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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended December 31, 2004oro
    
    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: 0-23576 CELERITEK, INC. (Exact name of registrant as specified in its charter)
 California
    
    77-0057484(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 3236 Scott Blvd.
Santa Clara, CA
(Address of principal executive offices)
    
    95054
(Zip Code)
 (408) 986-5060
(Registrants telephone number, including area code) NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes
þNo 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 þ 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: 12,982,644 shares as of January 28, 2005




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CELERITEK, INC. Table of Contents Page No.PART I: FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements (Unaudited)
    
    
    1Condensed Consolidated Balance Sheets: December 31, 2004 and March 31, 2004
    
    
    1Condensed Consolidated Statements of Operations: Three and nine months ended
December 31, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Cash Flows: Three and nine months ended
December 31, 2004 and 2003
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    29PART II: OTHER INFORMATION
    
    
    29Item 4. Submission of Matters to a Vote of Security Shareholders
    
    
    29Item 5. Other information
    
    
    30Item 6. Exhibits
    
    
    30SIGNATURES
    
    
    31EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  -i-




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PART I      FINANCIAL INFORMATION 
 Item 1.       Financial Statements CELERITEK, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  December 31,
    
    
    March 31,2004
    
    
    2004(Unaudited)
    
    
    (Note)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,068
    
    
    $
    3,121Short-term investments
    
    
    6,091
    
    
    
    24,110Accounts receivable, net
    
    
    1,928
    
    
    
    6,048Inventories
    
    
    776
    
    
    
    2,739Prepaid expenses and other current assets
    
    
    399
    
    
    
    1,315Total current assets
    
    
    16,262
    
    
    
    37,333Property and equipment, net
    
    
    2,750
    
    
    
    5,430Strategic investments
    
    
    2,504
    
    
    
    2,741Other assets
    
    
    589
    
    
    
    1,262Total assets
    
    $
    22,105
    
    
    $
    46,766LIABILITIES & SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,892
    
    
    $
    3,171Accrued payroll
    
    
    662
    
    
    
    1,459Accrued liabilities
    
    
    2,462
    
    
    
    4,826Current portion of long-term debt
    
    
    
    
    
    
    1,866Current obligations under capital leases
    
    
    16
    
    
    
    328Total current liabilities
    
    
    5,032
    
    
    
    11,650Shareholders equity (12,982,644 and
12,855,962 common and no preferred shares
outstanding at December 31, 2004 and March
31, 2004, respectively)
    
    
    17,073
    
    
    
    35,116Total liabilities and shareholders equity
    
    $
    22,105
    
    
    $
    46,766
   Note:
    
    The balance sheet at March 31, 2004 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. 1




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CELERITEK, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net sales
    
    $
    2,790
    
    
    $
    7,714
    
    
    $
    17,598
    
    
    $
    21,369Cost of goods sold
    
    
    3,197
    
    
    
    5,084
    
    
    
    12,995
    
    
    
    16,805Gross profit (loss)
    
    
    (407
    )
    
    
    2,630
    
    
    
    4,603
    
    
    
    4,564Operating expenses:Research and development
    
    
    1,290
    
    
    
    1,861
    
    
    
    4,812
    
    
    
    7,690Selling, general and
administrative
    
    
    1,108
    
    
    
    1,913
    
    
    
    4,991
    
    
    
    6,307Cost related to shareholder
and strategic activities
    
    
    
    
    
    
    323
    
    
    
    
    
    
    
    3,036Special charges
    
    
    
    
    
    
    1,939
    
    
    
    
    
    
    
    4,540Intangible asset amortization
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257Total operating expenses
    
    
    2,398
    
    
    
    6,036
    
    
    
    9,803
    
    
    
    21,830Loss from operations
    
    
    (2,805
    )
    
    
    (3,406
    )
    
    
    (5,200
    )
    
    
    (17,266
    )Impairment of strategic investment
    
    
    
    
    
    
    
    
    
    
    (237
    )
    
    
    Gain on sale of defense subsystem
business
    
    
    26,402
    
    
    
    
    
    
    
    26,402
    
    
    
    Interest income and other, net
    
    
    134
    
    
    
    258
    
    
    
    451
    
    
    
    1,490Income (loss) before income tax
    
    
    23,731
    
    
    
    (3,148
    )
    
    
    21,416
    
    
    
    (15,776
    )Provision for income tax
    
    
    800
    
    
    
    
    
    
    
    800
    
    
    
    Net income (loss)
    
    $
    22,931
    
    
    $
    (3,148
    )
    
    $
    20,616
    
    
    $
    (15,776
    )Basic earnings (loss) per share
    
    $
    1.77
    
    
    $
    (0.25
    )
    
    $
    1.60
    
    
    $
    (1.27
    )Diluted earnings (loss) per share.
    
    $
    1.75
    
    
    $
    (0.25
    )
    
    $
    1.59
    
    
    $
    (1.27
    )Weighted average common shares
outstanding
    
    
    12,951
    
    
    
    12,408
    
    
    
    12,900
    
    
    
    12,375Weighted average common shares
outstanding  assuming dilution
    
    
    13,080
    
    
    
    12,408
    
    
    
    12,943
    
    
    
    12,375
 See accompanying notes. 2




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CELERITEK, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Nine Months EndedDecember 31,2004
    
    
    2003Operating activitiesNet income (loss)
    
    $
    20,616
    
    
    $
    (15,776
    )Adjustment to reconcile net loss to net cash used in operating activities:Depreciation, amortization and other
    
    
    2,721
    
    
    
    6,651Gain on sale of defense subsystem business
    
    
    (26,402
    )
    
    
    Changes in operating assets and liabilities
    
    
    (318
    )
    
    
    5Net cash provided by (used) in operating activities
    
    
    (3,383
    )
    
    
    (9,120
    )Investing activitiesPurchase of property and equipment
    
    
    (737
    )
    
    
    (717
    )Purchases of short-term investments
    
    
    (15,317
    )
    
    
    (111,186
    )Maturities and sale of short-term investments
    
    
    33,310
    
    
    
    106,646Proceeds on sale of defense subsytem business
    
    
    30,871
    
    
    
    Net cash provided by (used in) investing activities
    
    
    48,127
    
    
    
    (5,257
    )Financing activitiesPayments on long-term debt
    
    
    (1,866
    )
    
    

