Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number: 0-23576

CELERITEK, INC.

(Exact name of registrant as specified in its charter)

(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. Yes x No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

     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: 12,345,445 shares as of July 25, 2003

Table of Contents

CELERITEK, INC.

Table of Contents

-i-

Table of Contents

CELERITEK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

See accompanying notes.

1

Table of Contents

CELERITEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

See accompanying notes.

2

Table of Contents

CELERITEK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes.

3

Table of Contents

Celeritek, Inc.

Notes to Condensed Consolidated Financial Statements
(Unaudited)

June 30, 2003

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 adjustments) 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 2004 and fiscal 2003 ended June 29, 2003 and June 30, 2002, 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, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2004. 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, 2003 as filed with the Securities and Exchange Commission.
		Certain amounts reported in previous years have been reclassified to conform to the current year presentation.
2.		Stock Based Compensation
		The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair value of the shares on the date of grant. The Company records compensation related to employees stock awards under the intrinsic value method and accordingly, no compensation expense is recognized in the Company’s financial statements in connection with stock options granted to employees with exercise prices not less than fair value.
		Proforma information regarding net loss and net loss per share under the fair value method is presented below (in thousands, except per share amounts):

4

Table of Contents

Pro forma information regarding net loss and net loss per share is required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-based Compensation (SFAS 123), as amended by SFAS 148, and has been determined as if the Company had accounted for its stock options granted subsequent to December 31, 1994 under the fair value method of SFAS 123. The fair market value for options granted prior to December 1995, the date of the initial public offering of the Company’s common stock, was estimated at the date of grant using the Minimum Value Method. The fair market value for options granted subsequent to December 1995 was estimated at the date of grant using the Black-Scholes option-pricing model. The Company valued its employee stock options using the following weighted-average assumptions:

		The Black-Scholes option valuation model was developed for use in estimating the fair market value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair market value estimate, in management’s opinion, the existing models do not necessarily provide a reliable measure of the fair market value of its options.
		The weighted average grant date fair value of options granted during the three months ended June 30, 2003 and 2002 was $5.25 and $6.20, respectively. There were no Employee Stock Purchases during the three months ended June 30, 2003 and 2002.

5

Table of Contents

3.		Inventories
		Inventories, stated at the lower of standard cost (which approximates actual cost on a first-in, first-out method) or market, consists of the following components:

4.		Loss per share
		Basic loss per common share is computed using the weighted average common shares outstanding during the period. The effect of outstanding stock options is excluded from the calculation of diluted net loss per share, as their inclusion would be antidilutive.
		The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):

6

Table of Contents

5.		Comprehensive loss
		The components of comprehensive loss for the three-month period ended June 30, 2003 and 2002 are as follows (in thousands):

6.		Strategic investments
		The Company regularly reviews its investments for circumstances of impairment and assesses the carrying value of the assets against market value. When an impairment exists, the Company records an expense to the extent that the carrying value exceeds fair market value in the period the assessment was made. The fair value of strategic investments is dependent on the performance of the companies invested in, as well as the marketability of these investments. In assessing potential impairment of these investments, management considers these factors as well as forecasted financial performance of the investees. If these forecasts are not met or if market conditions change, the Company may have to record additional impairment charges.
		Handset Design Company
		In December 2001, the Company invested $0.5 million in a Korean handset design company. On April 1, 2002, the Company invested an additional $2.0 million in the handset design company. The Company does not have significant influence over the management of the handset design company and accordingly has accounted for the investment on a cost basis in all reported periods. The Company reviewed the investment as of June 30, 2003 and determined no indicators of impairment were present that would indicate the current carrying value of the investment was impaired.
		GaAs Foundry
		In December 2000, the Company invested approximately $2.4 million in a GaAs foundry under construction in Taiwan in exchange for a strategic interest in the foundry. The Company has accounted for this investment using the cost basis in all reported periods.
		During the fourth quarter of fiscal 2002 and the first and fourth quarter of fiscal 2003, the Company recorded impairment charges of approximately $1.7 million, $0.3 million and $0.1 million, respectively, against its strategic investment in the Taiwanese foundry, which was deemed, in those respective periods, to have an other than temporary decline in value. The Company reviewed the investment as of June 30, 2003 and determined no indicators of further impairment were present that would indicate the current carrying value of the investment was impaired.

