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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JUNE 30, 2001
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
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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: 12,029,344 SHARES AS OF JULY 31, 2001
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CELERITEK, INC.
PART I: FINANCIAL INFORMATION PAGE
----
Item 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets: 1
June 31, 2001 and March 31, 2001
Condensed Consolidated Statements of Operations: 2
Three months ended June 30, 2001 and 2000
Condensed Consolidated Statements of Cash Flows: 3
Three months ended June 30, 2001 and 2000
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
PART II: OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 21
SIGNATURES 22
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CELERITEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, March 31,
2001 2001
-------- --------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 7,639 $ 3,515
Short-term investments 92,393 103,998
Accounts receivable, net 13,032 16,495
Inventories 16,084 15,361
Prepaid expenses and other current assets 2,853 3,446
-------- --------
Total current assets 132,001 142,815
Property and equipment, net 24,370 23,998
Other assets 3,703 3,712
-------- --------
Total assets $160,074 $170,525
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,870 $ 13,413
Accrued payroll 1,823 2,679
Accrued liabilities 4,276 3,912
Current portion of long-term debt 1,325 1,380
Current obligations under capital leases 790 754
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Total current liabilities 17,084 22,138
Long-term debt, less current portion 3,378 3,686
Non-current obligations under capital leases 1,626 1,892
Shareholders' equity 137,986 142,809
-------- --------
Total liabilities and shareholders' equity $160,074 $170,525
======== ========
Note: The balance sheet at March 31, 2001 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,
-------------------------
2001 2000
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Net sales $ 14,012 $ 19,689
Cost of goods sold 15,223 14,228
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Gross profit (loss) (1,211) 5,461
Operating expenses:
Research and development 2,414 2,257
Selling, general and administrative 2,744 2,641
-------- --------
Total operating expenses 5,158 4,898
Income (loss) from operations (6,369) 563
Interest income and other, net 1,253 262
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Income (loss) before income tax (5,116) 825
Provision for income taxes 0 124
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Net income (loss) ($ 5,116) $ 701
======== ========
Basic earnings (loss) per share ($ 0.43) $ 0.07
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Diluted earnings (loss) per share ($ 0.43) $ 0.07
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Weighted average common shares outstanding 11,960 9,633
Weighted average common shares outstanding,
assuming dilution 11,960 10,527
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,
2001 2000
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OPERATING ACTIVITIES
Net income (loss) $ (5,116) $ 701
Adjustment to reconcile net income (loss) to
net cash used in operating activities:
Depreciation, amortization and other 1,310 838
Changes in operating assets and liabilities (1,715) (5,619)
-------- --------
Net cash used in operating activities (5,521) (4,080)
INVESTING ACTIVITIES
Purchase of property and equipment (1,664) (2,261)
Sale of property and equipment 4 --
Purchases of short-term investments (37,280) (52,095)
Maturities and sale of short-term investments 48,609 10,591
-------- --------
Net cash used in investing activities 9,669 (43,765)
FINANCING ACTIVITIES
Payments on long-term debt (362) (167)
Borrowings on long-term debt -- 1,895
Payments on obligations under capital leases (230) (97)
Proceeds from issuance of common stock 568 87,502
-------- --------
Net cash provided by financing activities (24) 89,133
Increase (decrease) in cash and cash equivalents 4,124 41,288
Cash and cash equivalents at beginning of period 3,515 8,707
-------- --------
Cash and cash equivalents at end of period $ 7,639 $ 49,995
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes -- $ 1
Interest $ 144 37
See accompanying notes.
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CELERITEK, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 2001
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 2002 and fiscal 2001 ended July 1, 2001 and July 2,
2000, 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, 2001 are not
necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 2002. 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, 2001.
2. INVENTORIES
The components of inventory consist of the following:
June 30, March 31,
2001 2001
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(In Thousands)
Raw materials ................ $ 5,846 $ 4,903
Work-in-process .............. 10,238 10,458
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$16,084 $15,361
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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 2001 2000
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Net income (loss) ........................... $(5,116) $ 701
======= =======
Weighted common shares outstanding .......... 11,960 9,633
======= =======
Basic earnings (loss) per common share ...... $ (0.43) $ 0.07
======= =======
DILUTED
-------
Net income (loss) ........................... $(5,116) $ 701
======= =======
Weighted common shares outstanding .......... 11,960 9,633
Dilutive effect of stock options ............ -- 894
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Weighted common shares outstanding,
assuming dilution ......................... 11,960 10,527
======= =======
Diluted earnings (loss) per common share .... $ (0.43) $ 0.07
======= =======
4. Comprehensive Income
Comprehensive income for the three month period ended June 30, 2001 was
a loss of $5,392,000 and was the same as net income for the three month
period ended June 30, 2000.