    (2,016
    )Payments on obligations under capital leases
    
    
    (312
    )
    
    
    (488
    )Extraordinary dividend payment
    
    
    (38,947
    )
    
    
    (488
    )Proceeds from issuance of common stock
    
    
    328
    
    
    
    378Net cash used in financing activities
    
    
    (40,797
    )
    
    
    (2,126
    )Increase (decrease) in cash and cash equivalents
    
    
    3,947
    
    
    
    (16,503
    )Cash and cash equivalents at beginning of period
    
    
    3,121
    
    
    
    28,909Cash and cash equivalents at end of period
    
    $
    7,068
    
    
    $
    12,406Supplemental disclosures of cash flow information:Cash paid during the period for:Income taxes
    
    $
    
    
    
    $
    1Interest
    
    
    94
    
    
    
    351Capital lease obligations incurred to acquire equipment
    
    
    
    
    
    
    240
 See accompanying notes 3




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Celeritek, Inc. 
   December 31, 2004  1.
    Basis of PresentationThe 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 consists of a thirteen-week period ending on the Sunday
closest to the calendar month end. The third quarters of fiscal 2005 and fiscal 2004 ended
January 2, 2005 and December 28, 2003, 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 and nine months ended December 31, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year ending March 31, 2005.
This financial information should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the Companys annual report on Form 10-K
for the year ended March 31, 2004 as filed with the Securities and Exchange Commission.On October 22, 2004, the Company completed the sale of its defense subsystem business to
Teledyne Wireless, Inc. for $32.7 million in cash, net of a working capital adjustment, and
the assumption of specified liabilities related to the defense subsystem business. The gain
on the sale after subtracting transaction costs and the net assets sold to Teledyne was
$26.4 million. The Companys defense subsystem business had sales of $19.7 million for the
fiscal year ended March 31, 2004. On December 1, 2004, the Company paid an extraordinary
cash dividend of $38.9 million or $3.00 per share of common stock to shareholders of record
on November 17, 2004.The sale of the defense subsystem business represents the sale of assets related to the
Companys GaAs-based subsystem product line. The Company has not historically collected
separate financial data for this product line and, in this regard, discrete financial
information with respect to its operations and cash flows is not available for this product
line. Furthermore, the Companys chief operating decision maker does not review the
operating results of this product line as a basis for making decisions about resources to be
allocated to this product line. Based on the foregoing, the Company has determined that the
sale of the GaAs-based subsystem product line does not meet the definition of a discontinued
operation.Certain amounts reported in previous years and interim periods have been reclassified to
conform to the current year presentation. 4




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2.
    Stock Based CompensationThe 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 employee 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.Pro forma information regarding net loss and net loss per share under the fair value method
is presented below (in thousands, except per share amounts): Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income (loss)As reported
    
    $
    22,931
    
    
    $
    (3,148
    )
    
    $
    20,616
    
    
    $
    (15,776
    )Add: Total stock-based
employee compensation expense
determined under fair value
method for all awards, net of
related tax effects
    
    
    (1,765
    )
    
    
    (1,205
    )
    
    
    (2,898
    )
    
    
    (3,526
    )Pro forma net income
(loss)
    
    $
    21,166
    
    
    $
    (4,353
    )
    
    $
    17,718
    
    
    $
    (19,302
    )Basic net income (loss) per share:As reported
    
    $
    1.77
    
    
    $
    (0.25
    )
    
    $
    1.60
    
    
    $
    (1.27
    )Pro forma
    
    $
    1.63
    
    
    $
    (0.35
    )
    
    $
    1.37
    
    
    $
    (1.56
    )Diluted net income (loss) per share:As reported
    
    $
    1.75
    
    
    $
    (0.25
    )
    
    $
    1.59
    
    
    $
    (1.27
    )Pro forma
    
    $
    1.62
    
    
    $
    (0.35
    )
    
    $
    1.37
    
    
    $
    (1.56
    )
  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 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: Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Risk-free interest rate
    
    
    3.6
    %
    
    
    
    
    
    
    3.6
    %
    
    
    3.5
    %Dividend yield
    
    
    0.0
    %
    
    
    
    
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    88.3
    %
    
    
    
    
    
    
    88.3
    %
    
    
    87.3
    %Expected life of options
    
    5 years
    
    
    
    
    
    5 years
    
    5 years
 5




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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
December 31, 2004 was $0.80. There were no options granted during the three months ended
December 31, 2003. The Company granted no Employee Stock
Purchase Plan shares
during the three months ended December 31, 2004 and 2003.The Company declared an extraordinary cash dividend of $4.50 per share payable to
shareholders of record as of February 5, 2004, payable on March 11, 2004. The total
dividend paid was $57.8 million. Under the intrinsic value method of accounting for stock
options, the Company was required to adjust its stock option exercise price by the dividend
amount, or $4.50 per share, because the dividend was a return of capital. Since the
Companys stock option plan did not allow it to reprice options, the Company was required to
change to the variable method of accounting for its outstanding stock options. Under
variable accounting, compensation expense is recognized over the life of the option (until
exercised, forfeited, or cancelled) generally to the extent that there are any increases in
the per share market price of the Companys common stock. It is difficult to estimate the
impact that expensing stock options will have on the Companys statement of operations as
this expense is dependent upon future events that are difficult to predict, such as the
number of options to be granted during a period, the price of the Companys common stock at
the time of grant, the stock price volatility, the risk free interest rate during the period
and the expected average life of the option. A slight change in any one of these variables
can materially affect the amount of compensation expense to be recorded. This change to the
variable method of accounting on March 12, 2004 has had no financial impact on the first,
second or third quarter financial statements. of fiscal 2005.3.
    InventoriesInventories, 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 (in thousands): December 31,
    
    
    March 31,2004
    
    
    2004Raw materials
    
    $
    330
    
    
    $
    763Work-in-process
    
    
    446
    
    
    
    1,976$
    776
    
    
    $
    2,739
  4.
    Income (Loss) Per ShareBasic income (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. 6




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5.
    Comprehensive Income (Loss)The components of comprehensive income (loss) for the three and nine month periods ended
December 31, 2004 and 2003 are as follows (in thousands): Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income (loss)
    
    $
    22,931
    
    
    $
    (3,148
    )
    
    $
    20,616
    
    
    $
    (15,776
    )Other comprehensive income (loss):Unrealized gains (losses) on
marketable securities
    