7

Table of Contents

7.		Intangible Assets
		Intangible assets consist of the following (in thousands):

		The Company has reviewed the carrying values of its intangible assets and has determined no indicators of impairment were present that would indicate the current carrying value of these intangible assets was impaired.
8.		Special Charges
		The special charges of $2.8 million recorded during the third quarter of fiscal 2003 were due to Motorola’s transition from a handset platform on which the Company was the sole source for power amplifier modules, to the next generation of handset platforms, for which the Company is not a supplier of power amplifier modules. The special charges of $2.8 million are comprised of operating lease and fixed asset impairments and employee termination charges. The following table summarizes the Company’s special charges activity as follows (in thousands):

9.		Product Warranty
		The Company warrants its products against defects in design, materials, and workmanship, generally for one year from the date of shipment for all of its products. The actual term could vary depending on the specific customers. An accrual for estimated future costs relating to warranty expense is recorded, as a percentage of revenue based on prior experience, when revenue is recorded and is included in cost of goods sold. Factors that affect the Company’s warranty liability include historical

8

Table of Contents

		and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
		Changes in the Company’s product liability during the three months ended June 30, 2003 and 2002 were as follows (in thousands):

10.		Cost Related to Shareholder Actions
		In the fourth quarter of fiscal 2003, a group of shareholders (the “Celeritek Shareholder Protective Committee”) called a special meeting to remove the Company’s Board of Directors from office and replace them with a different slate of candidates. In May 2003 the Company’s Board of Directors entered into an agreement with the Committee. Under the terms of the agreement, the Company has expanded its Board of Directors from six directors to seven. The new Board is now composed of three of the Company’s directors who were directors prior to the agreement, three directors nominated by the Committee and one member who is not affiliated with either the Company or the Committee.
		The four new directors were each automatically granted options to purchase 6,000 shares of common stock. Consequently, the Company currently has 3,000 shares reserved for future issuance under the Directors’ Plan.
		In the first quarter of fiscal 2004, expenses of $1.4 million related to the special meeting of shareholders and $1.1 million in investment banking fees, including fees related to the special meeting, have been incurred and have been reported in loss from operations under the caption “Cost related to shareholder actions.”
11.		Recent Accounting Pronouncements
		In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company

9

Table of Contents

		does not believe the adoption of FIN 46 will have a material impact on its financial position or results of operations.
		In December 2002, the FASB issued Statement Number 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (SFAS 148). SFAS 148 amends Statement Number 123, “Accounting for Stock-Based Compensation,” (SFAS 123) to provide alternative methods of transition to the SFAS 123 fair value method of accounting for stock-based employee compensation. In addition, SFAS 148 requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The transition provisions of SFAS No. 148 are effective for fiscal years ended after December 15, 2002. The transition provisions do not currently have an impact on our consolidated financial position and results of operations as we have not elected to adopt the fair value based method of accounting for stock-based employee compensation under SFAS No. 123. We adopted the disclosure provisions of SFAS No. 148 and, accordingly, have included such disclosures in the financial statements for the three months ended June 30, 2003.
		In May 2003, the FASB issued Statement Number 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150). This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 generally requires liability classification for two broad classes of financial instruments: (1) instruments that represent, or are indexed to, an obligation to buy back the issuer’s shares, and (2) obligations that can be settled in shares, but are subject to certain conditions. SFAS 150 applies to all financial instruments created or modified after May 31, 2003, and to other instruments at the beginning of the first interim period beginning after July 1, 2003. As we have not created or modified any financial instruments since the effective date of SFAS 150, we do not believe this Statement will have a material impact on our financial statements
		In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21 Accounting for Revenue Arrangements with Multiple Deliverables. The EITF concluded that revenue arrangements with multiple elements should be divided into separate units of accounting if the deliverables in the arrangement have value to the customer on a standalone basis, if there is objective and reliable evidence of the fair value of the undelivered elements, and as long as there are no rights of return or additional performance guarantees by the Company. The provisions of EITF Issue No. 00-21 are applicable to agreements entered into after June 15, 2003. Management does not believe adoption of the consensus will have a material effect on the Company’s results of operations or financial condition.
12.		Rights Plan Termination
		On June 6, 2003 the Company amended the Rights Plan to accelerate the final expiration date of the Preferred Share Purchase Rights issued thereunder from April 8, 2009 to June 13, 2003. The Company terminated the Rights Plan upon expiration of the purchase rights on June 13, 2003.
13.		Subsequent Events
		In July 2003, the Company reduced its engineering headcount by four persons, in the United Kingdom. The Company expects this reduction to result in approximately $0.5 million to $0.8 million of termination expense and fixed asset impairment charges to research and development in the second quarter of fiscal 2004.

10

Table of Contents

On July 25, 2003, the Company sold its building in Lincoln, United Kingdom for approximately $0.3 million, which resulted in a gain of approximately $0.05 million.

Forward-Looking Statements

     This report contains forward-looking statements, which are identified by words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions. In addition, forward looking statements in this report include, but are not limited to, those regarding: exploration of strategic alternatives; semiconductor revenue; the handset market during this fiscal year; sales of our infrastructure products; our gross margins; research and development expenses; investment banking fees and selling, general and administrative expenses; and our belief that our cash and borrowings from equipment financing should be sufficient to meet our liquidity needs through at least the next twelve months. These forward-looking statements are subject to business and economic risks and uncertainties, and our actual results of operations may differ materially from those contained in the forward-looking statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth in this Form 10-Q and other reports or documents we file from time to time with the Securities and Exchange Commission.

