<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------------
WJ COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3559 94-1402710
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
3333 HILLVIEW AVENUE
PALO ALTO, CALIFORNIA 94304
(650) 493-4141
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------------
MALCOLM J. CARABALLO
WJ COMMUNICATIONS, INC.
3333 HILLVIEW AVENUE
PALO ALTO, CALIFORNIA 94304
(650) 493-4141
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
MITCHELL S. PRESSER, ESQ. ANTHONY T. ILER, ESQ. DANIEL CLIVNER, ESQ.
WACHTELL, LIPTON, ROSEN & KATZ IRELL & MANELLA LLP RICHARD CAPELOUTO, ESQ.
51 WEST 52ND STREET 333 S. HOPE STREET, SUITE 3300 SIMPSON THACHER & BARTLETT
NEW YORK, NY 10019-6150 LOS ANGELES, CA 90071-3043 3373 HILLVIEW AVENUE
(212) 403-1000 (213) 620-1555 PALO ALTO, CA 94304
(650) 251-5000
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________________
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common stock, par value $.01 per share...................... $100,000,000 $26,400
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE , 2000.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[WJ COMMUNICATIONS LOGO]
COMMON STOCK
This is an initial public offering of common stock by WJ
Communications, Inc. WJ Communications is selling shares of common stock.
The estimated initial public offering price is between $ and $ per
share.
--------------
No public market currently exists for our common stock. We have applied for
listing of our common stock on the Nasdaq National Market under the symbol WJCI.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to WJ Communications, before expenses.............. $ $
</TABLE>
WJ Communications has granted the underwriters an option for a period of
30 days to purchase up to additional shares of common stock.
--------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 4.
-------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CHASE H&Q
CIBC WORLD MARKETS
THOMAS WEISEL PARTNERS LLC
, 2000.
<PAGE>
[INSIDE FRONT COVER]
At the top of the inside front cover page of the prospectus appear the WJ
Communications name and the text, "Innovative products providing broadband
solutions for current and next generation fiber optic, broadband cable and
wireless communications networks."
At the center of the diagram are 2 interlinking multi-colored circles
representing a ring-based fiber optic network. The larger, central ring contains
the words "Metro Core Fiber Optic Ring;" the smaller ring contains the words
"Metro Access Fiber Optic Ring." Each ring connects by a band to a schematic
located in the upper-right and lower-left quadrants. From the larger ring to the
upper-right quadrant extends a multi-colored band ending in an arrow which loops
around a diagram of the globe. The globe shows the North American continent and
portions of the South American continent. Beneath the multi-colored connecting
band are the words "Long Haul Fiber Optic Backbone." The smaller ring connects,
by a green and black band, to a diagram of buildings located in the lower-left
quadrant.
The center "core" ring also links with schematics located in the upper-left
and lower-right quadrants. The upper-left quadrant shows the access
technologies, "DSL" and "Broadband Cable", typically employed by our home/small
office end-users. "DSL" is represented by a black line from the core ring of the
quadrant to a home. "Broadband Cable" is connected to the core ring by a small,
yellow and black circle. The circle contains the word "Fiber". "Broadband Cable"
is represented by a black line from the "Fiber" ring to 6 homes.
The lower-right quadrant shows the access technologies, "Mobile
Infrastructure" and "Broadband Wireless", primarily utilized by corporate
end-users. "Mobile Infrastructure" is attached by a black line to the core ring
and is represented by a base station connected, with yellow signal lines, to a
personal device assistant and cellular phone. "Broadband Wireless", also
connected to the core ring by a black line, is represented by a large building
with a transmitter/receiver module on top connected, by yellow signal lines, to
3 office structures. The words "Point-to-Point" and "Point-to-Multipoint" appear
next to the 2 outer office structures.
[INSIDE BACK COVER]
The page is divided into 2 sections which correspond to WJ Communications'
major product areas. In each section are a series of photographs superimposed
upon one another, which display the specific products.
The top section is labeled "Semiconductor Products." It contains 3
photographs of products including a GaAs wafer, GaAs packaged devices and a
thin-film square. Under the heading, the text states:
SEMICONDUCTOR PRODUCTS PROVIDE
- high linearity for broadband cable and wireless systems
- advanced, thin-film technology for improved high frequency electrical
performance.
The lower section is labeled "Fiber Optic and Wireless Communications
Products." It contains 3 sets of images located in a triangular formation. At
the top right appear 2 photographs of fiber optic products including an OC-192
oscillator and a neighborhood node. At the top left appear 3 photographs of
broadband fixed wireless products including a microwave multipoint distribution
system unit, a 3.5 GHz and a 26 GHz unit. Centered below these images appear 3
photographs of mobile wireless infrastructure products including a repeater, a
base station converter and a RF distribution unit. The text, which is located
between these images, states:
FIBER OPTIC AND WIRELESS COMMUNICATIONS PRODUCTS PROVIDE
- reliable, high speed, high capacity data transmission
- highly integrated solutions to complex RF challenges
- stable, precise oscillator and highly linear frequency converter
technology.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 12
Use of Proceeds............................................. 13
Dividend Policy............................................. 13
Capitalization.............................................. 14
Dilution.................................................... 15
Selected Consolidated Financial Data........................ 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 32
Management.................................................. 44
Principal Stockholders...................................... 53
Certain Transactions........................................ 55
Description of Capital Stock................................ 56
Shares Eligible for Future Sale............................. 57
U.S. Federal Tax Considerations for Non-U.S. Holders........ 58
Underwriting................................................ 61
Legal Matters............................................... 63
Experts..................................................... 63
Where You Can Find More Information......................... 64
Index to Consolidated Financial Statements.................. F-1
</TABLE>
"WJ Communications" is an unregistered trademark of WJ Communications.
This prospectus also includes references to registered service marks and
trademarks of other entities.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" BEGINNING ON PAGE 4, AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THOSE CONSOLIDATED FINANCIAL
STATEMENTS BEGINNING ON PAGE F-1 BEFORE MAKING AN INVESTMENT DECISION. SOME
TECHNICAL TERMS NOT EXPLAINED IN THIS SUMMARY ARE DESCRIBED IN MORE DETAIL IN
"BUSINESS."
WJ COMMUNICATIONS
We design, develop and manufacture innovative broadband communications
products for current and next generation fiber optic, broadband cable and
wireless communications networks. We leverage our 40 years of experience in
developing high quality radio frequency, or RF, products to enable the rapid
transmission of large amounts of voice, video and data traffic over these
advanced communications networks. Our core technology expertise, coupled with
our strong design and manufacturing capabilities, allows us to provide our
customers with complete solutions to the RF challenges they face. Our products
are used by communications equipment manufacturers and service providers to
enhance the capacity and speed of their network equipment. We sell our products
to over 50 customers, including industry leaders such as Lucent Technologies and
Nortel Networks.
Growing demand for voice, video and data services, as well as high speed
Internet access, has increased the need for communications networks capable of
handling large volumes of traffic. Simultaneously, increased competition among
network service providers has created a demand for greater bandwidth to support
new, enhanced service offerings. As the inadequacies of the traditional
communications infrastructure have limited the ability of communications service
providers to meet the growing demand for broadband access, these service
providers are upgrading the existing fiber infrastructure and are deploying
advanced communications networks which are comprised of fiber optic, broadband
cable and wireless systems. While the transport medium is very different for
these three types of networks, the core technology of RF electronics is common
to all three. With the increasing data transport rates of these networks,
greater demands are being placed on equipment manufacturers to provide high
performance RF products with the characteristics necessary to enable increased
bandwidth.
We provide the technology, design expertise and products that address the RF
and related integration challenges inherent in advanced communications networks.
Our solution is characterized by:
- GAAS SEMICONDUCTOR TECHNOLOGY. Our expertise in high performance GaAs
semiconductor technology results in highly linear products, which means
they efficiently amplify and transform signals with minimal distortion.
- THIN-FILM SUBSTRATE TECHNOLOGY. Our thin-film substrate technology
includes several features that enhance performance at high frequencies
while reducing the assembly cost of integrated products.
- OSCILLATOR TECHNOLOGY. Our advanced oscillator technology provides the
precision, stability, and reliability required by high speed broadband
networks.
- RF DESIGN EXPERTISE. Our team of highly qualified engineers applies our
company's 40 years of RF knowledge and expertise to both fiber optic and
wireless products. Our engineers are adept in component design and possess
an extensive level of integration expertise, resulting in optimum designs
from the component to the subsystem level.
- MANUFACTURABILITY. We use our ability to rapidly convert conceptual ideas
and new technologies into products, and to quickly move from design to
high volume, automated manufacturing to provide high quality, high
performance products at competitive prices.
<PAGE>
Our objective is to be the leading supplier of innovative, proprietary RF
solutions to fiber optic, broadband cable, and wireless communications equipment
companies and service providers enabling them to implement and deploy advanced
broadband networks. To meet this goal, we intend to continue to:
- leverage our technology leadership and design and integration expertise to
grow within these dynamic markets;
- maintain and develop strong collaborative customer relationships with
industry leaders;
- expand our manufacturing capabilities; and
- acquire and develop new technologies.
We were founded in 1957 to develop and manufacture microwave devices for
defense electronics and space communications systems. With the decline of the
aerospace and defense industries in the 1990s, we began applying our technology
and design expertise to develop commercial communications products. On
January 31, 2000, we completed a recapitalization merger transaction with an
affiliate of Fox Paine & Company. In several transactions leading up to the
recapitalization merger, we divested all of our divisions other than our current
business, along with several non-operating real estate assets. We are now
focused exclusively on providing RF product solutions for the commercial fiber
optic, broadband cable, and wireless communications applications. To reflect our
focus on these commercial broadband communications markets, we recently changed
our name from Watkins-Johnson Company to WJ Communications, Inc.
Our executive offices are located at 3333 Hillview Avenue, Palo Alto,
California 94304-1223. Our telephone number is (650) 493-4141.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by WJ
Communications.......................... shares
Common stock to be outstanding after this
offering................................ shares
We estimate that we will receive net proceeds from the
offering of approximately $ million. We intend to
use up to $40.0 million of the net proceeds to repay
borrowings under our senior secured credit facility. We
intend to use the balance of the net proceeds for
capital expenditures, strategic investments and
acquisitions and general corporate purposes.
Use of Proceeds...........................
Proposed Nasdaq National Market Symbol.... WJCI
</TABLE>
------------------------
This information excludes:
- 9,830,985 shares of common stock that were subject to outstanding options
at May 31, 2000 at a weighted average exercise price of $2.05625 per
share; and
- 1,154,104 additional shares of common stock reserved for issuance under
our 2000 stock incentive plan.