    
    1
    
    
    
    62
    
    
    
    (19
    )
    
    
    (42
    )Other comprehensive income (loss)
    
    
    1
    
    
    
    62
    
    
    
    (19
    )
    
    
    (42
    )Comprehensive income (loss)
    
    $
    22,932
    
    
    $
    (3,086
    )
    
    $
    20,597
    
    
    $
    (15,818
    )
  6.
    Strategic InvestmentsThe Company regularly reviews its investments for circumstances of other than temporary
impairment and assesses the carrying value of the assets against market value. When an
other than temporary 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
other than temporary 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 CompanyIn 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 December 31, 2004 and determined
no indicators of impairment were present that would indicate the current carrying value of
the investment was impaired.GaAs FoundryIn 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 does
not have significant influence over the management of the GaAs foundry and accordingly has
accounted for the investment on a cost basis in all reported periods.The Company had previously recorded approximately $2.2 million in impairment charges against
its strategic investments in the Taiwanese foundry in fiscal 2002 and 2003. During the
first quarter of fiscal 2005, the Company recorded an impairment charge equal to the
remaining value of approximately $0.2 million against its strategic investment in the
Taiwanese foundry, which 7




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was deemed to have an other than temporary decline in value. At the end of the first
quarter of fiscal 2005, the carrying value of this investment awas zero. The Company has
completely written off its investment in the GaAs foundry due to the insolvency of its
parent company, which the Company believes was the foundrys main source of funding.7.
    Special ChargesAt December 31, 2004, the Company held an accrual for $0.3 million relating to its fiscal
2003 and fiscal 2004 restructuring activities. Lease termination cost accrual of $0.4
million represented the present value of future minimum payments under operating leases
covering unused equipment in fiscal 2003. Such amounts will be paid through to lease expiry
in fiscal 2005. Relocation cost accrual of $0.7 million represented the present value of
future minimum payments under a building lease agreement for a building the Company vacated
in fiscal 2004. Such amounts will be paid through to lease expiry in fiscal 2006.The following table summarizes the Companys special charges activity (in thousands): LeaseImpairment
    
    
    TerminationEmployee
    
    
    
    
    
    
    of Assets
    
    
    andTermination
    
    
    Excess
    
    
    Held For
    
    
    RelocationCosts
    
    
    Equipment
    
    
    Sale
    
    
    Costs
    
    
    TotalAccrual balances, March 31, 2003
    
    $
    123
    
    
    $
    
    
    
    $
    
    
    
    $
    1,050
    
    
    $
    1,173Fiscal 2004 special charges
    
    
    734
    
    
    
    2,618
    
    
    
    183
    
    
    
    1,005
    
    
    
    4,540Cash paid
    
    
    (680
    )
    
    
    
    
    
    
    
    
    
    
    (932
    )
    
    
    (1,612
    )Non-cash activity
    
    
    (100
    )
    
    
    (2,618
    )
    
    
    (183
    )
    
    
    
    
    
    
    (2,901
    )Accrual balances, March 31, 2004
    
    $
    77
    
    
    $
    
    
    
    $
    
    
    
    $
    1,123
    
    
    $
    1,200Cash paid
    
    
    (77
    )
    
    
    
    
    
    
    
    
    
    
    (813
    )
    
    
    (890
    )Accrual balances, December 31, 2004
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    310
    
    
    $
    310
  8.
    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 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. 8




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Changes in the Companys product liability during the three and nine months ended December
31, 2004 and 2003 were as follows (in thousands): Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Beginning accrual balance
    
    $
    301
    
    
    $
    401
    
    
    $
    301
    
    
    $
    400Warranties issued
    
    
    12
    
    
    
    40
    
    
    
    78
    
    
    
    153Transferred
with sale of defense subsystem business
    
    
    (200
    )
    
    
    
    
    
    
    (200
    )
    
    
    Charges incurred
    
    
    (13
    )
    
    
    (41
    )
    
    
    (79
    )
    
    
    (153
    )Ending accrual balance
    
    $
    100
    
    
    $
    400
    
    
    $
    100
    
    
    $
    400
  9.
    Cost Related to Shareholder and Strategic ActionsIn the fourth quarter of fiscal 2003, a group of shareholders (the Shareholder 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 Shareholder Committee. Under the terms of the agreement,
the Company expanded its Board of Directors from six directors to seven. The new Board was
composed of three of the Companys directors who were directors prior to the agreement,
three directors nominated by the Shareholder Committee and one member who is not affiliated
with either the Company or the Shareholder Committee. On November 3, 2004, one of the
directors nominated by the Shareholder Committee resigned from his Board position. In
fiscal 2004, expenses of $1.4 million related to the special meeting of shareholders and
$1.7 million in investment banking fees were incurred and reported in loss from operations
under the caption Cost related to shareholder and strategic actions. The Company did not
incur any costs related to shareholder and strategic actions during the first nine months of
fiscal 2005.10.
    Recent Accounting PronouncementsIn November 2002, the Emerging Issues Task Force (the 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 in fiscal periods beginning after June 15, 2003. Management adopted the consensus in
the second quarter of fiscal 2004, and it did not have a material effect on the Companys
results of operations or financial condition.In November 2003, the EITF issued EITF No. 03-6 Participating Securities and the Two-Class
Method under FASB Statement No. 128, which provides for a two-class method of calculating
earnings per share computations that relate to certain securities that would be considered
to be participating in conjunction with certain common stock rights. This guidance was
applicable to the Company starting with the second quarter beginning July 1, 2004 and it did
not have a material effect on the Companys results of operations or financial condition. 9




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##### Table of Contents



11.
    Sale of the Companys Defense Subsystem BusinessOn October 22, 2004, the Company completed the sale of its defense subsystem business to
Teledyne Wireless, Inc. The following unaudited pro forma condensed consolidated statements
of operations give effect to the consummation of the sale in exchange for $32.7 million in
cash, net of a working capital adjustment, and the assumption of specified liabilities
related to the defense subsystem business. The gain on the sale after subtracting
transaction costs and the net assets sold to Teledyne was $26.4 million. The unaudited pro
forma condensed consolidated statements of operations for the three and nine month periods
ended December 31, 2004 give effect to the asset sale as if it occurred on April 1, 2004.The pro forma adjustments presented below reflect the elimination of the revenues and direct
costs of the Companys defense subsystem business. The pro forma adjustments presented below
do not reflect any elimination of indirect costs and expenses, such as those that are
attributable to centralized functions that the defense subsystem business may have utilized
but that the Company is retaining in connection with the asset sale (e.g. expenses
associated with the Companys fabrication facility). The following unaudited pro forma
financial information is being presented for illustrative purposes only and is not
necessarily indicative of the financial position or results of operations that the Company
would have obtained had it completed the asset sale as of the dates assumed, or the
Companys future results.The unaudited pro forma condensed consolidated statements of operations presented herein
should be read in conjunction with our historical condensed consolidated statements of
operations and the related notes that are included in the Companys Annual Report on Form
10-K for the year ended March 31, 2004. 10




