business days in order that necessary changes and arrangements (including any
necessary amendments or supplements to the Registration Statement or Prospectus)
may be effected by the Representatives and the Company.
-26-
<PAGE> 27
If the number of Shares to be purchased on such Closing Date by such defaulting
Underwriter or Underwriters shall exceed ten percent of the Shares that all the
Underwriters are obligated to purchase on such Closing Date, and none of the
nondefaulting Underwriters or the Company shall make arrangements pursuant to
this Section within the period stated for the purchase of the Shares that the
defaulting Underwriters agreed to purchase, this Agreement shall terminate with
respect to the Shares to be purchased on such Closing Date without liability on
the part of any nondefaulting Underwriter to the Company and without liability
on the part of the Company, except in both cases as provided in Sections 6(b),
7, 8 and 9. The provisions of this Section shall not in any way affect the
liability of any defaulting Underwriter to the Company or the nondefaulting
Underwriters arising out of such default. A substitute underwriter hereunder
shall become an Underwriter for all purposes of this Agreement.
11. Miscellaneous. The respective agreements, representations, warranties,
indemnities and other statements of the Company or its officers and of the
Underwriters set forth in or made pursuant to this Agreement shall remain in
full force and effect, regardless of any investigation made by or on behalf of
any Underwriter or the Company or any of the officers, directors or controlling
persons referred to in Sections 7 and 8 hereof, and shall survive delivery of
and payment for the Shares. The provisions of Sections 6(b), 7, 8 and 9 shall
survive the termination or cancellation of this Agreement.
This Agreement has been and is made for the benefit of the Underwriters,
the Company and their respective successors and assigns, and, to the extent
expressed herein, for the benefit of persons controlling any of the
Underwriters, or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing and mailed or
delivered or by telephone or telegraph if subsequently confirmed in writing, (a)
if to the Representatives, c/o CIBC World Markets Corp., One World Financial
Center, New York, New York 10281 Attention: , with a copy to Pillsbury Madison &
Sutro LLP, 50 Fremont Street, San Francisco, California 94105 Attention: Stanton
D. Wong, and (b) if to the Company, to its agent for service as such agent's
address appears on the cover page of the Registration Statement with a copy to
Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California
94304-1050 Attention: John T. Sheridan.
This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflict of laws.
This Agreement may be signed in any number of counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
Please confirm that the foregoing correctly sets forth the agreement
among us.
-27-
<PAGE> 28
Very truly yours,
Celeritek, Inc.
By
--------------------------------------
Title:
By
--------------------------------------
Title:
Confirmed:
CIBC WORLD MARKETS CORP.
- -----------------------------------
Acting severally on behalf of itself and as representative of the several
Underwriters named in Schedule I annexed hereto.
By CIBC WORLD MARKETS CORP.
By
--------------------------------------
Title:
-28-
<PAGE> 29
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Firm Shares to
Name of Underwriter Be Purchased
- ------------------- --------------
<S> <C>
CIBC World Markets Corp.
Prudential Securities Incorporated
Needham & Company, Inc.
--------------
Total
==============
</TABLE>
-29-
<PAGE> 1
EXHIBIT 5.1
[WILSON SONSINI LETTERHEAD]
May 17, 2000
Celeritek, Inc.
3236 Scott Boulevard
Santa Clara, CA 95054
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3, filed by
Celeritek Inc., a California corporation (the "Company"), with the Securities
and Exchange Commission in connection with the registration under the
Securities Act of 1933, as amended, of up to 2,300,000 shares of the Company's
Common Stock (including an over-allotment of up to 300,000 shares of the
Company's Common Stock granted to the underwriters) (the "Shares"). The Shares
are to be sold to the underwriters for resale to the public as described in the
Registration Statement and pursuant to the Underwriting Agreement filed as an
exhibit thereto. As legal counsel to the Company, we have examined the
proceedings proposed to be taken in connection with the sale and issuance of
the Shares.
Based upon the foregoing, we are of the opinion that the Shares, when
issued in the manner described in the Registration Statement, will be duly
authorized, validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI, P.C.
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference of our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
April 25, 2000, in the Registration Statement (Form S-3) and related Prospectus
of Celeritek, Inc. for the registration of 2,000,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
San Jose, California
May 17, 2000