------------------------
Unless otherwise noted, the information in this prospectus:
- assumes 31,671,821 shares of common stock outstanding on May 31, 2000; and
- assumes that the underwriters' over-allotment option will not be
exercised.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
THE FOLLOWING TABLE SETS FORTH SUMMARY CONSOLIDATED FINANCIAL DATA FOR THE
PERIODS INDICATED. WE COMMENCED OUR CURRENT OPERATIONS AT THE BEGINNING OF 1996.
THE CONSOLIDATED STATEMENTS OF OPERATIONS DATA REPRESENT OUR RESULTS FROM
CONTINUING OPERATIONS. IT IS IMPORTANT THAT YOU READ THIS INFORMATION TOGETHER
WITH THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" BEGINNING ON PAGE 18 AND OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------
----------------------------------------- MARCH 26, MARCH 31,
1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Sales................................................ $ 12,633 $ 31,174 $ 63,568 $ 82,404 $ 23,528 $ 17,051
Cost of goods sold................................... 12,238 25,591 43,400 50,534 16,095 10,075
-------- -------- -------- -------- -------- --------
Gross profit......................................... 395 5,583 20,168 31,870 7,433 6,976
Operating expenses:
Research and development......................... 6,585 10,204 14,124 16,806 3,934 4,145
Selling and administrative....................... 3,463 2,219 4,035 5,331 1,262 2,569
Corporate administrative......................... 561 1,240 1,811 4,391 739 322
Recapitalization merger and other................ -- -- -- 3,223 -- 35,453
-------- -------- -------- -------- -------- --------
Total operating expenses..................... 10,609 13,663 19,970 29,751 5,935 42,489
-------- -------- -------- -------- -------- --------
Income (loss) from operations........................ (10,214) (8,080) 198 2,119 1,498 (35,513)
Interest income...................................... 789 2,198 5,681 5,070 844 1,026
Interest expense..................................... (1,574) (795) (601) (520) (120) (872)
Other income (expense)--net.......................... (459) (249) 1,220 412 184 (519)
Gain on disposition of real property................. -- 7,609 14,973 61,652 -- --
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations before
income taxes....................................... (11,458) 683 21,471 68,733 2,406 (35,878)
Income tax (provision) benefit....................... 4,055 (240) (6,978) (26,383) (782) 10,764
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations............. $ (7,403) $ 443 $ 14,493 $ 42,350 $ 1,624 $(25,114)
======== ======== ======== ======== ======== ========
Income (loss) from continuing operations per
share--basic....................................... $ (0.04) $ 0.00 $ 0.09 $ 0.33 $ 0.01 $ (0.38)
======== ======== ======== ======== ======== ========
Income (loss) from continuing operations per
share--diluted..................................... $ (0.04) $ 0.00 $ 0.09 $ 0.32 $ 0.01 $ (0.38)
======== ======== ======== ======== ======== ========
Shares used to calculate income (loss) from
continuing operations per share--basic............. 165,300 165,160 154,740 128,389 131,157 66,400
Shares used to calculated income (loss) from
continuing operations per share--diluted........... 165,300 170,180 157,140 132,227 132,905 66,400
</TABLE>
The unaudited as adjusted selected consolidated balance sheet data reflect
the sale of shares of common stock in the offering at an assumed offering
price of $ per share after deducting underwriting discounts and commissions
and estimated offering expenses and the application of the proceeds to repay our
senior secured credit facility. The selected consolidated balance sheet data
exclude approximately $7.5 million of net assets of discontinued operations.
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents and short-term investments......... $15,552
Working capital......................................... 18,794
Total assets............................................ 60,899
Total debt.............................................. 39,926
Capital leases, net of current portion.................. 4,844
Stockholders' equity (deficit).......................... (6,197)
</TABLE>
3
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION.
IF ANY OF THE FOLLOWING RISKS, OR OTHER RISKS AND UNCERTAINTIES THAT WE HAVE NOT
YET IDENTIFIED OR THAT WE CURRENTLY THINK ARE IMMATERIAL, ACTUALLY OCCUR AND ARE
MATERIAL, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE
MATERIALLY AND ADVERSELY AFFECTED. IN THAT EVENT, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
IF WE ARE UNABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE TAKING PLACE IN
OUR INDUSTRY, OUR EXISTING PRODUCTS COULD BECOME OBSOLETE AND WE COULD FACE
DIFFICULTIES MAKING FUTURE SALES.
The markets in which we compete are characterized by rapidly changing
technologies, evolving industry standards and frequent improvements in products
and services. If the technologies supported by our products become obsolete or
fail to gain widespread acceptance, as a result of a change in industry
standards or otherwise, our business could be materially harmed. Our future
success will depend on factors including our ability to:
- enhance the functionality of existing products in a timely and
cost-effective manner;
- establish close working relationships with major customers for the design
of their new fiber optic or wireless transmission systems that incorporate
our products;
- identify, develop and achieve market acceptance of new products that
address new technologies and meet customer needs in the fiber optic,
broadband cable and wireless communications markets;
- apply expertise and technologies to existing and emerging fiber optic,
broadband cable or wireless communications markets; and
- produce new products cost-efficiently.
We must continue to make significant investments in research and development
to seek to develop product enhancements, new designs and technologies. If we are
unable to develop and introduce new products or enhancements in a timely manner
in response to changing market conditions or customer requirements, or if our
new products do not achieve market acceptance, our sales could decline.
SEVERAL CUSTOMERS ACCOUNT FOR A HIGH PERCENTAGE OF OUR SALES AND THE LOSS OF, OR
A REDUCTION IN ORDERS FROM, A SIGNIFICANT CUSTOMER COULD RESULT IN A LOSS OF
SALES.
We depend on a small number of customers for a majority of our sales. During
the year ended December 31, 1999, we had three customers that accounted for
approximately 76% of our sales. We currently have two customers, Nortel Networks
and Lucent Technologies, which each account for more than 10% of our sales. In
the first quarter of 2000, approximately 59% of our sales were attributable to
these two customers. We anticipate that we will continue to sell a majority of
our products to a relatively small group of customers. The loss of, or a
reduction in orders from, a significant customer for any reason could cause our
sales to decrease.
OUR POTENTIAL CUSTOMERS OPERATE IN AN INTENSELY COMPETITIVE ENVIRONMENT AND OUR
SUCCESS WILL DEPEND ON THE SUCCESS OF OUR CUSTOMERS.
The companies in our target markets, communications equipment companies and
service providers, face an extremely competitive environment. If the companies
with whom we establish business relations are not successful in building their
systems, promoting their products, including new revenue-generating services,
receiving requisite approvals and accomplishing the many other requirements for
the success of their businesses, our growth will be limited. Furthermore, our
customers may have difficulty obtaining
4
<PAGE>
parts from other suppliers causing these customers to cancel or delay orders for
our products. Moreover, our customers' success is affected by a number of
factors, many of which are out of our control, including:
- new product introductions;
- manufacturing strategy;
- product life cycles;
- success of their products;
- changes in inventory levels;
- regulatory approvals;
- competitive conditions;
- contract awards; and
- general economic conditions.
In addition, we have limited ability to foresee the competitive success of
our customers and to plan accordingly.
IF THE FIBER OPTIC, BROADBAND CABLE AND WIRELESS COMMUNICATIONS MARKETS FAIL TO
GROW OR THEY DECLINE, OUR SALES MAY NOT GROW OR MAY DECLINE.
Our future growth depends on the success of the fiber optic, broadband cable
and wireless communications markets. The rate at which these markets will grow
is difficult to predict. These markets may fail to grow or decline for many
reasons, including:
- the inability of fiber optic or wireless communications service providers
to handle growing demands for faster transmission of increasing amounts of
data for broadband applications;
- inefficiency and poor performance of fiber optic, broadband cable or
wireless communications services compared to other forms of broadband
access;
- insufficient consumer demand for fiber optic, broadband cable or wireless
products or services; and
- real or perceived security or health risks associated with wireless
communications.
If the markets for our products in fiber optic, broadband cable or wireless
communications fail to grow, or grow more slowly than we anticipate, the use of
our products may decline and our sales could suffer.
IF THE INTERNET DOES NOT CONTINUE TO EXPAND AND BROADBAND ACCESS TECHNOLOGIES
ARE NOT DEPLOYED TO SATISFY THE INCREASED BANDWIDTH REQUIREMENTS AS WE
ANTICIPATE, SALES OF OUR PRODUCTS MAY DECLINE.
Our future success depends on the continued growth of the Internet as a
widely-used medium for commerce and communications, the continuing increase in
the amount of data transmitted over communications networks and the growth of
broadband communications networks to meet the increased demand for bandwidth. If
the Internet does not continue to expand as a widespread communications medium
and commercial marketplace, the need for significantly increased bandwidth
across networks and the market for broadband communications equipment may not
continue to develop. Future demand for our products is uncertain and will depend
to a great degree on the continued growth and deployment of new broadband
communications equipment. If this growth does not continue, sales of our
products may decline.
IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE
MANUFACTURING DELAYS.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. It is very important that we accurately predict both
the demand for our products and the
5
<PAGE>
lead times required to obtain the necessary components and materials. Lead times
for components and materials that we order vary significantly and depend on
factors such as specific supplier requirements, the size of the order, contract
terms and current market demand for the components. For substantial increases in
production levels, some suppliers may need six months or more lead time. If we
overestimate our component and material requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component and
material requirements, we may have inadequate inventory, which could interrupt
our manufacturing and delay delivery of our products to our customers. Any of
these occurrences would negatively impact our sales.
WE DEPEND ON SINGLE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY COMPONENTS
AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR
PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We typically purchase our components and materials through purchase orders,
and we have no guaranteed supply arrangements with any of our suppliers. We
currently purchase several key components and materials used in the manufacture
of our products from single or limited source suppliers. Recently, we faced
difficulties obtaining tantalum capacitors, GaAs wafers and ceramic substrates.
We may fail to obtain required components in a timely manner in the future. We
may also experience difficulty identifying alternative sources of supply for the
components used in our products. We would experience delays if we were required
to test and evaluate products of potential alternative suppliers. Furthermore,
financial or other difficulties faced by our suppliers or significant changes in
demand for the components or materials they supply to us could limit the
availability of those components or materials to us. In addition, the majority
of our semiconductor products are packaged in The Philippines and Hong Kong.