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##### Table of Contents



Unaudited Pro Forma Condensed Consolidated Statements of Operations (In thousands, except per share amounts) Three Months Ended December 31, 2004Consolidated
    
    
    Adjustments
    
    
    Pro FormaNet sales
    
    $
    2,790
    
    
    $
    
    
    
    $
    2,790Cost of goods sold
    
    
    3,197
    
    
    
    616
    
    
    
    2,581Gross profit (loss)
    
    
    (407
    )
    
    
    616
    
    
    
    209Operating expenses:Research and development
    
    
    1,290
    
    
    
    228
    
    
    
    1,062Selling, general, and administrative
    
    
    1,108
    
    
    
    50
    
    
    
    1,058Total operating expenses
    
    
    2,398
    
    
    
    278
    
    
    
    2,120Loss from operations
    
    
    (2,805
    )
    
    
    894
    
    
    
    (1,911
    )Gain on sale of defense business
    
    
    26,402
    
    
    
    
    
    
    
    26,402Interest income and other, net
    
    
    134
    
    
    
    
    
    
    
    134Income before income taxes
    
    
    23,731
    
    
    
    894
    
    
    
    24,625Provision for income taxes
    
    
    800
    
    
    
    
    
    
    
    800Net income
    
    $
    22,931
    
    
    $
    894
    
    
    $
    23,825Basic net income per share
    
    $
    1.77
    
    
    $
    0.07
    
    
    $
    1.84Diluted net income per share
    
    $
    1.75
    
    
    $
    0.07
    
    
    $
    1.82Weighted average common shares outstanding
    
    
    12,951
    
    
    
    12,951
    
    
    
    12,951Weighted average common shares outstanding,
assuming dilution
    
    
    13,080
    
    
    
    13,080
    
    
    
    13,080
 See accompanying notes to unaudited pro forma condensed consolidated financial
information. 11




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##### Table of Contents



Unaudited Pro Forma Condensed Consolidated Statements of Operations (In thousands, except per share amounts) Nine Months Ended December 31, 2004Consolidated
    
    
    Adjustments
    
    
    Pro FormaNet sales
    
    $
    17,598
    
    
    $
    (8,564
    )
    
    $
    9,034Cost of goods sold
    
    
    12,995
    
    
    
    6,276
    
    
    
    6,719Gross profit
    
    
    4,603
    
    
    
    (2,288
    )
    
    
    2,315Operating expenses:Research and development
    
    
    4,812
    
    
    
    1,709
    
    
    
    3,103Selling, general, and administrative
    
    
    4,991
    
    
    
    893
    

    
    
    4,098Total operating expenses
    
    
    9,803
    
    
    
    2,602
    
    
    
    7,201Loss from operations
    
    
    (5,200
    )
    
    
    314
    
    
    
    (4,886
    )Impairment of strategic investments
    
    
    (237
    )
    
    
    
    
    
    
    (237
    )Gain on sale of defense business
    
    
    26,402
    
    
    
    
    
    
    
    26,402Interest income and other, net
    
    
    451
    
    
    
    
    
    
    
    451Income before income taxes
    
    
    21,416
    
    
    
    314
    
    
    
    21,730Provision for income taxes
    
    
    800
    
    
    
    
    
    
    
    800Net income
    
    $
    20,616
    
    
    $
    314
    
    
    $
    20,930Basic net income per share
    
    $
    1.60
    
    
    $
    0.02
    
    
    $
    1.62Diluted net income per share
    
    $
    1.59
    
    
    $
    0.02
    
    
    $
    1.62Weighted average common shares outstanding
    
    
    12,900
    
    
    
    12,900
    
    
    
    12,900Weighted average common shares outstanding,
assuming dilution
    
    
    12,943
    
    
    
    12,943
    
    
    
    12,943
 See accompanying notes to unaudited pro forma condensed consolidated financial information. Notes to Unaudited Pro forma Condensed Consolidated Financial Information Note A. Basis of Presentation On October 22, 2004, the Company completed the sale of its defense subsystem business to
Teledyne in exchange for $32.7 million in cash, net of a working capital adjustment, and the
assumption of specified liabilities related to its defense subsystem business. The gain on the
sale after subtracting transaction costs and the net assets sold to Teledyne was $26.4 million. The unaudited pro forma condensed consolidated statements of operations for the three and nine
month periods ended December 31, 2004 give effect to this asset sale as if it occurred on April 1,
2004. Note B. Pro Forma Adjustments Adjustments to present the unaudited pro forma condensed consolidated financial statements are
set forth below. The pro forma adjustments only give effect to amounts that are directly
attributable to the asset sale:  a.
    These adjustments reflect the elimination of the revenue and direct costs of
the Companys defense subsystem business as if the sale had occurred on April 1, 2004. 12




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##### Table of Contents



b.
    In the third quarter of fiscal 2005, the Company did not have any revenue from
the defense subsystem business, but did incur expenses directly related to that
business until the sale of the business was completed on October 22, 2004. As a result,
in the third quarter of fiscal 2005, the defense subsystems business had a negative
gross margin as compared to the nine month period in which there was $8.5 million of
revenue and gross profit of $2.3 million. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations 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: our focus on market areas where we believe our resources and core competencies will give
us the greatest opportunity for success in our goal of returning to profitability; our future gross
margins; our expected research and development expenses and selling, general and administrative
expenses; and our belief that our cash resources will 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 13