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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 the possibility that our loan
arrangements will be terminated and the ability to meet our liquidity
requirements. Actual results could differ materially from those projected in the
forward-looking statements as a result of a variety of factors discussed in the
section of this report entitled "Risks, Trends, and Uncertainties," and
elsewhere in this report.
RESULT OF OPERATIONS - FIRST QUARTER OF FISCAL 2001 COMPARED TO FIRST QUARTER OF
FISCAL 2002:
Total net sales decreased 29% from $19.7 million for the first quarter
of fiscal 2001 to $14.0 million for the first quarter of fiscal 2002. GaAs
semiconductor component sales decreased 7% from $8.7 million in the first
quarter of fiscal 2001 to $8.1 million in the first quarter of fiscal 2002. The
decrease in the semiconductor component sales was the result of a decrease in
sales of linear devices for wireless data infrastructure applications, partially
offset by an increase in the sales of GaAs RF power modules for use in mobile
handsets.
Net sales of GaAs-based subsystems decreased 74% from $8.1 million in
the first quarter of fiscal 2001 to $2.1 million in the first quarter of fiscal
2002, primarily because of the continuing weakness in the broadband wireless
infrastructure market. Total net sales to defense customers increased 31% from
$2.9 million in the first quarter of fiscal 2001 to $3.8 million for first
quarter of fiscal 2002, primarily as a result of increased government spending
in defense programs and declining competition in the defense industry.
In the fourth quarter of our prior fiscal year, many of our customers in
the broadband wireless market delayed and cancelled long-standing contracts in
response to declining market demand. The build out of wireless infrastructure is
capital intensive. As the capital markets rapidly softened in late 2000, a
number of the providers of broadband voice and data services were unable to
secure necessary capital and in some cases, filed for Chapter 11 bankruptcy
protection. Our customers, the equipment suppliers to these service providers,
responded by first delaying and then canceling orders associated with this
market. As a result of the cancellations and delays, we evaluated the impact on
our business and determined additional reserves and write-downs were required
for our accounts receivable, inventory and fixed assets. In the event we are
able to secure any cancellation charges, cost of goods sold for these revenues
will be zero because of the
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write-downs we have already taken in the fourth quarter of fiscal 2001. In the
first quarter of fiscal 2002 we have taken additional accounts receivable and
inventory reserves due to the continued weakness in the broadband wireless
infrastructure markets. In addition, we reduced our number of employees by about
30% during the first quarter of fiscal 2002 to adjust our employment level to
current business conditions.
Gross margin decreased from a positive 28% of net sales in the first
quarter of fiscal 2001 to a negative 9% of net sales in the first quarter of
fiscal 2002. The decrease in gross margin was primarily due to the decreased
sales of GaAs-based subsystems for point to point radios and satellite
transceivers and increased fixed expenses to support a previously higher level
of business. In addition, in the first quarter of fiscal 2002, we reduced the
number of employees by approximately 30%, primarily in our manufacturing areas,
which resulted in some termination expense.
Research and development expenses increased 4% from $2.3 million, or 11%
of net sales, in the first quarter of fiscal 2001 to $2.4 million, or 17% of net
sales, in the first quarter of fiscal 2002. We are maintaining our current level
of research and development spending and do not expect any significant decreases
because we believe developing future products is integral to our future growth.
Selling, general and administrative expenses increased 4% from $2.6
million, or 13% of net sales, in the first quarter of fiscal 2001 to $2.7
million, or 20% of net sales, in the first quarter of fiscal 2002. The increase
was primarily due to an increase in allowance for doubtful accounts.
Interest income and other, net increased from $262,000 in the first
quarter of fiscal 2001 to $1.3 million in the first quarter of fiscal 2002. The
increase in interest income and other, net, was primarily due to increased cash,
cash equivalents, and short-term investment balances from our follow-on public
offering in June 2001. We raised $100.3 million, including the over-allotment
option.