Critical Accounting Policies

     The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions that affect the reported amounts. Some of the estimation processes affect current assets and liabilities and are therefore critical in assessing our financial and operating status. These estimates involve certain assumptions that, if incorrect, could have a material adverse impact on our operations and financial position.

     We review our estimates, including, but not limited to, allowance for doubtful accounts, inventory write-downs, and impairments of long-lived assets and investments on a regular basis and make adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed regularly and adjustments are made, as information is available. We believe that these estimates are reasonable; however, actual results could differ from these estimates. The following paragraphs describe the methodology we use in making some of our principal accounting estimates, in evaluating some of the uncertainties inherent in accounting estimates and in evaluating some of the ways that our estimates may impact our financial condition.

     Revenue Recognition. Revenue related to product sales is recognized when the products are shipped to the customer, title has transferred and no obligations remain. In circumstances where the collection of payment is not probable at the time of shipment, we defer recognition of the revenue until payment is collected. We provide for expected returns based on past experience as well as current customer activities. Our customers do not have rights of return outside of products returned under warranty and, to date, returns have not been material. Shipping and handling costs are included in costs of goods sold for all periods presented.

     Allowance for Doubtful Accounts. We establish an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate our customers’

11

Table of Contents

financial position and order level to determine if an allowance should be established. Any change in the allowance from our assessment of the likelihood of receiving payment is reflected in the selling, general, and administrative costs in the period the change in assessment is made.

     Inventory Write-downs. We record inventory write-downs for estimated obsolescence or unmarketable inventory. Our write-downs for excess and obsolete inventory are primarily based upon forecasted demand and our backlog of orders for the product. Any inventory write-downs are reflected in cost of sales in the period the write-downs are made.

     Long-lived Assets and Strategic Investments. We regularly review our long-lived assets and strategic investments for indicators of impairment and assess the carrying value of the assets against market values. When impairment exists, we record an expense to the extent that the carrying value exceeds fair market value in the period the assessment is made.

     We record impairment losses on long-lived assets used in operations or expected to be disposed of when events and circumstances indicate that the undiscounted cash flow estimated to be generated by these assets is less than the carrying amounts of those assets. We consider sensitivities to capacity, utilization and technological developments in making related assumptions.

     The fair value of strategic investments is dependent on the performance of the companies in which we have invested, as well as the marketability of these investments. In assessing potential impairment of these investments, we consider these factors as well as forecasted financial performance of the investees. If these forecasts are not met or if market conditions change, we may assess the value of the strategic investment to be other than temporarily impaired and accordingly record an impairment charge.

     Intangible Assets. We record intangible assets at fair value. Intangible assets with finite useful lives are amortized over their estimated useful life and amortization expense is classified as part of operating expenses. To date we have only intangible assets with finite useful lives. We regularly perform reviews to determine if the carrying values of our intangible assets are impaired. We look for facts, circumstances, either internal or external, that indicate we may not recover the carrying value of the asset. We record impairment losses based on the amount by which the carrying amounts of such assets exceed their fair values.

Result of Operations — First Quarter of Fiscal 2004 Compared to First Quarter of Fiscal 2003:

     This continues to be a difficult time for our business as evidenced by the reduced revenue this quarter. Celeritek is facing considerable business challenges resulting from excess capacity and increasing competition in the wireless communications market. The success of our new products, primarily our 3mm x 3mm power amplifier modules, is critical to our ability to achieve revenue levels significant enough for us to return to profitability.

     As previously announced, we reached an agreement with the Celeritek Shareholder Protective Committee in May. As part of this agreement, the Board has established a strategy committee to explore all strategic alternatives available to the company and to make recommendations to the board regarding the company’s strategic alternatives. Our investment bankers continue to assist with this process.

     Total net sales were $6.6 million for the first quarter of fiscal 2004, compared to $15.3 million for the first quarter of fiscal 2003, a decrease of 57%.

     Semiconductor sales were $1.6 million in the first quarter of fiscal 2004, compared to $9.3 million in the first quarter of fiscal 2003, a decrease of 83%. Sales in the first quarter of fiscal 2004 did not include any sales of power amplifier modules for handsets while sales in the first quarter of fiscal 2003 included $8.5

12

Table of Contents

million of sales of power amplifier modules for handsets. Motorola, which was our largest customer for this product, transitioned from the handset platform on which we were the sole source for power amplifier modules, to new handset platforms for which we are not supplying modules. While sales of infrastructure products almost doubled in the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003, they were not significant enough to offset the loss of the handset related sales. We have designed several new products for the handset market and are currently providing samples of these products to customers. Until we secure design wins and significant production orders on new handset platforms, however, we do not expect to see any material increase in semiconductor sales.

     In addition to the foregoing, visibility of customer demand for power amplifier modules continues to be limited. The wireless communications market continues to suffer from excess capacity and increasing competition. We do not expect a strong recovery in the handset market in this fiscal year. In addition, the handset market has historically had seasonal and consumer trends in demand, which can cause variation in revenues in sequential quarters.