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##### Table of Contents



customers 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 recorded intangible assets at fair value. Intangible assets with finite
useful lives were amortized over their estimated useful life and amortization expense was
classified as part of operating expenses. To date, we have only had intangible assets with finite
useful lives. We regularly performed reviews to determine if the carrying values of our intangible
assets were impaired. We looked for facts, circumstances, either internal or external, that may
have indicated we may not have recovered the carrying value of the assets. We recorded impairment
losses based on the amount by which the carrying amounts of such assets exceeded their fair values. Overview On October 22, 2004, we completed the sale of our defense subsystem business to Teledyne
Wireless, Inc. for $32.7 million in cash, net of a working capital adjustment, and the assumption
of specified liabilities related to the defense subsystem business. The gain on the sale after
subtracting transaction costs and the net assets sold to Teledyne was $26.4 million. Our defense
subsystem business had sales of $19.7 million for the fiscal year ended March 31, 2004. On
December 1, 2004, we paid an extraordinary cash dividend of $38.9 million, or $3.00 per
share of common stock, to shareholders of record on November 17, 2004. Currently, we have
67 employees, as compared to 195 at September 30, 2004. Result of Operations  Third Quarter of Fiscal 2005 Compared to Third Quarter of Fiscal 2004 Total net sales were $2.8 million for the third quarter of fiscal 2005, compared to $7.7
million for the third quarter of fiscal 2004, a decrease of 64%. The decrease in sales was
primarily due to the sale of our defense subsystem business in October 2004. Semiconductor sales were $2.8 million in the third quarter of fiscal 2005, compared to $3.0
million in the third quarter of fiscal 2004, a decrease of 7%. Sales in the third quarter of fiscal
2005 included $0.2 14




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##### Table of Contents



million in sales of power amplifier modules for handsets. Sales in the third
quarter of fiscal 2004 included $0.7 million in sales of power amplifier modules for handsets. We
do not expect any further sales of power amplifier modules for handsets. Subsystem sales were zero in the third quarter of fiscal 2005, compared to $4.7 million in the
third quarter of fiscal 2004, a decrease of 100%. Subsystems sales were zero in the third quarter
of fiscal 2005 because we completed the sale of our defense subsystem business in October 2004. Gross margin was a negative 15% of net sales in the third quarter of fiscal 2005, compared to
a positive 34% of net sales in the third quarter of fiscal 2004. Included in the cost of sales in
the third quarter of fiscal 2005 was $0.6 million in overhead costs related to the defense
subsystem business, which we sold in October 2004. The decline in gross margin is due to reduced
revenue levels from the sale of the defense subsystem business, without a comparable reduction in
manufacturing overhead costs. We do not expect significant improvement in gross margin until sales
volumes increase because of fixed costs related to our fabrication facility. Research and development expenses were $1.3 million, or 46% of net sales, in the third quarter
of fiscal 2005 compared to $1.9 million, or 24% of net sales, in the third quarter of fiscal 2004,
a decrease of 31%. The decrease in research and development expense was primarily the result of
the sale of our defense subsystem business. Selling, general and administrative expenses were $1.1
million, or 40% of net sales, in the third quarter of fiscal 2005 compared to $1.9 million, or 25%
of net sales, in the third quarter of fiscal 2004, a decrease of 42%. The decrease was primarily
due to lower selling costs associated with lower revenues and lower administrative expenses. There were no costs related to shareholder and strategic actions in the third quarter of
fiscal 2005. The $0.3 million in costs related to shareholder and strategic actions in the third
quarter of fiscal 2004 was primarily for investment banking fees. There were no special charges during the third quarter of fiscal 2005. During the third
quarter of fiscal 2004, we incurred $1.9 million in special charges due to our exit of the wireless
handset power amplifier market. The charges were comprised of $0.9 million of building lease
termination costs, $0.2 million of facilities consolidation costs, $0.7 million in employee
termination expense and $0.1 million to close our Korean sales
office. Interest income and other, net was $0.1 million in the third quarter of fiscal 2005 compared
to $0.3 million in the third quarter of fiscal 2004. The decrease was primarily due to a loss on
the disposal of fixed assets and less interest income from lower cash and short-term investment
balances offset by lower interest expense. Result of Operations  First Nine Months of Fiscal 2005 Compared to the First Nine Months of Fiscal
2004 Total net sales were $17.6 million for the first nine months of fiscal 2005, compared to $21.4
million for the first nine months of fiscal 2004, a decrease of 18%. The decrease in sales was due
to the sale of our defense subsystem business in October 2004. Semiconductor sales were $9.1 million in the first nine months of fiscal 2005, compared to
$6.7 million in the first nine months of fiscal 2004, an increase of 36%. Sales in the first nine
months of fiscal 2005 included $2.0 million in sales of power amplifier modules for handsets and
$0.7 million in revenues 15




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##### Table of Contents



from a development contract. Sales in the first nine months of fiscal
2004 included $0.7 million in sales of power amplifier modules for handsets. Subsystem sales in the first nine months of fiscal 2005 were $8.5 million, compared to $14.7
million in the first nine months of fiscal 2004, a decrease of 42%. The decrease in sales was
primarily due to the sale of our defense subsystem business in October 2004. Gross margin was 26% of net sales in the first nine months of fiscal 2005, compared to 21% of
net sales in the first nine months of fiscal 2004. Most of the improvement in gross margin was due
to the sale in the first fiscal quarter of 2005 of products previously written off as obsolete
inventory and the revenue related to a development contract with corresponding costs in research
and development. To a lesser extent, lower overhead costs resulting from our decision to exit from
the wireless handset market, contributed to the improved gross margin. Research and development expenses were $4.8 million, or 27% of net sales, in the first nine
months of fiscal 2005, compared to $7.7 million, or 36% of net sales, in the first nine months of
fiscal 2004, a decrease of 37%. Research and development expenses decreased from the prior year
primarily due to our decision to exit the wireless handset market in September 2003. A significant
part of our research and development efforts were focused on developing wireless handset power
amplifier products for the market in South Korea. To a lesser extent, the sale of our
defense subsystem business in October 2004 contributed to the reduction of research and development
expenses. Selling, general and administrative expenses were $5.0 million, or 28% of net sales, in the
first nine months of fiscal 2005, compared to $6.3 million, or 30% of net sales, in the first nine
months of fiscal 2004, a decrease of 21%. The decrease was primarily due to lower administrative
expenses. There were no costs related to shareholder and strategic actions in the first nine months of
fiscal 2005. The $3.0 million in costs related to shareholder and strategic actions in the first
nine months of fiscal 2004 consisted of approximately $1.4 million in expense related to the
special meeting of shareholders and $1.6 million in investment banking fees. There were no special charges in the first nine months of fiscal 2005. The special charges of
$4.5 million in the first nine months of fiscal 2004 are comprised of approximately $0.2 million of
impairment charges related to the reassessment of carrying values for certain tangible and
intangible assets to be sold, $1.8 million of equipment impairment charges related to exiting the
wireless handset power amplifier market, and $0.6 million of equipment impairment charges related
to restructuring at the Belfast facility, $0.7 million in employee termination charges, $0.9
million for building lease termination costs, $0.2 million of facilities consolidation costs, and
$0.1 million to close our Korean sales office. The following table summarizes our special charges activity (in thousands): 16