Political and economic instability and changes in governmental regulations in
these areas could affect the ability of our overseas vendors to package our
products. Any interruption or delay in the supply of our required components,
materials or services, or our inability to obtain these components, materials or
services from alternate sources at acceptable prices and within a reasonable
amount of time, could impair our ability to meet scheduled product deliveries to
our customers and could cause customers to cancel orders.
WE FACE INTENSE COMPETITION, AND, IF WE DO NOT COMPETE EFFECTIVELY IN OUR
MARKETS, WE WILL LOSE SALES AND HAVE LOWER MARGINS.
The market for fiber optic and wireless communications services is
relatively new, rapidly evolving and intensely competitive, and we expect
competition to intensify further in the future. Many of our current and
potential competitors have substantially greater technical, financial,
marketing, distribution and other resources than we have. Price competition is
intense and the market prices and margins of products frequently decline after
competitors begin making similar products. A number of our competitors may have
greater name recognition and market acceptance of their products and
technologies. Furthermore, our competitors, or the competitors of our customers,
may develop new technologies, enhancements of existing products or new products
that offer superior price or performance features. These new products or
technologies could render obsolete our products or the systems of our customers
into which our products are integrated.
WE RELY ON OUR SENIOR MANAGEMENT AND MUST RETAIN AND ATTRACT QUALIFIED ENGINEERS
AND OTHER HIGHLY SKILLED PERSONNEL TO MAINTAIN AND GROW OUR BUSINESS.
Our performance is substantially dependent on the continued services and on
the performance of our senior management and our highly qualified team of
engineers. Our performance also depends on our ability to retain and motivate
our other executive officers and key employees. The loss of the services of any
of our executive officers or of a number of our engineers could harm our
business and results of operations. We have no "key man" life insurance
policies.
Our future success also depends on our ability to identify, attract, hire,
train, retain and motivate highly skilled technical, managerial, marketing and
customer service personnel. Competition for such
6
<PAGE>
personnel is intense, especially in the San Francisco Bay area, and we cannot
assure you that we will be able to successfully attract, integrate or retain
sufficiently qualified personnel. If we fail to attract, integrate and retain
the necessary personnel, our business could suffer significantly.
WE MAY PURSUE ACQUISITIONS AND INVESTMENTS THAT INVOLVE NUMEROUS RISKS,
INCLUDING THE USE OF CASH AND DIVERSION OF MANAGEMENT'S ATTENTION.
In the future, we may make acquisitions of and investments in new
businesses, products and technologies. If we identify an acquisition candidate,
we may not be able to successfully negotiate or finance the acquisition. Even if
we are successful, we may not be able to integrate the acquired businesses,
products or technologies into our existing business and products. Furthermore,
potential acquisitions and investments, whether or not consummated, may divert
our management's attention and require considerable expense. In addition, to
complete future acquisitions, we may issue equity securities, incur debt, assume
contingent liabilities or have amortization expenses and write-downs of acquired
assets, which could affect our profitability.
WE EXPECT TO EXPAND OUR OPERATIONS SIGNIFICANTLY AND OUR FAILURE TO MANAGE OUR
EXPANSION COULD LEAD TO CUSTOMER DISSATISFACTION, COST INEFFICIENCIES AND LOST
SALES OPPORTUNITIES.
We are currently experiencing a period of expansion and anticipate that
further expansion will be required to address potential growth in our customer
base and market opportunities. This expansion has placed, and is expected to
continue to place, a significant strain on our management, operational and
financial resources. To manage this growth, we will be required to improve
existing and implement new transaction processing, operational and financial
systems, procedures and controls, and to expand, train and manage our growing
employee base. We also will be required to expand our finance, administrative
and operations staff. We cannot assure you that our current and planned
personnel, systems, procedures and controls will be adequate to support our
future operations. Our failure to manage our growth effectively could harm our
business and prospects.
OUR RELOCATION MAY DISRUPT OUR BUSINESS AND MAY BE COSTLY IF IT IS NOT COMPLETED
ON TIME.
We are currently in the process of relocating our Palo Alto, California
operations to accommodate our growing operations. We are relocating to leased
office and manufacturing space in San Jose, California, which we believe
satisfies our current requirements. Our new location requires substantial
improvements and construction prior to our occupation. If these improvements and
construction are not completed as scheduled, we may have to remain in our Palo
Alto facility beyond the anticipated date, which would result in substantial
costs and expenses under our amended Palo Alto sublease. In addition, if we are
unable to relocate our operations in a timely manner, our production schedule
and product shipments may be delayed, which may, in turn, result in cancelled
orders and impaired relationships with our customers.
OUR BUSINESS IS SUBJECT TO THE RISKS OF PRODUCT RETURNS, PRODUCT LIABILITY AND
PRODUCT DEFECTS.
Products as complex as ours frequently contain undetected errors or defects,
especially when first introduced or when new versions are released. The
occurrence of errors could result in product returns from and reduced product
shipments to our customers. In addition, any failure by our products to properly
perform could result in claims against us by our customers. Such failure also
could result in the loss of or delay in market acceptance of our products or
harm our reputation. Due to the recent introduction of some of our products, we
have limited experience with the problems that could arise with these products.
Our purchase agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. However,
the limitation of liability provision contained in these agreements may not be
effective as a result of federal, state or local laws or ordinances or
unfavorable judicial decisions in the United States or other countries. Although
we maintain insurance to protect against claims associated with the use of our
products, our insurance coverage may not adequately
7
<PAGE>
cover all claims asserted against us. In addition, even ultimately unsuccessful
claims could result in costly litigation, divert our management's time and
resources and damage our customer relationships.
INFRINGEMENT OF OUR INTELLECTUAL PROPERTY RIGHTS COULD AFFECT OUR COMPETITIVE
POSITION, HARM OUR REPUTATION AND COST US MONEY.
We regard the protection of our copyrights, patents, service marks,
trademarks, trade dress and trade secrets as critical to our future success and
plan to rely on a combination of copyright, patent, trademark and trade secret
law, as well as on confidentiality procedures and contractual provisions, to
protect our proprietary rights. Adequate protection of our intellectual property
rights may not be available in every country where our products and services are
made available. We intend, as a general policy, to enter into confidentiality
and invention assignment agreements with all of our employees and contractors,
as well as into nondisclosure agreements with parties with which we conduct
business, to limit access to and disclosure of our proprietary information;
however, we have not done so on a uniform basis. As a result, we may not have
adequate remedies to preserve our trade secrets or prevent third parties from
using our technology without authorization. We cannot assure you that all future
employees, contractors and business partners will agree to these contracts, or
that, even if agreed to, these contractual arrangements or the other steps we
have taken to protect our intellectual property will prove sufficient to prevent
misappropriation of our technology or to deter independent third-party
development of similar technologies. If we are unable to execute these
agreements or take other steps to prevent misappropriation of our technology or
to deter independent development of similar technologies, our competitive
position and reputation could be materially harmed and we could be forced to
make significant expenditures.
We regularly file patent applications with the U.S. Patent and Trademark
Office covering particular aspects of our technology and intend to prosecute
such applications to the fullest extent of the law. Based upon our assessment of
our current and future technology, we may decide to file additional patent
applications in the future, and may decide to abandon current patent
applications. We cannot assure you that any patent application we have filed or
will file will result in an issued patent, or, if patents are issued to us, that
such patents will provide us with any competitive advantages and will not be
challenged by third parties or invalidated by the U.S. Patent and Trademark
Office. Any failure to protect our existing patents or to secure new patents may
limit our ability to protect the intellectual property rights that such patents
or patent applications were intended to cover. Furthermore, the patents of
others may impair our ability to do business.
We have several registered trademarks and service marks, in the United
States and abroad, and are in the process of registering others in the United
States. Nevertheless, we can not assure you that the U.S. Patent and Trademark
Office will grant us these registrations. Should we decide to apply to register
additional trademarks or service marks in foreign countries, there is no
guarantee that we will be able to secure such registrations. The inability to
register and adequately protect our trademarks and service marks could harm our
competitive position, reputation and financial condition.
CLAIMS THAT WE ARE INFRINGING THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS MAY
RESULT IN COSTLY LITIGATION.
As a provider of technologically advanced products, we are at particular
risk of becoming subject to litigation based on claims that we are infringing
the intellectual property rights of others. We have been notified that some of
our products may infringe the proprietary rights of third parties. While we
believe these claims to be without merit, we cannot assure you that we will be
able to resolve them without harming our business or operating results. These
and any future similar claims, whether meritorious or not, could be
time-consuming to defend, damage our reputation, result in substantial and
unanticipated costs associated with litigation and require us to enter into
royalty or licensing agreements, which may not be available on acceptable terms
or at all.
8
<PAGE>
THE VARIABILITY OF OUR MANUFACTURING YIELDS MAY AFFECT OUR GROSS MARGINS.
The success of our business depends largely on our ability to produce our
products efficiently through a manufacturing process that results in a large
number of usable products or yields, from any particular production run. In the
past, we have experienced significant delays in our product shipments due to
lower-than-expected production yields. Due to the rigid technical requirements
for our products and manufacturing processes, our production yields may be
negatively affected by a variety of factors, some of which are beyond our
control. For instance, yields may be reduced by:
- impurities in materials used;
- contamination of the manufacturing environment;
- human error, in part, due to insufficient employee training; 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
production yields in the future, our financial condition and operating results
may suffer.
WE ARE CURRENTLY INVOLVED IN CLASS ACTION LAWSUITS, WHICH COULD RESULT IN
SUBSTANTIAL COSTS AND DIVERT OUR MANAGEMENT'S ATTENTION AND RESOURCES.
In 1999, four securities class action suits were brought against us
alleging, among other things, breaches of fiduciary duty of our former directors
to our former shareholders in connection with our recapitalization merger. We
believe that these lawsuits are without merit. We have entered into a
non-binding memorandum of understanding with the plaintiffs' counsel to settle
the claims of unfairness and other breaches arising out of the recapitalization
merger on a basis that will not have a material financial impact on our
business; any settlement is, however, subject to the completion of discovery and
settlement documentation on a basis acceptable to plaintiffs' counsel, as well
as to court approval after notice to the class members. Accordingly, we cannot
assure you that the settlement will occur on the basis provided for in the
memorandum or at all. If the plaintiffs elect to pursue these claims or if the
court does not approve the settlement, we could be forced to pay damages or be
subject to court-ordered relief. In addition, we may be the target of other
litigation in the future. This pending and future litigation could result in
substantial costs to us and divert our management's attention and resources,
which could seriously affect our business and financial condition.