     Subsystem sales in the first quarter of fiscal 2004 were $5.0 million compared to $6.0 million in the first quarter of fiscal 2003, a decrease of 17%. Sales of subsystems products to defense customers decreased 7% to $5.0 million in the first quarter of fiscal 2004 from $5.4 million in the first quarter of fiscal 2003, and sales of subsystem products to commercial customers declined to zero in the first quarter of fiscal 2004 compared to $0.6 million in the first quarter of fiscal 2003. The decrease in sales of subsystems products to defense customers is primarily the result of many defense customers making purchases for specific programs, and therefore product demand fluctuates from quarter to quarter. The decrease in commercial subsystem sales is due to continued weakness in the communications infrastructure market. We do not expect any significant sales this fiscal year for commercial infrastructure products.

     Gross margin was 8% of net sales in the first quarter of fiscal 2004 compared to 26% of net sales in the first quarter of fiscal 2003. The decrease in gross margin was primarily due to decreased semiconductor sales volume. We do not expect significant improvement in gross margin until sales volumes increase because of fixed costs related to our fabrication facility. In fact, 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 further reductions.

     Research and development expenses were $2.9 million, or 44% of net sales, in the first quarter of fiscal 2004 compared to $2.6 million, or 17% of net sales, in the first quarter of fiscal 2003, an increase of 12%. Research and development expenses increased due to our acquisition of Tavanza, which included an assembled workforce, and, to a lesser extent, our increased focus on defense product development. We expect research and development expenses to remain fairly consistent because of cost reduction strategies undertaken that have partially offset the addition of research and development expenses from the acquisition of Tavanza’s assets. A significant part of our research and development efforts are focused on developing semiconductor products for the market in South Korea. If we are not successful in introducing products and increasing our market share in South Korea, our revenues and financial condition will be negatively impacted.

     Selling, general and administrative expenses were $2.2 million, or 33% of net sales, in the first quarter of fiscal 2004 compared to $2.7 million, or 17% of net sales, in the first quarter of fiscal 2003, a decrease of 19%. The decrease was primarily due to lower selling costs driven by the decrease in revenues and lower personnel costs. In addition, we incurred management information systems consulting costs in the first quarter of fiscal 2003. We expect selling, general and administrative expenses to be fairly consistent with this quarter, absent any expenses related to the strategy committee’s activities.

     The $2.5 million of costs related to shareholder actions in the first quarter of fiscal 2004 consisted of approximately $1.4 million in expense related to the special meeting of shareholders and $1.1 million in investment banking fees, including fees related to the special meeting. We expect to incur additional investment banking fees of at least $0.9 million through March 2004.

13

Table of Contents

     The $0.3 million impairment of strategic investment included in the first quarter of fiscal 2003 was the result of a further impairment of our investment in a Taiwanese foundry. During the fourth quarter of fiscal 2002, we recorded an impairment charge of approximately $1.7 million related to our cost basis strategic investment in the Taiwanese foundry. During the fourth quarter of fiscal 2002, we reviewed updated financial statements and projections from the foundry. Significant decreases in actual and expected revenues, net income and cash balances were observed as compared with the original projections. In addition, the foundry had no current customers. With this backdrop, combined with the downturn in the semiconductor industry and our excess semiconductor capacity, we determined there was a decline in the value of the foundry that was other than temporary. The additional impairment charge included in the first quarter of fiscal 2003 results was determined after analysis of changes in the market values of public companies in the GaAs market from March 2002 to June 2002.

     The $2.8 million of special charges recorded in the third quarter of fiscal 2003 were due to Motorola’s decision to transition from a handset platform on which we were the sole source for power amplifier modules, to new handset platforms, for which we will not be supplying power amplifier modules. The $2.8 million of special charges is made up of both operating lease and fixed asset impairments and employee termination charges.

     The following table summarizes our special charges activity as follows (in thousands):

     Amortization of intangibles was $0.1 million during the first quarter of fiscal 2004. The intangible assets were acquired as part of the purchase of Tavanza’s assets during the third quarter of fiscal 2003.

     Interest income and other, net was $0.2 million in the first quarter of fiscal 2004 compared to $0.3 million in the first quarter of fiscal 2003. The decrease in interest income and other, net, was primarily due to lower interest rates.

     Subsequent to the end of the first quarter, in July 2003, we reduced the engineering headcount by four persons in the United Kingdom. We expect this reduction to result in approximately $0.5 million to $0.8 million of termination expense and fixed asset impairment charges in research and development in the second quarter of fiscal 2004.

14

Table of Contents

     On July 25, 2003, we sold the building in Lincoln, United Kingdom for approximately $0.3 million, which resulted in a gain of approximately $0.05 million.

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, 2003, we had $5.9 million in cash and cash equivalents, $84.8 million in short-term investments and $85.6 million in working capital.