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##### Table of Contents



LeaseTerminationEmployee
    
    
    
    
    
    
    Impairment
    
    
    andTermination
    
    
    Excess
    
    
    of Assets
    
    
    RelocationCosts
    
    
    Equipment
    
    
    Held For Sale
    
    
    Costs
    
    
    TotalAccrual balances, March 31, 2003
    
    $
    123
    
    
    $
    
    
    
    $
    
    
    
    $
    1,050
    
    
    $
    1,173Fiscal 2004 special charges
    
    
    734
    
    
    
    2,618
    
    
    
    183
    
    
    
    1,005
    
    
    
    4,540Cash paid
    
    
    (680
    )
    
    
    
    
    
    
    
    
    
    
    (932
    )
    
    
    (1,612
    )Non-cash activity
    
    
    (100
    )
    
    
    (2,618
    )
    
    
    (183
    )
    
    
    
    
    
    
    (2,901
    )Accrual balances, March 31, 2004
    
    $
    77
    
    
    $
    
    
    
    $
    
    
    
    $
    1,123
    
    
    $
    1,200Cash paid
    
    
    (77
    )
    
    
    
    
    
    
    
    
    
    
    (813
    )
    
    
    (890
    )Accrual balances, December 31, 2004
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    310
    
    
    $
    310
 Amortization of intangibles was $0.3 million during the first nine months of fiscal 2004. The
intangible assets were acquired as part of the purchase of Tavanzas assets during the third
quarter of fiscal 2003. At the end of the second quarter of fiscal 2004, the intangible assets
were reclassified to assets held for sale based on our decision in September 2003 to exit the
wireless handset power amplifier market. These assets were subsequently sold on October 15, 2003;
accordingly, no amortization expense will be recorded in future periods. During the first quarter of fiscal 2005, we recorded an impairment charge of $0.2 million
against our strategic investment in the Taiwanese foundry, which was deemed to have an other than
temporary decline in value. At the end of the first quarter of fiscal 2005, the carrying value of
this investment awas zero. We have completely written off our investment in the Taiwanese foundry
due to the insolvency of its parent company, which we believe was the foundrys main source of
funding. The Company had previously recorded approximately $2.2 million in impairment charges
against its strategic investments in the Taiwanese foundry in fiscal 2002 and 2003, which was
deemed, in those respective periods, to have an other than temporary decline in value. Interest income and other, net was $0.5 million in the first nine months of fiscal 2005
compared to $1.5 million in the first nine months of fiscal 2004. The decrease in interest income
and other, net, was due to the collection of a customers order cancellation charge of $0.8 million
in the first nine months of fiscal 2004 and lower interest rates on lower cash and short-term
investment balances. Liquidity and Capital Resources We have funded our operations to date primarily through cash flows from operations and sales
of equity securities. As of December 31, 2004, we had $7.1 million in cash and cash equivalents,
$6.1 million in short-term investments and $11.2 million in working capital. On October 22, 2004, we completed the sale of our defense subsystem business to Teledyne
Wireless, Inc. in exchange for $32.7 million in cash, net of a working capital adjustment, and the
assumption of specified liabilities related to the defense subsystem business. The net increase to
cash from the transaction was approximately $30.9 million, after deducting related cash expenses.
On December 1, 2004, we paid an extraordinary cash dividend of $38.9 million, or $3.00 per share of
common stock, to shareholders of record on November 17, 2004. Net cash used in operating activities was $3.4 million in the first nine months of fiscal 2005
and was due to our quarterly operating net losses. Net cash used in operating activities was $9.1
million in the first 17




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##### Table of Contents



nine months of fiscal 2004 and was due primarily to the quarterly net losses partially offset
by non-cash impairment charges and depreciation charges. Net cash provided by investing activities was $48.1 million in the first nine months of fiscal
2005 and was primarily due to the gain on the sale of our defense subsystem business of $30.9
million and net sales and maturities of short-term investments of $18.0 million. Net cash used in
investing activities was $5.3 million in the first nine months of fiscal 2004 and was primarily due
to the net purchases, sales and maturities of short-term investments of $4.5 million. Net cash used in financing activities was $40.8 million in the first nine months of fiscal
2005 and was primarily due to the payment of an extraordinary dividend of $38.9 million and
principal payments on long-term debt of $1.9 million. Net cash used in financing activities was
$2.1 million in the first nine months of fiscal 2004 and was due to principal payments on long-term
debt of $2.0 million and payments on capital leases of $0.5 million offset by cash proceeds of $0.4
million from the issuance of common stock. As of December 31, 2004, we had $0.9 million in outstanding letters of credit, which are
secured by certificates of deposits. We currently do not have a line of credit. We have various equipment notes outstanding with
other lenders, which are secured by the equipment. Our future cash requirements will depend on a number of different factors, including the
timing and volume of orders from our customers, the progress of our research and development
efforts, the success of our sales efforts and our ability to effect cost reductions. Currently, our
principle source of liquidity consists of our existing cash balances. Assuming we are able execute
on a number of factors, including the timing and volume of orders from our customers, the success
of our sales efforts and our ability to effect cost reductions, we believe that our current cash
resources should be sufficient to meet our liquidity requirements through at least the next twelve
months. If we are unable to execute on these and other factors, we will not have sufficient cash
to continue to do business and we may have to cease operations altogether. 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 employees totaling
approximately $0.5 million at December 31, 2004. 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 voluntarily ceases being employed by us, the
principal outstanding will be due and payable within 90 days. 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 December
31, 2004 (in thousands): 18




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##### Table of Contents



Contractual Obligations Fiscal YearTotal
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterCapital lease obligations
    