CHANGES IN THE REGULATORY ENVIRONMENT OF THE COMMUNICATIONS INDUSTRY MAY REDUCE
THE DEMAND FOR OUR PRODUCTS.
Since the passage of the Telecommunications Act of 1996, the communications
industry has undergone rapid growth. This has led and will likely continue to
lead to intense competition, short product life cycles, and, to some extent,
regulatory uncertainty in and outside the United States. The course of the
development of the communications industry is difficult to predict. For example,
the delays in governmental approval processes have in the past caused, and may
in the future cause, the cancellation, postponement or rescheduling of the
installation of communications systems by our customers. A reduction in network
infrastructure expenditures could negatively affect the use of our products.
Moreover, in the short term, deregulation may result in a delay or a reduction
in the procurement cycle because of the general uncertainty involved with the
transition period of businesses.
9
<PAGE>
OUR BUSINESS COULD BE HARMED BY KNOWN OR UNKNOWN LIABILITIES THAT WE RETAINED
WHEN WE SOLD PARTS OF OUR COMPANY.
We have recently completed the divestiture of all but our current business.
We have retained, however, various known and unknown liabilities associated with
the sold businesses, including liabilities associated with the environmental
condition of our facilities as well as some indemnity obligations with respect
to the sold businesses. If the unknown liabilities and obligations exceed our
expectations, this could materially harm our financial condition.
IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS WE COULD BE SUBJECT TO
SUBSTANTIAL FINES.
Two of our current and former production facilities have significant
environmental liabilities for which we have entered into and funded fixed price
remediation agreements and obtained cost-overrun and unknown pollution insurance
coverage. We cannot assure you that this insurance will be sufficient to cover
all liabilities related to these sites. In addition, we are subject to a variety
of federal, state and local governmental regulations relating to the storage,
discharge, handling, emission, generation, manufacture and disposal of toxic or
other hazardous substances used to manufacture our products. In the past, we
have been subject to periodic environmental reviews and audits, which have
resulted in minor fines. If we fail to comply with these regulations,
substantial fines could be imposed on us, and we could be required to suspend
production, alter manufacturing processes or cease operations.
IF RADIO FREQUENCY EMISSIONS POSE A HEALTH RISK, THE DEMAND FOR OUR PRODUCTS MAY
DECLINE.
Recent news reports have asserted that some radio frequency emissions from
wireless handsets may be linked to various health concerns, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. If it were determined or perceived that radio frequency
emissions from wireless communications equipment create a health risk, the
market for our wireless customers' products and, consequently, the demand for
our products could decline significantly.
OUR MANUFACTURING FACILITIES ARE CONCENTRATED IN AN AREA SUSCEPTIBLE TO
EARTHQUAKES.
Our headquarters and our manufacturing facilities are concentrated in an
area where there is a risk of significant earthquake activity. Substantially all
of the production equipment that currently accounts for our sales, as well as
planned additional production equipment, is or will be located in a known
earthquake zone. We cannot predict the extent of the damage that our facilities
and equipment would suffer in the event of an earthquake or how such damage
would affect our business. We do not maintain earthquake insurance.
RISKS RELATED TO THE OFFERING
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
COMMON STOCK IF YOU PURCHASE COMMON STOCK IN THIS OFFERING.
Purchasers of our common stock in this offering will experience immediate
and substantial dilution in the net tangible book value of their shares of our
common stock. At an assumed initial public offering price of $ per
share, which is the midpoint of the initial public offering price range set
forth on the cover of this prospectus, the dilution will be $ per
share in net tangible book value of common stock from the initial public
offering price, as more fully described under "Dilution."
YOUR INTERESTS AS HOLDERS OF OUR COMMON STOCK MAY CONFLICT WITH THOSE OF OUR
CONTROLLING STOCKHOLDER
As of May 31, 2000, Fox Paine beneficially owned 80.6% of our outstanding
share capital, and, after the offering, will continue to own approximately
% of our outstanding share capital. As a result,
10
<PAGE>
Fox Paine has and will continue to have control over the outcome of matters
requiring stockholder approval, including the power to:
- elect all of our directors and the directors of our subsidiaries;
- amend our charter or by-laws; and
- agree to or prevent mergers, consolidations or the sale of all or
substantially all of our assets or our subsidiaries' assets.
Fox Paine also will be able to delay, prevent or cause a change in control
relating to us. Fox Paine's control over us and our subsidiaries, and its
ability to delay or prevent a change in control relating to us could adversely
affect the market price of our common stock.
Fox Paine may in the future make significant investments in other
communications companies. Some of these companies may be our competitors. Fox
Paine and its affiliates are not obligated to advise us of any investment or
business opportunities of which they are aware, and they are not restricted or
prohibited from competing with us.
THE PRICE OF OUR COMMON STOCK MAY BE SUBJECT TO WIDE FLUCTUATIONS AND MAY TRADE
BELOW THE INITIAL PUBLIC OFFERING PRICE.
The market price of our common stock after this offering may vary from the
initial public offering price. Fluctuations in the price of our common stock may
result from multiple factors, some of which are beyond our control, including
quarterly operating results that fluctuate and vary from expectations. Factors
that could cause our quarterly operating results to fluctuate include:
- our inability to predict the timing and magnitude of sales of our products
due to our lengthy and variable sales cycle;
- the timing of our orders from and shipments to major customers and
possible cancellation of orders;
- the tendency of customers in our industry to order large quantities of
products on an irregular basis;
- the concentration of customer orders at the end of a quarter which may
result in products shipping in the following quarter;
- the length of time our customers spend in evaluating and testing our
products and our manufacturing process before purchasing our products;
- the timing of our introduction of new products or product enhancements;
- any delay in shipments caused by component shortages or other
manufacturing problems or regulatory issues;
- the reduction in the sales price of our products;
- the loss of or a reduction in orders from a major customer;
- customer responses to announcements of new products and product
enhancements by competitors and the entry of new competitors into our
markets; and
- general economic conditions in the markets served by our customers.
In addition, in recent months, the stock market has experienced extreme
price and volume fluctuations that often have been unrelated or disproportionate
to the operating performance of the underlying companies. As a result of these
fluctuations, our common stock may trade at prices below the initial public
offering price.
11
<PAGE>
THE VOLATILITY OF OUR STOCK PRICE MAY INDUCE CLASS ACTION LAWSUITS, WHICH COULD
RESULT IN SUBSTANTIAL COSTS AND DIVERSION OF OUR MANAGEMENT'S ATTENTION AND
COULD CAUSE OUR STOCK PRICE TO FALL FURTHER.
The public markets have experienced volatility that has particularly
affected the market prices of securities of many technology companies for
reasons that have often been unrelated to their operating results. In the past,
following periods of volatility in the market prices of their stock, many
companies have been the subjects of securities class action litigation.
Similarly, if our stock price is volatile we could face securities class action
litigation. Such litigation could result in substantial costs and divert
management's attention and resources, which could cause our stock price to fall
further. Furthermore, the volatility of our stock price, in addition to exposing
us to potential litigation, may adversely affect the market price of our common
stock and our company's visibility and credibility in our markets.
OUR SHARE PRICE MAY DECLINE DUE TO THE LARGE NUMBER OF SHARES OF OUR COMMON
STOCK ELIGIBLE FOR FUTURE SALE.
Sales of substantial amounts of our common stock after the offering, or the
possibility of such sales, could adversely affect the market price of our common
stock and impede our ability to raise capital through the issuance of equity
securities. See "Shares Eligible for Future Sale."
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking
statements are not historical facts but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "may," "will," "anticipates," "expects," "intends,"
"plans," "believes," "seeks" and "estimates" and variations of these words and
similar expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from
those expressed, implied or forecasted in the forward-looking statements. In
addition, the forward-looking events discussed in this prospectus might not
occur. These risks and uncertainties include, among others, those described in
"Risk Factors" starting on page 5 and elsewhere in this prospectus. You are
cautioned not to place undue reliance on these forward-looking statements, which
reflect our management's view only as of the date of this prospectus. Except as
required by law, we undertake no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
12
<PAGE>
USE OF PROCEEDS
We will receive net proceeds of approximately $ million from the sale of
shares of common stock at an assumed public offering price of $ per
share, which is the midpoint of the initial public offering price range set
forth on the cover of this prospectus, after deducting underwriting discounts
and commissions of $ million and estimated expenses of $ million. If the
underwriters exercise their over-allotment option in full, then the net proceeds
will be approximately $ million.
We intend to use up to $40.0 million of the net proceeds to repay the
aggregate principal amount outstanding under the two tranches of our senior
secured credit facility, which had estimated weighted average interest rates of
9.45% and 9.90% in the two-month period ended March 31, 2000 and mature in
December 2004 and 2005, respectively. We borrowed under our credit facility to
finance in part our recapitalization merger.
We currently estimate that we will use the balance of the net proceeds of
this offering to fund a portion of our capital expenditures, and for strategic
investments and acquisitions and general corporate purposes. We currently expect
that for 2000, capital expenditures will total approximately $13.6 million,
including expenditures for capital improvements to our new manufacturing
facility and corporate headquarters as well as the purchase of new production
equipment.
Pending any use, the net proceeds of this offering will be invested in
short-term, interest-bearing, investment grade securities.
DIVIDEND POLICY
In 1998 and 1999, we paid $3.7 million and $2.4 million in dividends,
respectively. Historically, we paid dividends on a quarterly basis. We do not
intend to pay cash dividends on our capital stock for the foreseeable future.
Instead, we intend to retain all earnings for use in the operation and expansion
of our business. Our board of directors will make any future determination of
the payment of dividends based upon various factors then existing, including,
but not limited to, our financial condition, operating results and current and
anticipated cash needs. In addition, covenants in our revolving credit facility
limit our ability to declare and pay cash dividends on our common stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2000:
- on an unaudited actual basis; and
- on an unaudited as adjusted basis to give effect to:
- the sale by us of shares of common stock at an assumed initial
public offering price of $ per share, which is the midpoint of the
initial public offering price range set forth on the cover of this
prospectus, after deducting underwriting discounts and commissions and
estimated offering expenses;
- the use of up to $40.0 million of the estimated net proceeds to repay the
outstanding indebtedness under our senior secured credit facility; and
- the write-off of deferred debt issuance costs and the expense of the
prepayment penalty related to the long-term debt.
This table should be read in conjunction with our consolidated financial
statements and notes to those consolidated financial statements included
elsewhere in this prospectus.