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, 2001, we had $7.6
million of cash and cash equivalents, $92.4 million of short-term investments
and $114.9 million of working capital. In June 2000, we issued 2.3 million
shares of common stock to institutional investors in an underwritten secondary
offering and received net proceeds of approximately $100.3 million.
As of June 30, 2001, we had $500,000 in outstanding letters of credit,
which are secured by certificates of deposits.
We have various equipment notes outstanding, which are secured by the
equipment. These notes have various attached covenants pertaining to the
maintenance of financial ratios, liquidity levels and minimum tangible net worth
and prohibit the payment of dividends. As of June 30, 2001, we were in default
of certain covenants for two lenders. Both lenders have granted us a written
waiver of the default and have agreed to modify the respective covenants so we
will be in compliance by next quarter. Accordingly, we have classified the notes
in accordance with their contractual maturities.
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We believe our current cash resources, combined with cash generated from
operations and borrowings available from our equipment financing sources should
be sufficient to meet our liquidity requirements through at least the next
fiscal 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.
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 the fourth quarter of
fiscal 2001, a number of our GaAs-based subsystems contracts were either
terminated or delayed and our net sales declined substantially from the prior
quarter. 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 that have been delayed. During the first
quarter of fiscal 2002, there were no significant cancellations but we cannot
assure you that we will not have additional cancellations. We cannot assure you
that we will be able to achieve or maintain quarterly profitability in the
future.
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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 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, 2001, sales to our top ten customers accounted for approximately
72% of our net sales. Motorola accounted for approximately 21% of our net sales,
and DMC Stratex Networks accounted for approximately 10% of our net sales during
fiscal 2001. For the first three months of fiscal 2002, sales to our top ten
customers accounted for approximately 81% of our net sales. Motorola accounted
for approximately 47% of our net sales, and DMC Stratex Networks accounted for
approximately 11% of our net sales for the first three months of fiscal 2002. 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. Motorola accounted for
approximately 41% of our backlog at June 30, 2001. In addition, the mix of our
major customers 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 the fourth quarter of fiscal 2001, our net sales were
adversely affected when a number of customers cancelled orders as a result of a
decline in demand for wireless communications equipment.
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 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. We committed to
significant expenditures in capital equipment and facilities in fiscal 2001
based on customer demand. The recent decline in market demand has resulted in
infrastructure costs in excess of
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current needs and has resulted in lower earnings. In the fourth quarter of
fiscal 2001, we wrote-down fixed assets in response to the decline in the
broadband wireless infrastructure market. If future demand does not increase or
if our net sales decline further, our results will continue to suffer. 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.
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, 2001, our backlog was approximately
$52 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. 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.
In the fourth quarter of our fiscal year, some of our customers in the
broadband wireless market delayed and cancelled long-standing contracts in
response to declining market demand. The build out of wireless infrastructure is
capital intensive. As the capital markets rapidly softened in late 2000, a
number of the providers of broadband voice and data services were unable to
secure necessary capital and in some cases, filed for Chapter 11 bankruptcy
protection. Our customers, the equipment suppliers to these service providers,
responded by first delaying and then canceling orders associated with this
market.
Of our current backlog, approximately 41% is attributable to orders
received from Motorola. 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.
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:
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- defects in masks that 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. For example, in the fourth quarter of fiscal 2001, we began
volume production of a new product, HBT modules. We experienced lower than
expected yields and start up quality issues with the subcontractor who is
assembling the modules. These issues have resulted in lower gross margins than
expected. 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 RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. We currently do not have
backup generators or alternate sources of power in the event of a blackout, and
our current insurance does not provide coverage for any damages we or our
customers may suffer as a result of any interruption in our power supply. If
blackouts interrupt our power supply, we would be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could damage our reputation, harm our ability to
retain existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and results of
operations.
Furthermore, the deregulation of the energy industry instituted in 1996
by the California government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over the past
year. If wholesale prices continue to increase, our operating expenses will
likely increase, as all of our facilities are located in California.