    $
    16
    
    
    $
    16
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    5,602
    
    
    
    510
    
    
    
    1,222
    
    
    
    900
    
    
    
    855
    
    
    
    831
    
    
    
    1,284Open purchase order commitments
    
    
    452
    
    
    
    452
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    6,070
    
    
    $
    978
    
    
    $
    1,222
    
    
    $
    900
    
    
    $
    855
    
    
    $
    831
    
    
    $
    1,284
 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. We have outstanding letters of credit of approximately $0.9 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 ability to continue operations, 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. Because of the sale of our defense subsystem business to Teledyne, our future success will depend
on our semiconductor business alone. On October 22, 2004 we sold all of the assets related to our defense subsystem business to
Teledyne Wireless, Inc. Our defense subsystem business constituted a substantial portion of our
assets. As such, our asset base and revenues following the asset sale are significantly lower from
those existing prior to the asset sale. The third quarter of fiscal 2005 was the first quarter in
which we operated our semiconductor business as a stand-alone business. During the quarter we were
unable to increase the semiconductor revenues, and because we were not able to reduce expenses
commensurate with the lower revenue levels generated by the semiconductor business alone, we were
not profitable. Moreover, economic and other factors may prevent us from rapidly and substantially
growing our semiconductor business in the future. If we are unable to achieve profitability in our
semiconductor operations in the near future, we will be unable to afford to continue to do business
and we may have to cease operations altogether. Because many of our expenses are fixed, we will not achieve profitability until our revenues
significantly increase. Our business requires us to maintain 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 19




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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. Although we have sold our defense subsystem business, we do not expect to achieve
cost reductions commensurate with the lower revenue levels and expect to continue to report losses
for some time. We are relying on increased sales of semiconductor products to manufacturers of
commercial communications equipment and defense contractors 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. As a result of the cash dividend we paid in December 2004, our cash position was weakened and may
affect our ability to continue operations in the future if our
semiconductor operations do not achieve profitability. On December 1, 2004, we paid a cash dividend to shareholders of $38.9 million, or $3.00 per
share. The amount of the dividend was based on the excess of cash that we had after accounting for
the amount that the board of directors determined we need to retain in order to finance our
continuing semiconductor operations. However, to date our semiconductor operations have not been
profitable and we have not yet made progress in plans to achieve profitability, such as expanding
our sales and marketing efforts and increasing our semiconductor research efforts to broaden our
product offerings over time. If we are unable to implement these plans or if our future efforts
are not successful, our semiconductor operations may never achieve profitability and we will
continue to burn through our cash reserves. Consequently, we may be forced to seek alternative
sources of funding more rapidly than we otherwise would have, had we not made the cash distribution
to our shareholders, or we may be forced to cease operations. 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 for our semiconductor components;
    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 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 20




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negatively impacted. In addition, in late September 2003, we exited the wireless handset
power amplifier market entirely. 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. The cash dividend we paid in December 2004 may cause our stock to be delisted from the Nasdaq
National Market. After the cash dividend, our stock price was adjusted downward by $3.00 and consequently
opened at $0.77 per share. Since the date of the dividend, the price of our stock has fluctuated
above and below $1.00. The Nasdaq National Market listing requirements with which we must comply
provide that delisting procedures may be instituted against us if our stock trades for less than
$1.00 for a consecutive 30-day period. If the price of our stock falls below $1.00 for more than
30 days, we may be subject to delisting, which could have a further negative impact on the price of
our stock. Our board of directors has authorized our management to seek shareholder approval of a
4 for 1 reverse stock split in order to raise the price of our stock and prevent delisting.
However, there can be no assurance that our shareholders will approve of a reverse split, if and
when management seeks their approval, or that our stock will continue to trade at the increased
price following the reverse split. Our stock may decline following the reverse split and we may
again face the prospect of being delisted. Variable accounting related to past stock option grants may impact our future earnings. We declared an extraordinary cash dividend of $4.50 per share payable to shareholders of
record as of February 5, 2004, payable on March 11, 2004. The total dividend paid was $57.8
million. Pursuant to the Nasdaq Marketplace Rules, the ex-dividend date with respect to the cash
dividend was set as March 12, 2004. Accordingly, prior to the commencement of trading on March 12,
2004, our opening bid price was reduced by $4.50 per share to reflect the payment of the cash
dividend. Under the intrinsic value method of accounting for stock options, we were required to
adjust our stock option exercise price by the dividend amount or $4.50 per share because the
dividend was a return of capital. Since our stock option plan does not currently allow us to
reprice options, we were required to change to the variable method of accounting for our
outstanding stock options. Under variable accounting, compensation expense is recognized over the
life of the option (until exercised, forfeited, or cancelled) generally to the extent that there
are any increases in the per share market price of our common stock. It is difficult to estimate
the impact that expensing stock options will have on our statement of operations as this expense is
dependent upon future events that are difficult to predict, such as the number of options to be
granted during a period, the price of our common stock at the time of grant, the stock price
volatility, the risk free interest rate during the period and the expected average life of the
option. A slight change in any one of these variables can materially affect the amount of
compensation expense to be recorded. Certain terms of the sale of our defense subsystem business to Teledyne are unfavorable to us and
could cause our business to be harmed. Pursuant to the terms of the asset purchase agreement that we entered into with Teledyne in
connection with the sale of the defense subsystem business, we remain responsible for substantially
all preclosing liabilities of our defense subsystem business, except for current liabilities that
were assumed by Teledyne. Currently, we are not aware of any pending
liability related to our former defense subsystems business. Although we analyzed the
likelihood of these liabilities arising and believe that likelihood to be minimal, there can be no
assurance that they will not be incurred, nor can we assure you that we will have adequate cash to
satisfy them. In addition, we are obligated to indemnify Teledyne against certain losses it may
suffer arising out of the acquisition of our defense 21