This information excludes:
- 9,706,196 shares of common stock that were subject to outstanding options
at March 31, 2000 at a weighted average exercise price of $2.05625 per
share; and
- 1,293,804 additional shares of common stock reserved for issuance under
our 2000 stock incentive plan.
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------
AS ADJUSTED
ACTUAL FOR OFFERING
-------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash and equivalents........................................ $15,552 $
======= =======
Current portion of long-term debt........................... 1,113 --
Long-term debt, net of current portion...................... 38,813 --
------- -------
Capital leases, net of current portion...................... 4,844 4,844
------- -------
Stockholders' equity:
Common stock ($0.01 par value) 100 million shares
authorized; 31,627,910 shares issued and outstanding;
as adjusted shares issued and outstanding........ 65,035
Retained earnings (deficit)............................. (66,067)
------- -------
Subscriptions receivable................................ (5,165) (5,165)
------- -------
Total stockholders' equity (deficit)................ (6,197)
------- -------
Total capitalization.............................. $38,573 $
======= =======
</TABLE>
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<PAGE>
DILUTION
As of March 31, 2000, we had an unaudited net tangible book value (deficit)
of approximately $(6.3) million, or approximately $(0.20) per share of common
stock. Net tangible book value (deficit) represents the amount of our total
tangible assets less our total liabilities divided by our shares of common stock
outstanding. Without taking into account any other changes in the net tangible
book value after March 31, 2000, other than to give effect to the receipt by us
of the net proceeds from the sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share, our
unaudited pro forma net tangible book value as of March 31, 2000 would have been
$ , or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an
immediate dilution in net tangible book value of $ per share of common stock
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share............. $
Net tangible book value (deficit) per share as of March
31, 2000.............................................. (0.20)
Increase in net tangible book value per share
attributable to new investors.........................
Pro forma net tangible book value per share after the
offering..................................................
Dilution per share to new investors......................... $
</TABLE>
The following table summarizes on an as adjusted basis, as of March 31,
2000, the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid by existing stockholders
and by new investors who purchase shares of common stock in this offering before
deducting the underwriting discounts and commissions and estimated offering
expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 31,627,910 $65,035,000 $2.06
New investors...............
----- -----
Total............... 100% 100%
</TABLE>
The share amounts in the tables above are based on 31,627,910 shares of
common stock outstanding as of March 31, 2000. The tables exclude:
- 9,706,196 shares of common stock that were subject to outstanding options
at March 31, 2000 at a weighted average exercise price of $2.05625 per
share; and
- 1,293,804 additional shares of common stock reserved for issuance under
our 2000 stock incentive plan.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and notes to those
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. We commenced our current operations in the beginning of 1996. Our
quarters end on the Friday closest to the calendar month's end. The selected
consolidated financial data for the years ended and as of December 31, 1997,
1998 and 1999 are derived from our audited consolidated financial statements
included elsewhere in this prospectus. The selected consolidated financial data
for the year ended and as of December 31, 1996 are derived from our unaudited
consolidated financial statements. The selected consolidated financial data for
the three months ended and as of March 26, 1999 and March 31, 2000 have been
derived from our unaudited interim consolidated financial statements included
elsewhere in this prospectus. In the opinion of management, our unaudited
consolidated financial statements have been prepared on a basis consistent with
our audited consolidated financial statements, and include all adjustments,
which are only normally recurring adjustments, necessary for a fair presentation
of the financial position and results of operations for the unaudited periods.
Operating results for the three months ended March 31, 2000 are not necessarily
indicative of the results for the year ending December 31, 2000 or for any
future period. The selected consolidated statement of operations data represent
our results from continuing operations only and the selected consolidated
balance sheet data exclude net assets from discontinued operations. For a
discussion of our discontinued operations, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and note 10 of the audited consolidated financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------
----------------------------------------- MARCH 26, MARCH 31,
1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Sales..................................... $12,633 $31,174 $63,568 $82,404 $23,528 $ 17,051
Cost of goods sold........................ 12,238 25,591 43,400 50,534 16,095 10,075
------- ------- ------- ------- ------- --------
Gross profit.............................. 395 5,583 20,168 31,870 7,433 6,976
Operating expenses:
Research and development.............. 6,585 10,204 14,124 16,806 3,934 4,145
Selling and administrative............ 3,463 2,219 4,035 5,331 1,262 2,569
Corporate administrative.............. 561 1,240 1,811 4,391 739 322
Recapitalization merger and other..... -- -- -- 3,223 -- 35,453
------- ------- ------- ------- ------- --------
Total operating expenses.......... 10,609 13,663 19,970 29,751 5,935 42,489
------- ------- ------- ------- ------- --------
Income (loss) from operations............. (10,214) (8,080) 198 2,119 1,498 (35,513)
Interest income........................... 789 2,198 5,681 5,070 844 1,026
Interest expense.......................... (1,574) (795) (601) (520) (120) (872)
Other income (expense)--net............... (459) (249) 1,220 412 184 (519)
Gain on disposition of real property...... -- 7,609 14,973 61,652 -- --
------- ------- ------- ------- ------- --------
Income (loss) from continuing operations
before income taxes..................... (11,458) 683 21,471 68,733 2,406 (35,878)
Income tax (provision) benefit............ 4,055 (240) (6,978) (26,383) (782) 10,764
------- ------- ------- ------- ------- --------
Income (loss) from continuing
operations.............................. $(7,403) $ 443 $14,493 $42,350 $ 1,624 $(25,114)
======= ======= ======= ======= ======= ========
Income (loss) from continuing operations
per share--basic........................ $ (0.04) $ 0.00 $ 0.09 $ 0.33 $ 0.01 $ (0.38)
======= ======= ======= ======= ======= ========
Income (loss) from continuing operations
per share--diluted...................... $ (0.04) $ 0.00 $ 0.09 $ 0.32 $ 0.01 $ (0.38)
======= ======= ======= ======= ======= ========
Shares used to calculate income (loss)
from continuing operations per
share--basic............................ 165,300 165,160 154,740 128,389 131,157 66,400
Shares used to calculate income (loss)
from continuing operations per
share--diluted.......................... 165,300 170,180 157,140 132,227 132,905 66,400
</TABLE>
16
<PAGE>
Working capital excludes net assets of discontinued operations in the amount
of $96,617, $35,563, $27,922, $20,237 and $7,494 as of December 31, 1996, 1997,
1998, 1999 and March 31, 2000, respectively. Total assets exclude net assets of
discontinued operations in the amount of $166,326, $97,317, $36,975, $20,237 and
$7,494 as of December 31, 1996, 1997, 1998, 1999 and March 31, 2000,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- MARCH 31,
1996 1997 1998 1999 2000
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents and short-term
investments........................ $ 15,702 $134,462 $ 64,624 $173,812 $15,552
Working capital...................... 30,889 131,963 90,660 179,077 18,794
Total assets......................... 55,878 182,668 147,614 223,383 60,899
Total debt........................... -- -- -- -- 39,926
Capital leases, net of current
portion............................ 7,565 5,190 5,066 4,902 4,844
Total stockholders' equity
(deficit).......................... $195,005 $220,987 $133,679 $202,137 $(6,197)
Dividends per common share........... $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ --
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO THOSE CONSOLIDATED FINANCIAL
STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. OUR DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS
AND UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS.
OUR ACTUAL RESULTS AND THE TIMING OF EVENTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND ELSEWHERE IN THIS
PROSPECTUS.
OUR HISTORY
We were founded as Watkins-Johnson Company in 1957 by Dr. Dean A. Watkins,
formerly a professor of electrical engineering at Stanford University, and
Dr. H. Richard Johnson, formerly an engineer at Hughes Laboratories. We began
developing and manufacturing microwave devices for government electronics and
space communications systems used for intelligence gathering and communications.
With the decline of the aerospace and defense industries in the 1990s, we
applied our radio-frequency, or RF expertise to the growing commercial
communications industry. In the mid-1990s, we were comprised of three primary
divisions, the semiconductor equipment group, the telecommunications group and
the microwave products group. In 1996, the microwave products group began to
develop commercial applications from its military technologies, which became our
initial products. In 1997, we sold the government electronics business within
the microwave products group to Stellex Microwave Systems, Inc. We retained the
commercial applications that we had developed and formally created a separate
business to develop these applications into products for the commercial
broadband communications market, including fiber optic and wireless networks.
In October 1999, an affiliate of Fox Paine agreed to enter into a
recapitalization merger transaction with us. In several transactions leading up
to the recapitalization merger, we divested all of our divisions other than our
current business operations, including the semiconductor equipment group and the
telecommunications group, along with the associated real estate assets. Since
the closing of the recapitalization merger on January 31, 2000, we have been
focused exclusively on providing product solutions that enable and facilitate
the development of fiber optic, broadband cable and wireless network
infrastructure. In April 2000, we changed our name from Watkins-Johnson Company
to WJ Communications, Inc. to highlight our focus on the commercial broadband
communications markets. We will reincorporate in Delaware in connection with
this offering.
Our statement of operations includes the costs of the recapitalization
merger as an expense. In addition, as a result of the continuing significant
ownership interest of the pre-recapitalization stockholders, no adjustments have
been made to the historical carrying amounts of our assets and liabilities as a
result of the recapitalization merger. Furthermore, the premium paid in cash to
stockholders in excess of that historical cost is shown as a reduction of
stockholders' equity.
OVERVIEW
We design, develop and manufacture innovative, high quality broadband
communications products that enable voice, data and image transport over fiber
optic, broadband cable and wireless communications networks around the world.
Our products are comprised of advanced, highly functional components and
integrated assemblies which address the RF challenges of both current and next
generation broadband communications networks. These products are used in the
network infrastructure supporting and facilitating mobile communications,
broadband high speed data transmission and enhanced voice services. Our core
expertise in gallium-arsenide, or GaAs, semiconductor and thin-film technology,
coupled with our exceptional RF design and manufacturing capabilities, have
enabled us to attain a leadership position in these broadband communications
markets.
18
<PAGE>
SALES
We sell our products predominantly to a few large equipment manufacturers
and service providers in the fiber optic, broadband cable and wireless network
infrastructure markets. Our major customers provide forecasted demand on at
least a monthly basis, which assists us in allocating our manufacturing
capacity. These forecasts, however, are subject to changes, including as a
result of changes in market conditions, and could fluctuate from quarter to
quarter.
We depend on a small number of customers for a majority of our sales. During
the year ended December 31, 1999, we had three customers that each accounted for
more than 10% of our sales, Lucent Technologies, Nortel Networks and Bartley.