     Net cash used by operating activities was $3.9 million in the first three months of fiscal 2004 and was due mainly to the quarterly net loss partially offset by decreases in accounts receivable and inventory and increases in accounts payable and accrued liabilities. Net cash used by operating activities was $5.2 million in the first three months of fiscal 2003 and was due mainly to decreases in accounts payable and other current liabilities. Net cash used by investing activities was $18.4 million in the first three months of fiscal 2004 and was due to the purchase of short-term investments of $52.9 million and the purchase of property and equipment of approximately $0.3 million offset by the proceeds from the sale and maturities of short-term investments of approximately $34.8 million. Net cash provided by investing activities was $0.1 million in the first three months of fiscal 2003 and was due to the proceeds from the sale and maturities of short-term investments of approximately $19.1 million offset by the purchase of short term investments of $16.3 million, the purchase of property and equipment of approximately $0.7 million and the strategic investment of $2.0 million.

     Net cash used by financing activities was $0.7 million in the first three months of fiscal 2004 and was due to principal payments on long-term debt of approximately $0.6 million and payments on capital leases of approximately $0.1 million. Net cash used by financing activities was approximately $0.7 million in the first three months of fiscal 2003 and was due to principal payments on long-term debt of approximately $0.6 million and payments on capital leases of approximately $0.2 million. As of June 30, 2003, we had $0.5 million in outstanding letters of credit, which are secured by certificates of deposits. Given our cash position, we currently do not have a line of credit.

     We believe that our current cash resources and borrowings available from our equipment financing sources should be sufficient to meet our liquidity requirements through at least the next twelve months.

Commitments

     We do not have any special purpose entities. We have no commercial commitments with related parties, except for employee loans. We have outstanding loans to certain officers and employees totaling approximately $1.5 million at June 30, 2003. The notes are relocation loans collateralized by certain real property assets, bear no interest and have maturities through 2019. The principal will be repaid at various dates. If an employee ceases being employed by us, the principal outstanding will be due and payable within 90 days.

     We have various equipment notes outstanding with lenders, which are secured by the equipment. Several of these notes have covenants pertaining to liquidity levels and minimum tangible net worth. As of June 30, 2003 we were in compliance with all covenants.

     We have contractual obligations in the form of operating and capital leases, debt and purchase order commitments. The following table sets forth our future contractual obligations as of June 30, 2003 (in thousands):

15

Table of Contents

     The table records cash obligations, including future interest repayments, and includes operating lease obligations for equipment that no longer has economic value for us, for which a special charge of $1.3 million was recorded in the third quarter of fiscal 2003 income statement.

     In addition, we have contractual commitments as of June 30, 2003, relating to our engagement of financial advisory firms pursuant to which we will be required to incur aggregate minimum future costs of approximately $0.9 million through March 2004. However, as is customary for contracts of this type, these commitments may increase above the minimum depending on the value of any strategic transaction we may complete, or the value of our common stock in the event that there is no strategic transaction.

     We have outstanding letters of credit of approximately $0.5 million as security for capital leases for equipment.

RISK FACTORS

     You should carefully consider the risks described below. 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.

We depend on a small number of original equipment manufacturers as customers. If we fail to secure design wins from new OEMs who have not made recent purchases from us or who have never purchased from us, or if we lose one or more of our significant customers, or if purchases by any one of our key customers decrease, our business will be harmed.

     We expect that sales to a limited number of customers will account for a large percentage of our net sales in the future and will be a very important component in our plans for returning to profitability. In particular, we are currently marketing our products to large OEMs in the wireless handset market to whom we have not in the past sold our power amplifier products. If we fail to secure design wins from one or more of these large OEMs, if the design wins we do secure do not result in significant production volumes for our customers and

16

Table of Contents

consequently, we are unable to secure significant sales to major new OEM customers, our revenues will be less than anticipated and we will not be profitable.

     In addition, if we lose any of our existing major customers, our operating results and business would be harmed. In the first three months of fiscal year 2004, sales to our top ten customers accounted for approximately 64% of our net sales, with one customer making up approximately 16% and another customer making up approximately 11% of those net sales. In fiscal year 2003, sales to our top ten customers accounted for approximately 75% of our net sales, with Motorola making up approximately 41% of those net sales. In fiscal year 2002, sales to our top ten customers accounted for approximately 76% of our net sales, with Motorola making up approximately 43% of those net sales. We had been a sole source supplier of power amplifier modules to Motorola for its model 120v handset platform. However, Motorola transitioned to new platforms, and it selected a sole source supplier other than us for its new platforms. We did not receive any revenue from products for the handset market in the first quarter of fiscal 2004 nor do we expect revenue sufficient to replace the Motorola revenue in the next several quarters. Although we intend to compete for Motorola’s business in the future, there can be no assurance that we will be successful. If we were to lose another major customer, or if orders by any of our remaining major customers were to otherwise decrease or be delayed, our business, operating results and financial condition would be seriously harmed.

