1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[ x ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ___________ to ___________ .
Commission file number 0-25560 .
CELERITEK, INC.
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(Exact name of registrant as specified in its charter)
California 77-0057484
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3236 Scott Blvd., Santa Clara, CA 95054
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(Address of principal executive offices) (Zip code)
(408) 986-5060
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [X] Yes [ ] No
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Common Stock, No Par Value: 11,688,862 shares as of July 28, 2000
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CELERITEK, INC.
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PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets: 1
June 30, 2000 and March 31, 2000
Condensed Consolidated Statements of Operations: 2
Three months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows: 3
Three months ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 6-20
Item 3: Quantitative and Qualitative Disclosures about Market Risk 20-21
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 22
SIGNATURES 23
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CELERITEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, March 31,
2000 2000
-------- ---------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 49,995 $ 8,707
Short-term investments 59,513 18,009
Accounts receivable, net 16,475 11,909
Inventories 17,157 14,355
Prepaid expenses, other current assets,
and deferred tax assets 1,272 1,182
-------- -------
Total current assets 144,412 54,162
Property and equipment, net 10,824 9,401
Other assets 92 92
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Total assets $155,328 $63,655
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LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,470 $ 6,221
Accrued payroll 1,990 2,514
Accrued liabilities 3,581 2,467
Current portion of long-term debt 945 667
Current obligations under capital leases 322 319
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Total current liabilities 14,308 12,188
Long-term debt, less current portion 1,672 222
Non-current obligations under capital leases 313 414
Shareholders' equity 139,035 50,831
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Total liabilities and shareholders' equity $155,328 $63,655
======== =======
Note: The balance sheet at March 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
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CELERITEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
June 30,
-----------------------
2000 1999
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Net sales $19,689 $ 10,188
Cost of goods sold 14,228 9,395
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Gross profit 5,461 793
Operating expenses:
Research and development 2,257 1,439
Selling, general and administrative 2,641 2,227
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Total operating expenses 4,898 3,666
Income (loss) from operations 563 (2,873)
Interest income and other, net 262 40
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Income (loss) before income tax 825 (2,833)
Provision for income taxes 124 0
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Net income (loss) $ 701 ($ 2,833)
======= ========
Basic earnings (loss) per share $ 0.07 ($ 0.38)
======= ========
Diluted earnings (loss) per share $ 0.07 ($ 0.38)
======= ========
Weighted average common shares outstanding 9,633 7,381
Weighted average common shares outstanding,
assuming dilution 10,527 7,381
See accompanying notes.
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CELERITEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(unaudited)
Three Months Ended
-------------------------
June 30, June 30,
2000 1999
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OPERATING ACTIVITIES
Net income (loss) $ 701 ($2,831)
Adjustment to reconcile net income (loss) to
net cash used in operating activities:
Depreciation, amortization and other 838 735
Changes in operating assets and liabilities (5,619) 2,957
-------- -------
Net cash used in operating activities (4,080) 861
INVESTING ACTIVITIES
Purchase of property and equipment (2,261) (123)
Decrease (increase) in other assets -- (2)
Purchases of short-term investments (52,095) --
Maturities of short-term investments 10,591 1,746
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Net cash used in investing activities (43,765) 1,621
FINANCING ACTIVITIES
Payments on long-term debt (167) (166)
Borrowings on long-term debt 1,895 --
Payments on obligations under capital leases (97) (36)
Proceeds from issuance of common stock 87,502 --
-------- -------
Net cash provided by financing activities 89,133 (202)
Increase (decrease) in cash and cash equivalents 41,288 2,280
Cash and cash equivalents at beginning of period 8,707 1,729
-------- -------
Cash and cash equivalents at end of period $ 49,995 $ 4,009
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $1 --
Interest 37 37
See accompanying notes.
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CELERITEK, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included.
The Company's reporting period consisted of a thirteen-week period
ending on the Sunday closest to the calendar month end. The first
quarters of fiscal 2001 and fiscal 2000 ended July 2, 2000 and June 27,
1999, respectively. For convenience, the accompanying financial
statements have been shown as ending on the last day of the calendar
month.
Operating results for the three months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2001. This financial information should be
read in conjunction with the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the
year ended March 31, 2000.
2. INVENTORIES
The components of inventory consist of the following:
June 30, March 31,
2000 2000
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(In Thousands)
Raw materials ....... $ 5,453 $ 3,193
Work-in-process ..... 11,704 11,162
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$17,157 $14,355
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3. EARNINGS PER SHARE
In accordance with the Statement of Financial Accounting Standards No.
128, "Earnings per Share," basic earnings (loss) per common share are
computed using the weighted average common shares outstanding during the
period. Diluted earnings per common share incorporates the incremental
shares issuable upon the assumed exercise of stock options when
dilutive.
The following table sets forth the computation of basic and diluted
earnings (loss) per share (in thousands, except per share data):
Three months ended
June 30,
----------------------
BASIC 2000 1999
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Net income (loss) .......................... $ 701 ($2,833)
======= =======
Weighted common shares outstanding ......... 9,633 7,381
======= =======
Basic earnings (loss) per common share ..... $ 0.07 ($ 0.38)
======= =======
DILUTED
Net income ................................. $ 701 ($2,833)
======= =======
Weighted common shares outstanding ......... 9,633 7,381
Dilutive effect of stock options ........... 894 --
------- -------
Weighted common shares outstanding,
assuming dilution ........................ 10,527 7,381
======= =======
Diluted earnings per common share .......... $ 0.07 ($ 0.38)
======= =======
4. COMPREHENSIVE INCOME
Comprehensive income was the same as net income for the periods
presented.