During that period, approximately 76% of our sales were to these three
customers. In the three months ended March 31, 2000, approximately 59% of our
sales were to Nortel and Lucent, which were our only customers that accounted
for more than 10% of our sales for that period. We have diversified our customer
base over the last few years and we have expanded our product offering from
wireless mobile infrastructure products to include fiber optic, broadband cable
and fixed wireless products and intend to further diversify our customer base
and product offering in the future. However, we anticipate that we will continue
to sell a majority of our products to a relatively small group of customers.
Delays in manufacturing or supply procurement or other factors could potentially
cause cancellation, reduction or delay in orders by or in shipments to a
significant customer.
We recognize revenues upon transfer of title of our products to customers.
Generally, title passes upon shipment of our products. Beginning in March 2000,
our contract with Lucent converted to a consignment arrangement under which
title does not pass until Lucent utilizes our products in its production
processes. As a consequence, we recognize revenue on this contract only when
Lucent notifies us of product consumption. Less than 10% of our sales are made
to distributors, who maintain the right of return. As such returns historically
have been nominal, we recognize revenues for these customers upon shipment.
We provide a warranty on standard products and components and products
developed for specific customer or program applications. We estimate the
warranty cost based on our historical field return rates. To date, we have had
no significant warranty returns. We include warranty expense related to these
products in cost of goods sold.
COST OF GOODS SOLD
Our cost of goods sold consists primarily of:
- direct material costs of product components;
- production wages, taxes and benefits;
- costs of assembly by third party contract manufacturers;
- labor contracted on a temporary basis;
- supplies consumed in the manufacturing process;
- depreciation and amortization of manufacturing plant and equipment;
- allocated occupancy costs; and
- scrapped material used in the production process.
We recognize cost of goods sold upon recognition of revenue. We recognize
losses on contracts, including purchase orders, when identified.
19
<PAGE>
OPERATING EXPENSES
Our operating expenses are classified into three general categories:
research and development, selling and administrative, and corporate
administrative. We classify all charges to the research and development, selling
and administrative, and corporate administrative categories based on the nature
of the expenditures. Although each of these three categories includes expenses
that are unique to the category type, there are commonly recurring expenditures
that are typically included in these categories, such as wages, fringe benefit
costs, depreciation and allocated overhead.
RESEARCH AND DEVELOPMENT
Research and development expense represents wages, supplies and allocated
overhead costs to design, develop and improve products and processes. These
costs are expensed as incurred.
SELLING AND ADMINISTRATIVE
Selling and administrative expense consists primarily of wages, travel and
facility costs incurred by and other expenses allocated to our selling and
administrative departments. Selling and administrative expense also includes
manufacturer representatives and distributor sales commissions, trade show and
advertising expenses and fees and expenses of legal, accounting, and other
professional consultants.
CORPORATE ADMINISTRATIVE
Corporate administrative expense is comprised of costs incurred at our
corporate level that were allocated to our current business operations based on
projected business volume and services provided. The portion of this expense
which is continuing to be incurred after the closing of the recapitalization
merger is included in selling and administrative expense after January 31, 2000.
RECAPITALIZATION MERGER AND OTHER
Recapitalization merger and other expense is a non-recurring expenditure
comprised of employee retention and severance compensation, legal, professional
and other costs associated with our recapitalization merger and the sale of our
telecommunications group.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected items from our statements of
operations as a percentage of total sales for the periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
------------------------------------------------------------------
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------ ---------------------------------
1997 1998 1999 MARCH 26, 1999 MARCH 31, 2000
-------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Sales......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............ 82.1 68.3 61.3 68.4 59.1
----- ----- ----- ----- ------
Gross profit.................. 17.9 31.7 38.7 31.6 40.9
Operating expenses:
Research and
development............. 32.7 22.2 20.4 16.7 24.3
Selling and
administrative.......... 7.1 6.4 6.5 5.4 15.1
Corporate
administrative.......... 4.0 2.8 5.3 3.1 1.9
Recapitalization merger
and other............... -- -- 3.9 -- 207.9
----- ----- ----- ----- ------
Total operating
expenses............ 43.8 31.4 36.1 25.2 249.2
----- ----- ----- ----- ------
Income (loss) from
operations.................. (25.9) 0.3 2.6 6.4 (208.3)
Interest income............... 7.1 8.9 6.2 3.6 6.0
Interest expense.............. (2.6) (0.9) (0.6) (0.5) (5.1)
Other income (expense)--net... (0.8) 1.9 0.5 0.8 (3.0)
Gain on disposition of real
property.................... 24.4 23.6 74.8 0.0 0.0
----- ----- ----- ----- ------
Income (loss) from continuing
operations before income
taxes....................... 2.2 33.8 83.4 10.2 (210.4)
Income tax (provision)
benefit..................... (0.8) (11.0) (32.0) (3.3) 63.1
----- ----- ----- ----- ------
Income (loss) from continuing
operations.................. 1.4% 22.8% 51.4% 6.9% (147.3)%
===== ===== ===== ===== ======
</TABLE>
The following table sets forth our sales by product category for the years
ended December 31, 1997, 1998 and 1999 and for the unaudited three-month periods
ended March 26, 1999 and March 31, 2000:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------ -------------------------------
1997 1998 1999 MARCH 26, 1999 MARCH 31, 2000
-------- -------- -------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Sales:
Semiconductor............. $ 3,651 $ 9,763 $15,625 $ 2,862 $ 4,877
Fiber optic............... 676 7,251 15,228 2,821 6,370
Wireless.................. 26,847 46,554 51,551 17,845 5,804
------- ------- ------- ------- -------
Total sales........... $31,174 $63,568 $82,404 $23,528 $17,051
======= ======= ======= ======= =======
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 26, 1999 AND MARCH 31, 2000
SALES. Sales decreased 27% to $17.1 million in the first quarter 2000 from
$23.5 million in the first quarter 1999 primarily due to the completion in the
second quarter 1999 of our contract with a major customer to build
wireless-local-loop products, which represented 59% of our first quarter 1999
sales. The
21
<PAGE>
decrease in wireless-local-loop sales was partially offset by increases in sales
of fiber optic and semiconductor products.
COST OF GOODS SOLD. Cost of goods sold decreased 37% to $10.1 million in
the first quarter 2000 from $16.1 million in the first quarter 1999. This
decrease resulted primarily from the decrease in sales of wireless-local-loop
products in the first quarter 2000. The decrease was partially offset by costs
associated with increased sales of fiber optic and semiconductor products. Our
cost of goods sold as a percentage of sales decreased to 59% in the first
quarter 2000 from 68% in the first quarter 1999. This decrease was mostly due to
increased sales of semiconductor and fiber optic products which have lower
variable product costs.
RESEARCH AND DEVELOPMENT. Research and development expense increased 5% to
$4.1 million in the first quarter 2000 from $3.9 million in the first quarter
1999. This increase was primarily attributable to our continued spending on the
development of wireless broadband access products and semiconductor products as
well as new spending on fiber optic product development. Research and
development expense as a percentage of sales increased to 24% in the first
quarter 2000 from 17% in the first quarter 1999. This increase was primarily the
result of the lower level of sales in the first quarter 2000.
SELLING AND ADMINISTRATIVE. Selling and administrative expense increased
100% to $2.6 million in the first quarter 2000 from $1.3 million in the first
quarter 1999. This increase was primarily attributable to an increase in
recruiting and human resources expense, as well as costs associated with
additional sales resources and commissions in the first quarter 2000. Selling
and administrative expense as a percentage of sales increased to 15% in the
first quarter 2000 from 5% in the first quarter 1999 as a result of the
increases in selling and administrative costs described above combined with the
lower level of sales in the first quarter 2000.
CORPORATE ADMINISTRATIVE. Corporate administrative expense decreased 57% to
$322,000 in the first quarter 2000 from $739,000 in the first quarter 1999. This
decrease resulted from the winding-down of corporate activities at the corporate
level as a result of the recapitalization merger. It was also attributable to
the fact that in the first quarter 2000 these expenses were only included in
corporate administrative expense through January 31, 2000. After that date, the
portion of these costs which continued to be incurred were included in selling
and administrative expense. In future periods, all of these costs which continue
to be incurred will be classified as selling and administrative expense.
RECAPITALIZATION MERGER AND OTHER. We incurred the recapitalization merger
and other expense of $35.5 million in the first quarter 2000 related to our
recapitalization merger. There was no corresponding expense in the first quarter
1999.
INTEREST INCOME. Interest income primarily represents interest earned on
short-term available-for-sale investments. Interest income increased 25% to
$1.0 million in the first quarter 2000 from $844,000 in the first quarter 1999.
This increase resulted from increased average amounts of funds available for
investment during the first quarter 2000 as compared to the first quarter 1999.
INTEREST EXPENSE. Interest expense increased to $872,000 in the first
quarter 2000 from $120,000 in the first quarter 1999. This increase resulted
primarily from interest expense related to the new credit facility with CIBC
World Markets that we entered into as part of the recapitalization merger.
OTHER INCOME (EXPENSE)--NET. Other income (expense)--net, decreased to
$519,000 of other expense in the first quarter 2000 from $184,000 of other
income in the first quarter 1999. This decrease is primarily related to losses
realized in the first quarter 2000 when we liquidated short-term investments to
fund in part the recapitalization merger.
INCOME TAX (PROVISION) BENEFIT. Income tax (provision) benefit consists of
federal and state income taxes. Our first quarter 1999 effective tax rate was
32.5%. It was lower than the statutory rate mostly due to benefits derived from
our foreign sales corporation and research tax credits. In the first quarter
2000, our effective tax rate was 30.0%. In this period, we had an effective tax
benefit as a result of the recapitalization merger with Fox Paine.
22
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999
SALES. Sales increased 30% to $82.4 million in 1999 from $63.6 million in
1998 primarily due to product development efforts which resulted in
significantly increased product offerings and shipments to customers. In
particular, higher shipments in fiber optic, semiconductor and
wireless-local-loop products contributed to our sales growth in 1999.
COST OF GOODS SOLD. Cost of goods sold increased 16% to $50.5 million in
1999 from $43.4 million in 1998. This was primarily due to increased costs
resulting from our increase in sales. Cost of goods sold as a percentage of
sales decreased to 61% in 1999 from 68% in 1998, as we leveraged our fixed costs
over a higher sales volume.