Because many of our expenses are fixed, we will not achieve profitability until our revenues significantly increase.

     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, are fixed and do not vary greatly, if at all, when 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 current needs and has resulted in lower earnings. We are relying on increased sales to large OEMs in the wireless handset market in order to realize a significant increase in revenues. If these sales do not materialize, and if our revenues do not significantly increase to a level commensurate with our installed capacity, we will be unable to achieve profitability.

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 and our ability to grow will depend substantially on our ability to continue to apply our GaAs semiconductor components expertise to existing and emerging wireless communications markets. For example, we recently introduced 3mm x 3mm indium gallium phosphide heterojunction bipolar transistor (“InGaP HBT”) power amplifier modules, and hope to secure design wins and production orders for this product from mobile handset manufacturers. However, our competitors may introduce products using similar technologies, and new process technologies could be developed that have characteristics that are superior to our InGaP HBT process or our other current processes. If we are unable to develop and maintain competitive processes or design products using new technologies, and if we are unable to secure production orders for these products, we will not achieve the significant increase in revenues necessary to achieve profitability, and 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

17

Table of Contents

standards. Any significant delays in our development, introduction or shipment of products could seriously harm our business, operating results and financial condition.

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, particularly from our largest customers;
	•		fluctuating demand from our defense customers;
	•		the timing of our introduction of new products and the introduction of new products by our competitors;
	•		variations in average selling prices of our products;
	•		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;
	•		market acceptance 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 third quarter of fiscal 2003, Motorola, our largest customer, began transitioning to new handset platforms for which we were not the selected supplier of power amplifier modules and our sales were negatively impacted. Due to fluctuations in our net sales and operating expenses, we believe that period to period comparisons of our results of operations are not good indications 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.

Any acquisitions we make could disrupt our business and harm our financial condition.

     In October 2002, we acquired Tavanza, Inc., and we may make additional investments in or acquire complementary companies, products or technologies. These acquisitions involve numerous risks, including problems combining or integrating the purchased operations, technologies or products; unanticipated costs; diversion of management’s attention from our core business; adverse effects on existing business relationships with suppliers and customers; risks associated with entering markets in which we have no or limited prior experience; and potential loss of key employees, particularly those of the acquired organizations. In addition, in the event of any such investments or acquisitions, we could issue stock that would dilute our current shareholders’ percentage ownership, incur debt, assume liabilities, incur amortization or impairment expenses related to goodwill and other intangible assets, or incur large and immediate write-offs. We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future. For example, with the acquisition of Tavanza, we acquired the technology necessary to introduce 3mm x 3mm power amplifier modules with lower cost packaging. Previous to this product introduction, most power amplifier modules were 6mm x 6mm. Although we have completed development of the 3mm x 3mm power amplifier modules and have begun to deliver samples of these parts to our potential customers, there can be no assurance that our customers will adopt these products for use in

18

Table of Contents

handsets. In addition, several of our competitors have recently introduced similar products. If our customers do not purchase our new power amplifier modules, our development and integration efforts will have been unsuccessful, and our business may suffer.

We are exposed to general economic, market and, additionally, industry conditions.

     Our business is subject to the effects of general economic conditions in the United States and globally, and, in particular, market conditions in the wireless communications industry. In recent quarters, our operating results have been adversely affected as a result of unfavorable economic conditions and reduced capital spending in the United States, Europe and Asia. In particular, sales to customers who supply equipment to service providers of voice and data services have been adversely affected due to significant decline in demand in the wireless infrastructure markets. Additionally, industry forecast of sales of handsets for calendar 2003 continue to show expectations of zero to low growth with rising concerns regarding excess inventory levels. If the economic conditions in the United States and globally do not improve, if we experience a worsening in the global economic slowdown or if the wireless infrastructure markets do not recover, we may continue to experience material adverse impacts on our business, operating results and financial condition.

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 been significantly declining, and we anticipate that prices will continue to decline and negatively impact our gross profit margins. There is currently over capacity in the markets we serve, which could lead to additional pricing pressure as our competitors seek to improve their asset utilization. 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.

Our sales to international customers expose us to risks that may harm our business.

     During the first three months of fiscal 2004, sales to international customers accounted for 35% of our net sales. During fiscal 2003, sales to international customers accounted for 67% of our net sales. During fiscal 2002, sales to international customers accounted for 31% 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

19

Table of Contents

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.

     Additionally, all of our circuit assembly and test vendors are located outside of the United States. Consequently, our ability to secure products from these vendors is subject to most of the same risks described in the above paragraphs, including: 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; and general geopolitical risks. In the event that any of our international vendors is unable to fulfill our requirements in a timely manner, we may experience an interruption in production until we locate alternative sources of supply. If we encounter shortages in component supply, we may be forced to adjust our product designs and production schedules. The failure of one or more of our key suppliers or vendors to fulfill our orders in a timely manner and with acceptable quality and yields could cause us to not meet our contractual obligations, could damage our customer relationships (including relationships with major customers) and could harm our business.