OUR MANUFACTURING CAPACITY AND OUR ABILITY TO INCREASE SALES VOLUME IS DEPENDENT
ON THE SUCCESSFUL RETENTION AND HIRING OF SUFFICIENT DESIGN, ASSEMBLY AND TEST
PERSONNEL AND OUR ABILITY TO INSTALL CRITICAL ASSEMBLY AND TEST EQUIPMENT ON A
TIMELY BASIS.
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Our ability to satisfy our current backlog and any additional orders we
may receive in the future will depend on our ability to successfully retain,
hire or contract for 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 retaining, hiring and contracting for
sufficient personnel with these critical skills. Our business has been harmed in
the past by our inability to hire and 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 that 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 may not have sufficient capacity to
meet customer demand for our GaAs semiconductor components and GaAs- based
subsystems. If we are not able to meet our planned production requirements, it
could result in a loss of customers and sales, which would harm our business.
Our in-house capacity may 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. Our agreement with
them requires us to commit to a certain volume of production based on a rolling
forecast. In the event that our requirements fall below this level, we are still
obligated to pay for the forecast level of service. If this foundry does not
deliver to us the GaAs semiconductor components we request in a timely manner at
acceptable yields, we may not be able to satisfy customer demand for our
products on a
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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.
In December 2000, we invested approximately $2.4 million in Suntek
Compound Semiconductor Co. LTD, a GaAs foundry under construction in Taiwan.
This foundry is scheduled to be in production at the end of calendar 2002. We
believe this investment will assist in securing a portion of Suntek's capacity
for our use although we have not yet entered into a written agreement for the
purchase of product. If Suntek is not successful or is delayed in completing the
construction of their facility of if we do not execute a capacity purchase
agreement with Suntek, we may have difficulty in meeting our capacity
requirements and might have to write down this investment. We have accounted for
this investment on a cost basis.
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.
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
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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.
WE NEED TO KEEP PACE WITH RAPID PRODUCT AND PROCESS DEVELOPMENT AND
TECHNOLOGICAL CHANGES TO BE COMPETITIVE.
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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.
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
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 2001, our operating results were adversely affected
when major customers experienced a reduction in anticipated demand for broadband
wireless communications 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.
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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 that 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 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.
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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 THAT 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.
A DISASTER COULD SEVERELY DAMAGE OUR OPERATIONS.
A disaster could severely damage our ability to deliver our products to
our customers. Our products depend on our ability to maintain and protect our
computer systems, which are primarily located in or near our principal
headquarters in Santa Clara, California. Santa Clara exists on or near a known
earthquake fault zone. Although the facilities in which we host our computer
systems are designed to be fault tolerant, the systems are susceptible to damage
from fire, floods, earthquakes, power loss, telecommunications failures, and
similar events. Although we maintain general business insurance against fires,
floods and some general business interruptions, there can be no assurance that
the amount of coverage will be adequate in any particular case.
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.
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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 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 have reviewed 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. 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 on the United States. 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.
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A significant portion of our products is 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 THAT MAY HARM OUR
BUSINESS.
During the first three months of fiscal 2002, sales from international
customers accounted for 63% of our net sales. In fiscal 2001, sales from
international customers accounted for 41% 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 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
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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.
ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK
INTEREST RATE RISK
Our exposure to market risk is principally confined to our cash, cash
equivalents and investments which have maturities of less than two years. We
maintain a non-trading investment portfolio of investment grade, liquid, debt
securities that limits the amount of credit exposure to any one issue, issuer or
type of instrument. At June 30, 2001 our investment portfolio comprised
approximately $8.2 million in money market funds and certificate of deposits and
$91.9 million of preferred stocks, corporate debt securities and municipal
bonds. The securities in our investment portfolio are not leveraged, are
classified as available for sale and are therefore subject to interest rate
risk. We currently do not hedge interest rate exposure. If market interest rates
were to increase by 100 basis points, or 1%, from June 30, 2001 levels, the fair
value of our portfolio would decline by approximately $166,000. The modeling
technique used measures the change in fair values arising from an immediate
hypothetical shift in market interest rates and assumes ending fair values
include principal plus accrued interest.
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
None.
B. No reports on Form 8-K were filed during the three months ended
June 30, 2001.
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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 15, 2001 /s/ MARGARET E. SMITH
-----------------------------------------
Margaret E. Smith, Vice President,
Chief Financial Officer and Assistant
Secretary
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