5. RECENT ACCOUNTING 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
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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.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of
the Accounting Principals Board, or APB, Opinion No. 25. This
Interpretation clarifies the application of APB Opinion 25 including:
- the definition of employee for purposes of applying APB
Opinion 25;
- the criteria for determining whether a plan qualifies as a
noncompensatory plan;
- the accounting consequence of various modifications to the
terms of a previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in
a business combination
In general, this Interpretation is effective July 1, 2000. We do not
expect the adoption of Interpretation No. 44 to have a material effect
on our financial position or results of operations.
7. SUBSEQUENT EVENTS
On July 19, 2000 we issued 300,000 shares of common stock through the
exercise of the over-allotment option granted to the underwriters in
connection with the follow-on public offering in June 2000 and received
net proceeds of approximately $13.2 million.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements
represent the Company's expectations or beliefs concerning future events and
include statements, among others, regarding our expected expenditures on
research and development and our beliefs concerning our liquidity and capital
resources. Actual results could differ materially from those projected in the
forward-looking statements as a result of a variety of factors, including those
set forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Risks, Trends, and Uncertainties," and elsewhere in
this report.
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RESULT OF OPERATIONS - FIRST QUARTER OF FISCAL 2000 COMPARED TO FIRST QUARTER OF
FISCAL 2001:
Total net sales increased 93% from $10.2 million for the first quarter
of fiscal 2000 to $19.7 million for the first quarter of fiscal 2001. Total net
sales to commercial customers increased 143% from $6.9 million for the first
quarter of fiscal 2000 to $16.8 million for the first quarter of fiscal 2001.
The increase in sales was the result of a higher volume of sales in GaAs-based
subsystems for point to point radios and GaAs RF power amplifiers for use in
mobile handsets. Total net sales to defense customers decreased 12% from $3.3
million in the first quarter of fiscal 2000 to $2.9 million for first quarter of
fiscal 2001, 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. See "Risks, Trends, and Uncertainties -
Potential Fluctuations in Quarterly Results."
Net sales of GaAs-based subsystems increased 131%, from $3.5 million in
fiscal 2000 to $8.1 million in fiscal 2001, primarily because of increased sales
of GaAs-based subsystems for point to point radios. GaAs semiconductor component
sales increased 156% from $3.4 million in fiscal 2000 to $8.7 million in fiscal
2001. 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 increased from 8% of net sales in the first quarter of
fiscal 2000 to 28% of net sales in the first quarter of fiscal 2001. The
increase in gross margin was primarily due to the increased sales level and the
related absorption of a larger portion of fixed costs due to volume increases in
fiscal 2001. See "Risks, Trends, and Uncertainties - Yields and the High Degree
of Fixed Costs in the Manufacturing Operation."
Research and development expenses increased 57% from $1.4 million, or
14% of net sales, in the first quarter of fiscal 2000 to $2.3 million, or 11% of
net sales, in the first quarter of fiscal 2001. The increase is due to increased
staffing and the opening of our Lincoln, England design center. We expect to
expend larger amounts on research and development than we have historically as
our Lincoln, England facility becomes fully operational and we continue to
expand our Belfast, Northern Ireland facility. See "Risks, Trends, and
Uncertainties - Dependence on Key Personnel."
Selling, general and administrative expenses increased from $2.2
million, or 22% of net sales, in the first quarter of fiscal 2000 to $2.6
million, or 13% of net sales, in the first quarter of fiscal 2001. The dollar
increase was primarily due to increased selling cost.
Interest income and other, net increased 555% from $40,000 in the first
quarter of fiscal 2000 to $262,000 in the first quarter of fiscal 2001. The
increase in interest income and other, net, was primarily due to the increased
cash, cash equivalents, and short-term investment balances from our follow-on
public offering.
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LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through cash flows from
operations and sales of equity securities. As of June 30, 2000, we had $50.0
million of cash and cash equivalents, $59.5 million of short-term investments
and $130.1 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. In June 2000, we issued 2.0 million shares of
common stock through a follow-on public offering and received net proceeds of
approximately $87.2 million.
On July 19, 2000 we issued 300,000 shares of common stock through the
exercise of the over-allotment option granted to the underwriters in connection
with the follow-on public offering in June 2000 and received net proceeds of
approximately $13.2 million.
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 June 30, 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
(9.5% per annum as of June 30, 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 June 30, 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 June 30, 2000, we had borrowings of
$722,000 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 should be sufficient to meet our liquidity
requirements through at least the next year.
RISKS, TRENDS, AND UNCERTAINTIES
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.
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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
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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 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
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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. 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
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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 and the first three months of fiscal 2001, sales to our top
ten customers accounted for approximately 61% and 75% of our net sales,
respectively. Motorola accounted for approximately 15% of our net sales during
fiscal 2000 and approximately 21% during the first three months of fiscal 2001.
P-COM accounted for approximately 11% of our net sales during fiscal 2000 and
approximately 12% during the first three months of fiscal 2001. 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
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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 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 June 30, 2000, our backlog was approximately
$81 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 June 30, 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 22% 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. Currently, we are experiencing longer lead times and higher prices
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for some components. 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.
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.
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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
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
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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
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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 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
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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 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.
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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.
During the first three months of fiscal 2001, sales from international
customers accounted for 41% of our net sales. In fiscal 2000, sales from
international customers accounted for 22% 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.
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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
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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK
INTEREST RATE 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.
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FOREIGN CURRENCY EXCHANGE RISK
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.
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Part II
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Number
------
27. Financials Statements included herein
B. No reports on Form 8-K were filed during the three months
ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Celeritek, Inc.
(Registrant)
Date: August 14, 2000 /s/ MARGARET E. SMITH
-------------------------------------
Margaret E. Smith, Vice President,
Chief Financial Officer and Assistant
Secretary
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EXHIBIT INDEX
Exhibit # Description
- --------- -----------
27.1 Financial Data Schedule