RESEARCH AND DEVELOPMENT. Research and development expense increased 19% to
$16.8 million in 1999 from $14.1 million in 1998. This increase was primarily a
result of our increased product development efforts related to future generation
fiber optic, broadband cable and semiconductor products and wireless broadband
equipment. Research and development expense as a percentage of sales decreased
to 20% in 1999 from 22% in 1998 as a result of a greater increase in sales
during the period.
SELLING AND ADMINISTRATIVE. Selling and administrative expense increased
33% to $5.3 million in 1999 from $4.0 million in 1998. This increase was
primarily due to increased costs relating to an increase in sales. Selling and
administrative expense as a percentage of sales remained approximately 6% for
both years.
CORPORATE ADMINISTRATIVE. Corporate administrative expense increased 144%
to $4.4 million in 1999 from $1.8 million in 1998. This increase resulted
primarily from a larger amount of corporate costs being allocated to our current
business in comparison to other divisions previously operated by us, as our
current business experienced overall sales growth during the period while sales
from other divisions were declining. Following the merger recapitalization, we
expect that the portion of these costs which will continue to be incurred will
decline, with the ongoing costs included in selling and administrative expense
in the future.
RECAPITALIZATION MERGER AND OTHER. We incurred recapitalization merger and
other expense of $3.2 million principally during the third and fourth quarter
1999 related to our recapitalization merger and the sale of our
telecommunications group. There was no corresponding expense in 1998.
INTEREST INCOME. Interest income decreased 11% to $5.1 million in 1999 from
$5.7 million in 1998. This decrease resulted from the lower average amounts of
funds available for investment during 1999.
INTEREST EXPENSE. Interest expense decreased 13% to $520,000 in 1999 from
$601,000 in 1998. This decrease resulted from the amortization of the interest
component of our capital lease obligations in 1999.
OTHER INCOME (EXPENSE)--NET. Other income (expense)--net, decreased to
$412,000 in 1999 from $1.2 million in 1998. This decrease is primarily due to an
increase in the costs of administering our sublease of the Palo Alto facility
during 1999. These costs primarily related to the facility repairs.
GAIN ON DISPOSITION OF REAL PROPERTY. In 1999, we completed the sale of our
San Jose, California facility including a 190,000 square foot building,
resulting in net proceeds of about $16.9 million and a pre-tax gain of
$9.7 million. This property was vacated in 1998. Also in 1999, we completed the
sale of one of our long-term lease interests involving about 16 acres in Palo
Alto, California to Stanford University, resulting in net proceeds of
approximately $54.0 million and a pre-tax gain of $51.8 million.
In 1998, we sold approximately 15 acres of undeveloped land adjacent to our
San Jose, California, facility for net proceeds of $16.0 million and a pre-tax
gain of $15.0 million. The remainder of the San Jose property was sold in 1999.
23
<PAGE>
INCOME TAX (PROVISION) BENEFIT. Our effective tax rate increased to 38.4%
in 1999 from 32.5% in 1998. This increase was primarily related to higher taxes
paid in 1999 on the gain on real property.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
SALES. Sales increased 104% to $63.6 million in 1998 from $31.2 million in
1997 due to increased demand for our semiconductor, fiber optic and wireless
products including custom RF subsystems for PCS base stations and
wireless-local-loop customer premise equipment. In addition, fourth quarter 1998
shipments included our first large order for outdoor repeaters from a major
wireless carrier.
COST OF GOODS SOLD. Cost of goods sold increased 70% to $43.4 million in
1998 from $25.6 million in 1997. This increase is primarily due to increased
costs resulting from the increase in sales. Cost of goods sold as a percentage
of sales decreased to 68% in 1998 from 82% in 1997, as we leveraged our fixed
costs over higher sales volume.
RESEARCH AND DEVELOPMENT. Research and development expense increased 38% to
$14.1 million in 1998 from $10.2 million in 1997. This increase was primarily
attributable to increased research and development activities in 1998 related to
the launch of several products. Research and development expense as a percentage
of sales decreased to 22% in 1998 from 33% in 1997 due to greater increases in
sales in 1998 resulting from our product development efforts.
SELLING AND ADMINISTRATIVE. Selling and administrative expense increased
82% to $4.0 million in 1998 from $2.2 million in 1997. This increase was
primarily attributable to our increased sales efforts in 1998. Selling and
administrative expense as a percentage of sales decreased to 6% in 1998 from 7%
in 1997 primarily as a result of the increase in sales during this period.
CORPORATE ADMINISTRATIVE. Corporate administrative expense increased 50% to
$1.8 million in 1998 from $1.2 million in 1997. This increase primarily resulted
from a larger amount of corporate level costs being allocated to our current
business, as it achieved significant sales growth in 1998 while sales from other
business divisions were declining.
INTEREST INCOME. Interest income increased 159% to $5.7 million in 1998
from $2.2 million in 1997. This increase resulted from an increased average
amount of funds available for investment during the year in 1998.
INTEREST EXPENSE. Interest expense decreased 24% to $601,000 in 1998 from
$795,000 in 1997. This decrease resulted from the amortization of the interest
component of our capital lease obligations during 1998.
OTHER INCOME (EXPENSE)--NET. Other income (expense)--net, increased to
$1.2 million of other income in 1998 from $249,000 of other expense in 1997.
This increase is primarily due to a full year of net rental income of
approximately $1.2 million from subleasing part of the Palo Alto facility in
1998. In 1997, we only received two months of rental income related to this
facility, as the sublease agreement did not commence until the divestiture of
the government electronics group in October of 1997.
GAIN ON DISPOSITION OF REAL PROPERTY. In 1998, we sold approximately 15
acres of undeveloped land adjacent to our San Jose, California, facility for net
proceeds of $16.0 million and a pre-tax gain of $15.0 million. The remainder of
the San Jose property was sold in 1999.
In 1997, we exchanged a portion of our subleased interest at our Palo Alto,
California, facility for consideration consisting of cash and the sublessor's
leasehold rights in the remaining parcels under the lease. The exchange resulted
in a pre-tax gain of $7.6 million.
24
<PAGE>
INCOME TAX (PROVISION) BENEFIT. Our effective tax rate decreased to 32.5%
in 1998 from 35.1% in 1997. This decrease was primarily related to a decrease in
our effective state tax rate that resulted from an increase in tax credits
utilized for state tax purposes.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, selected data
from our consolidated statements of operations and the data as a percentage of
sales on a quarterly basis. The consolidated statements of operations data have
been derived from our unaudited consolidated financial statements. In the
opinion of management, these statements have been prepared on substantially the
same basis as the audited consolidated financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information for the periods presented. This
information should be read in conjunction with the consolidated financial
statements and notes to those financial statements included elsewhere in this
prospectus.
25
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MARCH 26, JUNE 25, SEPT. 24, DEC. 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Sales............................... $23,528 $23,688 $16,524 $18,664 $ 17,051
Cost of goods sold.................. 16,095 13,730 9,684 11,025 10,075
------- ------- ------- -------- --------
Gross profit........................ 7,433 9,958 6,840 7,639 6,976
Operating expenses:
Research and development........ 3,934 4,717 4,367 3,788 4,145
Selling and administrative...... 1,262 1,290 1,168 1,611 2,569
Corporate administrative........ 739 1,113 1,181 1,358 322
Recapitalization merger and
other......................... -- -- 1,639 1,584 35,453
------- ------- ------- -------- --------
Total operating expenses.... 5,935 7,120 8,355 8,341 42,489
------- ------- ------- -------- --------
Income (loss) from operations....... 1,498 2,838 (1,515) (702) (35,513)
Interest income..................... 844 780 1,084 2,362 1,026
Interest expense.................... (120) (125) (134) (141) (872)
Other income (expense)--net......... 184 (28) 165 91 (519)
Gain on disposition of real
property.......................... -- -- 9,686 51,966 --
------- ------- ------- -------- --------
Income (loss) from continuing
operations before income taxes.... 2,406 3,465 9,286 53,576 (35,878)
Income tax (provision) benefit...... (782) (1,121) (2,964) (21,516) 10,764
------- ------- ------- -------- --------
Income (loss) from continuing
operations........................ $ 1,624 $ 2,344 $ 6,322 $32,060 $(25,114)
======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF SALES
-------------------------------------------------------
MARCH 26, JUNE 25, SEPT. 24, DEC. 31, MARCH 31,
1999 1999 1999 1999 2000
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................... 68.4 58.0 58.6 59.1 59.1
----- ----- ----- ------ ------
Gross profit............................ 31.6 42.0 41.4 40.9 40.9
Operating expenses:
Research and development............ 16.7 19.9 26.4 20.3 24.3
Selling and administrative.......... 5.4 5.4 7.1 8.6 15.1
Corporate administrative............ 3.1 4.7 7.1 7.3 1.9
Recapitalization merger and other... 0.0 0.0 9.9 8.5 207.9
----- ----- ----- ------ ------
Total operating expenses........ 25.2 30.1 50.6 44.7 249.2
----- ----- ----- ------ ------
Income (loss) before operations......... 6.4 12.0 (9.2) (3.8) (208.3)
Interest income......................... 3.6 3.3 6.6 12.7 6.0
Interest expense........................ (0.5) (0.5) (0.8) (0.8) (5.1)
Other income (expense)--net............. 0.8 (0.1) 1.0 0.5 (3.0)
Gain on disposition of real property.... 0.0 0.0 58.6 278.4 0.0
----- ----- ----- ------ ------
Income (loss) from continuing operations
before income taxes................... 10.2 14.6 56.2 287.1 (210.4)
Income tax (provision) benefit.......... (3.3) (4.7) (17.9) (115.3) 63.1
----- ----- ----- ------ ------
Income (loss) from continuing
operations............................ 6.9% 9.9% 38.3% 171.8% (147.3)%
===== ===== ===== ====== ======
</TABLE>
26
<PAGE>
The following discussion highlights significant events that impacted our
sales and financial results in the five quarters ended March 31, 2000. You
should not rely on our prior results in any quarter as an indication of our
future performance.
SALES. For the five-quarter period presented, sales were at peak levels
during the first and second quarter of 1999, due primarily to large shipments of
our wireless-local-loop products. These wireless-local-loop shipments and our
customer requirements for them were completed in the second quarter 1999. Total
sales for all other products have grown on a quarter-by-quarter basis from the
first quarter 1999 with the exception of the first quarter 2000. In the first
quarter 2000, our sales were negatively impacted as our contract with Lucent
Technologies converted to a consignment arrangement under which title will not
pass, and we will therefore not recognize sales, until Lucent Technologies
utilizes our products in its production processes.