Our expected sales to customers in South Korea may be less than anticipated.

     Over the past year, we have increased our focus with respect to sales of our power amplifier modules to customers in South Korea, and in particular, Samsung. Among other things, we recently opened a new sales and technical support office in Seoul, South Korea, and we have invested approximately $2.5 million in a South Korean handset design company. During the third quarter of fiscal 2003, we loaned the South Korean handset design company $0.5 million, which was repaid during the fourth quarter of fiscal 2003. However, we are subject to a number of risks and uncertainties with respect to our desire to increase our sales to South Korea customers, and there is no assurance that we will be successful in doing so. These risks include, but are not limited to: the recent political uncertainty with respect to North Korea’s announcements about its nuclear program; competition from South Korean companies; unexpected or changing product specifications by South Korean customers; uncertainties in the development of the South Korean wireless communications networks; unexpected changes in regulatory requirements; and tariffs and other potential trade barriers and restrictions, perhaps as a result of the political situation between the United States and North Korea. If our expected sales do not materialize, our revenues will be less than anticipated, and we may be unable to quickly reduce the costs attendant to our Korean operations. In such a case, our results of operations would be seriously harmed.

Uncertainties resulting from the recent proxy contest and the exploration of strategic alternatives may adversely affect our business and may hamper our ability to retain key personnel.

     In the fourth quarter of fiscal 2003, a group of shareholders (the “Celeritek Shareholder Protective Committee”) called a special meeting to remove our Board of Directors from office and replace them with a different slate of candidates. Although we have reached an agreement with the Celeritek Shareholder Protective Committee as described in our Form 10-K and other public filings, uncertainties resulting from the proxy contest and our exploration of strategic alternatives may adversely affect our business and hamper our ability to retain our executives or key personnel in our engineering and other departments. If we fail to retain executives or key engineering personnel, our ability to develop products, especially new products such as the recently introduced 3mm x 3mm power amplifier modules, will be harmed and our revenues will likely decline. In addition, we anticipate that we will incur additional expenses of at least $0.9 million through March 2004 for advisory services related to the activities of our strategy committee with respect to the considerations of strategic alternatives available to us. However, expenses could be greater than anticipated, which would negatively affect our earnings.

20

Table of Contents

Given our presence in China and other parts of Asia, the outbreak of SARS may negatively impact our operating results.

     The recent outbreak of severe acute respiratory syndrome (SARS), a disease of unknown etiology that has caused numerous deaths in Asia, North America and Europe, could have a negative impact on our operations. In particular, we have both customers, sales personnel and third party suppliers located in the affected areas of Asia, and therefore, our normal operating processes could be hindered by a number of SARS-related factors, including, but not limited to:

	•		disruptions to our sales personnel and process in affected locations;
	•		disruptions at our third-party suppliers located in affected locations;
	•		disruptions in our customers’ operations in affected locations; and
	•		reduced travel between ourselves, customers, and suppliers.

     If the number of SARS cases rises or spreads to other areas, our sales and operating results could 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, 2003, our backlog was approximately $13.1 million, of which 78% was from defense customers and 22% was from commercial customers. 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 purchasing materials, hiring 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.

     Generally, purchase orders in our backlog are subject to cancellation without penalty at the option of the customer, and from time to time we have experienced cancellation of orders in backlog. In fact, in the fourth quarter of fiscal 2001 and in fiscal 2002, a significant portion of our backlog was cancelled due to changing market conditions. Certain of our customers in the wireless infrastructure market delayed and cancelled long-standing contracts in response to declining market demand.

The variability of our manufacturing yields may affect our gross margins.

     The success of our business depends largely on our ability to make 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:

	•		lack of experience in producing a new product;
	•		defects in masks that are used to transfer circuit patterns onto wafers;
	•		impurities in materials used;
	•		contamination of the manufacturing environment; and
	•		equipment failures.

21

Table of Contents

     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 resulted in lower gross margins than expected. In addition, with the acquisition of Tavanza, we acquired the technology necessary to introduce 3mm x 3mm power amplifier modules with lower cost packaging. Although we have completed development of the 3mm x 3mm power amplifier modules and have begun to deliver samples of these parts to our potential customers, we have limited experience with these modules. Consequently, our production yields may be lower than expected, and 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.

Decreases in our customers’ sales volumes could result in decreases in our sales volumes.

     Our current semiconductor product strategy is to design standard products that can be used by different customers for a variety of applications. Any significant increase in our sales volume is dependent on our achieving a considerable number of design wins. Additionally, where our products are designed into an original equipment manufacturer’s product, our sales volumes will be dependent 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, for wireless infrastructure equipment and for defense communications systems. 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 wireless communications networks. Additionally, industry forecasts of sales of handsets for calendar 2003 continue to show zero to low growth expectations.