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subsystem business. If we are required to indemnify Teledyne for any matter, it could have a
material adverse impact on our business by draining our available cash reserves. 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 any one of our key customers decrease, our
net sales will decline and our business will be harmed. Historically, a limited number of customers, both in the defense subsystem business and the
semiconductor business, accounted for a large percentage of our net sales. As of December 31, 2004,
one customer accounted for 56% of our semiconductor backlog. In the first nine months of fiscal
year 2005, sales to our top ten defense subsystem and semiconductor customers accounted for
approximately 56% of our net sales, with Motorola making up approximately 12%. In fiscal year
2004, sales to our top ten defense subsystem and semiconductor customers accounted for
approximately 62% of our net sales, with Raytheon making up approximately 16% and BAE Systems
making up approximately 10% of those net sales. We anticipate that in the future we will continue
to rely on a limited number of customers for sales of our semiconductor components. We expect
that a small number of customers will account for a large percentage of our net sales in the future
and will be a very important factor in our goal to return to profitability. If we lose any of our
existing major customers, our operating results and business would be harmed. 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 must 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. New process technologies could be developed that have characteristics that
are superior to our 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 standards. Any significant delays in our
development, introduction or shipment of products could seriously harm our business, operating
results and financial condition. 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 and defense
industries. 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. 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. 22




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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. Historically, international sales of both our defense subsystems and semiconductor products
have accounted for a significant portion of our net sales. For example, sales to international
customers accounted for 43% of our total net sales in the first nine months of fiscal 2005, 35% of
our total net sales in fiscal 2004 and 67% of our total net sales in fiscal 2003. We anticipate
that international sales of our semiconductor components will continue to impact our net sales in
the future, as evidenced by the fact that in the first nine months of fiscal 2005, international
customers accounted for 64% of our semiconductor sales. 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. 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. 23




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Our backlog may not result in sales. Our backlog primarily represents signed purchase orders for products due to ship within 12
months. As of December 31, 2004, our backlog was approximately $3.3 million. One customer accounted
for 56% of our backlog. In connection with the sale of all of our assets related to our defense
subsystem business,in October 2004, our entire defense subsystem backlog was transferred
to Teledyne. 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 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. Our manufacturing yields also vary significantly among our products due to product complexity
and the depth of our experience in manufacturing a particular product. We cannot assure you that we
will not experience problems with our production yields in the future. Decreases in our yields can
result in substantially higher costs for our products. If we cannot maintain acceptable yields in
the future, our business, operating results and financial condition will suffer. 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 wireless and defense communications systems. Our
operating results have been 24




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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. 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 semiconductor 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 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. 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 Agilent Technologies, Sirenza
Microdevices, TriQuint Semiconductor and WJ Communications. 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; 25




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
    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 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 commercial 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 outdated due to the short life cycle of the end
products that incorporate our products. In fiscal 2003, we wrote off outdated 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 outdated 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. 26




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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. 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. 27




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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 potential business restructurings 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. Currently, we have 67
employees, as compared to 195 at September 30, 2004, therefore the loss of a key employee could
have a significant impact on our operations. 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. 
 Item 3. Quantitative and Qualitative Disclosures About 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 December 31, 2004, our investment portfolio
comprised approximately $7.5 million in money market funds and certificates of deposit and $5.2
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 December 31, 2004 levels, the fair value of our portfolio would decline by
approximately 28




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$2,000. 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. 
 Item 4. Controls and Procedures 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. 
 PART II       OTHER INFORMATION 
 Item 4.         Submission of Matters to a Vote of Security Holders Our Annual Meeting of Shareholders was held on October 21, 2004. The results of the voting
were as follows: Proposal 1: Proposed Sale of our Defense Business to Teledyne Wireless, Inc. Votes For:
    
    
    7,710,967Votes Against:
    
    
    51,715Votes Abstaining:
    
    
    5,165Broker Non-Vote
    
    
    4,010,819
 Proposal 2: Election of Directors. Nominee
    
    Votes For
    
    
    Votes WithheldTamer Husseini
    
    
    10,653,373
    
    
    
    1,125,293Robert J. Gallagher
    
    
    10,728,209
    
    
    
    1,050,457J. Michael Gullard
    
    
    10,797,101
    
    
    
    981,565Lloyd I. Miller, III
    
    
    10,756,735
    
    
    
    1,021,931Bryant R. Riley
    
    
    10,658,270
    
    
    
    1,120,396Michael B. Targoff
    
    
    10,525,133
    
    
    
    1,253,533Charles P. Waite
    
    
    10,760,164
    
    
    
    1,018,502
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##### Table of Contents



Proposal 3:
    Ratification of Appointment of BDO Seidman, LLP as our Independent Auditors for
the Fiscal Year Ending March 31, 2005. Votes For:
    
    
    11,703,199Votes Against:
    
    
    67,460Votes Abstaining:
    
    
    8,007Broker Non-Vote
    
    
    0
  Proposal 4:
    Approval of Amendment to our 1994 Stock Option Plan; Approval of Material Terms
of our 1994 Stock Option Plan; Approval of Amendment to our Outside Directors Stock
Option Plan. Votes For:
    
    
    5,361,913Votes Against:
    
    
    2,390,550Votes Abstaining:
    
    
    15,384Broker Non-Vote
    
    
    4,010,819
  Proposal 5:
    Approval of a Pricing Modification of Options Granted Prior to March 12, 2004,
Under our 1994 Stock Option Plan and our Outside Directors Stock Option Plan. Votes For:
    
    
    5,547,895Votes Against:
    
    
    2,197,984Votes Abstaining:
    
    
    21,968Broker Non-Vote
    
    
    4,010,819
 
 Item 5. Other Information On November 17, 2004 we entered into a Second Amendment to Lease with Mission West Properties,
L.P. II (formerly known as Berg & Berg Developers), in connection with our corporate headquarters
located at 3236 Scott Blvd in Santa Clara, CA. Pursuant to the terms of this Second Amendment to
Lease, the term of the lease was extended through September 30, 2010, with amended lease payments
commencing on December 1, 2004. Total lease payments over the new term of the lease will be
approximately $4.7 million. 
 Item 6. Exhibits ExhibitNumber
    
    Description10.1
    
    Second Amendment to Lease, dated November 17, 2004, by and between Celeritek,
Inc. and Mission West Properties, L.P. II.31.1
    
    Certification of Chief Executive Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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##### 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. CELERITEK, INC.Date: February 15, 2005
    
    /s/ MARGARET E. SMITHMargaret E. Smith, Vice President,Chief Financial Officer and AssistantSecretary
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##### Table of Contents



INDEX TO EXHIBITS ExhibitNumber
    
    Description10.1
    
    Second Amendment to Lease, dated November 17, 2004, by and between Celeritek,
Inc., and Mission West Properties, L.P. II31.1
    
    Certification of Chief Executive Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Securities Exchange Act
Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.