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. Our single-sourced components include substrates, millimeter wave components and semiconductor packages. Some of these components are critical to the products we sell to our major customers. In the event that any of these suppliers are unable to fulfill our requirements in a timely manner, we may experience an interruption in production until we locate alternative sources of supply. If we encounter shortages in component supply, we may be forced to adjust our product designs and production schedules. The failure of one or more of our key suppliers or vendors to fulfill our orders in a timely manner and with acceptable quality and yields could cause us to not meet our contractual obligations, could damage our customer relationships (including relationships with major customers) and could harm our business. For example, a single-sourced supplier of substrates ceased operations at the end of the second quarter of fiscal 2002, but we were able to find a replacement supplier. If we had not been able to find another supplier, the delivery of our products to our customers, including our major customers, would have been delayed and our relationship with such customers would have been harmed and our business would have suffered.

22

Table of Contents

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, CTT, JCA Technology, Miteq, REMEC, RF Micro Devices, Skyworks Solutions 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.

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.

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

23

Table of Contents

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, wireless infrastructure equipment or defense communications systems. 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 dated 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, 2002 and 2003, we wrote off out dated inventory when one of our customers stopped producing the mobile handsets that incorporated our power amplifier. Our business, operating results and financial condition could be harmed by excess or out dated inventory levels if our customers’ products evolve more rapidly than anticipated or if demand for a product does not materialize.

We are subject to stringent environmental regulations 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.

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.

     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.

24

Table of Contents

     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 manufacturing capacity and our ability to maintain sales volume is dependent on the successful retention of qualified 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 retain qualified design engineers, assembly and test personnel. Our design engineers reside at our headquarters in Santa Clara, California and at our design center 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 manage and retain these personnel will intensify if in the future 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 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, we also lost an order from a major customer in fiscal 2000 due to a shortage we experienced in design engineers.

     Our ability to maintain 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.

Past in-house foundry capacity limitations forced us into relationships with other foundries. We may incur extra costs as a result of these third party foundry relationships, which could negatively impact our financial condition.

     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. In the past, our in-house capacity was not sufficient by itself to satisfy the demand and our growth objectives.

     In December 2000, we invested approximately $2.4 million in a GaAs foundry under construction in Taiwan. We made this investment to secure a portion of the foundry’s capacity for our use. During the fourth quarter of fiscal 2002 we recorded an impairment charge of approximately $1.7 million against the foundry investment, which was deemed to have an other than temporary decline in value. During the first and fourth

25

Table of Contents

quarter of fiscal 2003, we recorded additional impairments of $0.3 and $0.1 million respectively. We regularly review our investments for circumstances of impairment and assess the carrying value of the assets against market value. When impairment exists, we record an expense to the extent that the carrying value exceeds fair market value in the period the assessment was made. The fair value of strategic investments, such as the foundry, is dependent on the performance of the companies invested in, as well as the marketability for these investments. In assessing potential impairment of these investments, management considers these factors as well as forecasted financial performance of the investees. If these forecasts are not met or if market conditions change, we may have to record additional impairment charges.

     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 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 develop a wider range of handset products in a timely manner. Competition for these kinds of experienced personnel is intense. In addition, as discussed above, uncertainties resulting from the proxy contest and future unsolicited acquisition offers may hamper our ability to retain our executives or key personnel in our engineering and other departments. 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 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.

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.

26

Table of Contents

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, 2003, our investment portfolio comprised approximately $6.2 million in money market funds and certificate of deposits and $84.3 million of money market auction rate 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, 2003 levels, the fair value of our portfolio would decline by approximately $0.2 million. The modeling technique used measures the change in fair values arising from an immediate hypothetical shift in market interest rates.

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.

     Our management evaluated, with the participation of our chief executive officer and our chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

     There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

27

Table of Contents

(a)

Exhibits.

28

Table of Contents

(b)

Reports on Form 8-K.

We filed five reports of Form 8-K with the Securities and Exchange Commission during the period covered by this report, as follows:

	1.		Report on Form 8-K filed on April 16, 2003 under Item 5 (Other Events), regarding our adoption of new board committee charters, corporate governance guidelines and change of control agreements.
	2.		Report on Form 8-K filed on April 30, 2003 under Item 12 (Results of Operations and Financial Condition), regarding our fourth quarter 2003 financial results.
	3.		Report on Form 8-K filed on May 19, 2003 under Item 5 (Other Events), regarding the preliminary settlement with respect to the proxy contest and the cancellation of the special meeting of shareholders.
	4.		Report on Form 8-K filed on May 28, 2003 under Item 5 (Other Events), regarding the definitive settlement with respect to the proxy contest and the cancellation of the special meeting of shareholders.
	5.		Report on Form 8-K filed on June 9, 2003 under Item 5 (Other Events), regarding the amendment and termination of our Rights Agreement.

29

Table of Contents

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.

30

Table of Contents

INDEX TO EXHIBITS

31