COST OF GOODS SOLD. For the five quarters presented, cost of goods sold as
a percentage of sales was at its highest level in the first quarter 1999. This
was primarily a result of costs related to the wireless-local-loop products and
the higher variable product costs required for manufacturing these products.
Cost of goods sold as a percentage of sales decreased in the second quarter 1999
as a result of our product mix and higher level of manufacturing efficiency as
we completed the wireless-local-loop orders. We expect cost of goods sold as a
percentage of sales to increase in the near term as new products are
transitioned from development to manufacturing and a new operating lease
commences in the third quarter 2000 in connection with the relocation of our
Palo Alto, California operations to San Jose, California.
RESEARCH AND DEVELOPMENT. Research and development expense generally
decreased in each of the five quarters presented, with the exception of
increases in the second quarter 1999 and the first quarter 2000. The decreases
primarily relate to lower supplies consumed and lower related support costs
allocable to research and development activities. The increases were primarily
due to the addition of personnel and supplies required to improve and develop
new products and processes. We expect research and development expense to
continue to increase as we continue to support future growth of our
semiconductor, fiber optic and wireless products.
SELLING AND ADMINISTRATIVE. Selling and administrative expense increased in
each of the five quarters presented, with the exception of a small decrease in
the third quarter 1999. The increases were primarily due to an increase in the
number of sales and marketing personnel, sales commissions and recruiting
expenses. We expect selling and administrative expense to increase as we
continue to expand our sales and administrative organization.
CORPORATE ADMINISTRATIVE. Corporate administrative expense increased in
each of the five quarters presented, with the exception of a decrease in the
first quarter 2000. The increases resulted primarily from corporate
administrative expense incurred at our corporate level that we allocated to our
current business as it experienced overall sales growth during these periods
relative to the corporation as a whole. Following the recapitalization merger on
January 31, 2000, we expect the portion of these costs which continue to be
incurred to decline, with the ongoing costs included in selling and
administrative expense in the future.
INTEREST INCOME. Interest income for the five-quarter period presented
varied primarily as a result of the average amount of funds available for
investment during the period.
INTEREST EXPENSE. Interest expense remained at approximately the same
amount in the five quarters presented with the exception of the first quarter
2000. Interest expense for that quarter was higher due to our new credit
facility that we entered into as part of the recapitalization merger. We expect
interest expense to be lower in future quarters if we raise sufficient funds in
the offering to repay the amounts currently outstanding under this facility.
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OTHER INCOME (EXPENSE)--NET. For the four quarters in the period ended
December 31, 1999, net rental income generated from the sublease on our Palo
Alto facility decreased mostly due to higher facility repairs. Other income
(expense)--net, declined in the first quarter 2000 primarily due to losses
realized in the liquidation of short-term investments to fund in part the
recapitalization merger. Other income (expense)--net, is expected to decrease in
the fourth quarter of 2000, as the Palo Alto, California sublease arrangement is
scheduled to expire.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments decreased from
$173.8 million at December 31, 1999 to $15.6 million at the end of March 31,
2000. The decrease was attributable to cash required to complete the
recapitalization merger on January 31, 2000. The recapitalization merger was
accomplished with our cash on hand, proceeds from the sale of the
telecommunications group, proceeds from the sale of equity to Fox Paine for
$50.8 million, $4.9 million in roll-over equity by an existing stockholder, and
$40.0 million drawn from the new credit facility.
This credit facility is comprised of a $15.0 million five-year revolver, a
$25.0 million five-year term A loan, and a $15.0 million six-year term B loan.
The initial interest rates were LIBOR plus 3.25% for the revolver and the term A
facility and LIBOR plus 3.75% for the term B facility. Six months after the
initial pricing, interest rates are to be determined by a leveraged-based
pricing grid. The revolver has a 0.50% commitment fee payable on the undrawn
portion. The credit facility is secured by substantially all of our tangible and
intangible assets. As of March 31, 2000, $25.0 million was outstanding under the
term A facility and $15.0 million was outstanding under the term B facility. The
applicable interest rates for the two-month period ended March 31, 2000 averaged
9.45% and 9.90% for the term A and B facility, respectively. The credit facility
requires that a mandatory prepayment of an estimated $9.3 million be made on
August 4, 2000, related to final settlements of transactions which occurred
prior to the merger recapitalization. We expect to use a portion of the net
proceeds to repay the outstanding balance of our credit facility.
As of March 31, 2000, working capital, excluding net assets of discontinued
operations, was $18.8 million. Based on current plans and business conditions,
we believe that our existing cash, cash equivalents, short-term investments,
cash generated from operations, and available credit facility will satisfy our
anticipated cash and working capital requirements for the next twelve months
regardless of whether or not the offering is completed.
NET CASH PROVIDED (USED) BY CONTINUING OPERATING ACTIVITIES. Net cash
provided by continuing operating activities in 1999 of $4.0 million primarily
resulted from higher net income and positive net working capital generated from
our continuing operations. Excluding certain nonrecurring transactions and
related deferred and income tax effects, net cash used by continuing operating
activities in 1998 and 1997 was approximately $3.0 million and $1.0 million,
respectively.
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES. Net cash provided by
investing activities increased $122.3 million to $87.8 million in 1999 from a
use of cash in 1998 of $34.5 million. The majority of the increase was
attributable to proceeds related to sales of a number of our real property
assets and asset retirements. In 1999, we completed the sale of our San Jose,
California facility resulting in net proceeds of $16.9 million and a pre-tax
gain of $9.7 million. Also during 1999, we completed the sale of one of our Palo
Alto leasehold interests involving approximately 16 acres in Palo Alto,
California, resulting in proceeds of approximately $54.0 million and a pre-tax
gain of approximately $51.8 million. In addition, in 1999, we also had proceeds
of $20.0 million from the sale of our discontinued operations.
Net cash used in investing activities in 1998 of $34.5 million decreased
from net cash provided by investing activities in 1997 of $83.5 million,
primarily as a result of proceeds of $77.9 million from the sale of the
government electronics group in 1997 and an increase in short term investments
of $45.1 million in 1998. These short-term investments primarily consisted of
commercial paper and municipal bond funds.
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We also sold undeveloped land adjacent to our San Jose, California facility
resulting in net proceeds of approximately $16.0 million in 1998.
CAPITAL EXPENDITURES. Capital expenditures were $4.8 million in 1999,
$5.7 million in 1998 and $2.9 million in 1997. Capital expenditures are
projected to be approximately $13.6 million and $12.5 million in 2000 and 2001,
respectively. In 2000, approximately $6.0 million of the capital expenditures is
budgeted for capital improvements related to the relocation of the Palo Alto,
California facility to San Jose, California. The balance of capital expenditures
in 2000 and 2001 is projected for the purchase of new production equipment to
meet the expected growth in demand for our products. As of the end of 1999,
there were no material commitments for capital expenditures.
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES. Net cash provided by
financing activities was $2.4 million in 1999, as compared to net cash used in
financing activities of $38.4 million and $9.3 million in 1998 and 1997,
respectively. The use of cash in 1997 and 1998 primarily resulted from our stock
repurchase program. In 1998, our board of directors authorized us to increase
the amount of common stock we could repurchase to 70 million shares. By
December 31, 1998, we had repurchased all 70 million shares (giving effect to
the stock split). We repurchased 35.9 million shares in 1998 for approximately
$36.2 million and 4.1 million shares in 1997 for approximately $5.7 million.
DISCONTINUED OPERATIONS. We divested three businesses that are being
reported as discontinued operations. The net income (loss) from each of these
discontinued operations, and the resultant gains (losses) on disposition for
1997, 1998 and 1999, were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------- ---------------------- ----------------------
NET NET NET
INCOME GAIN FROM INCOME GAIN FROM INCOME GAIN FROM
(LOSS) DISPOSITION (LOSS) DISPOSITION (LOSS) DISPOSITION
-------- ----------- -------- ----------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Government electronics............. $ 7,210 $29,677 $ -- $ -- $ -- $ 3,323
Semiconductor equipment............ (8,998) -- (54,288) -- 6,512 12,506
Telecommunications................. 4,593 -- (9,413) -- 3,149 --
------- ------- -------- ------ ------ -------
Total.......................... $ 2,805 $29,677 $(63,701) $ -- $9,661 $15,829
======= ======= ======== ====== ====== =======
</TABLE>
We divested the government electronics business in October 1997, resulting
in net gains of $29.7 million in 1997 and $3.3 million in 1999. We divested the
semiconductor equipment business in July 1999, resulting in a net gain of
$12.5 million in 1999. We divested the telecommunications business in
January 2000, resulting in a net gain of $31.4 million in the first quarter
2000.
Please refer to note 10 to the consolidated financial statements for further
information regarding our discontinued operations.
OTHER MATTERS
ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards
Board, or FASB, issued Statement of Financial Accounting Standard 133,
"Accounting for Derivative Instruments and Hedging Activities." In June of 1999,
the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS 133." These statements
require companies to record derivatives on the balance sheet as either assets or
liabilities, measured at fair market value. Gains and losses resulting from
changes in the fair market values of those derivative instruments would be
accounted for depending on the use of the instrument and whether it qualifies
for hedge accounting. SFAS 133 will be effective for our fiscal year ending
December 31, 2001. We are currently in the process of evaluating any impact on
our financial condition or results of operations resulting from these
statements.
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We do not expect that the adoption of SFAS 133 will have a significant impact on
our financial statements in future periods.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition in financial statements. We believe that our
current accounting policies are in accordance with SAB 101.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB No. 25. Interpretation No. 44 is
effective July 1, 2000. The Interpretation clarifies the application of
Opinion 25 for various issues, specifically:
- the definition of an employee;
- the criteria for determining whether a plan qualifies as a
non-compensatory plan;
- the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a business
combination.
We do not anticipate that the adoption of Interpretation No. 44 will have a
material impact on our financial position or the results of our operations.
ENVIRONMENTAL MATTERS. Of our current and former production facilities, two
have known environmental liabilities of significance, the Scotts Valley site and
the Palo Alto site. Prior to the recapitalization merger, we entered into and
funded fixed price remediation contracts, as well as cost overrun and unknown
pollution conditions liability coverage, with respect to both these sites. For a
more detailed description, see "Business--Environmental Matters."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed
to market risk related to changes in interest rates and foreign currency
exchange rates. We do not use derivative financial instruments for speculative
or trading purposes.
- INTEREST RATES. We are exposed to changes in interest rates primarily
from our credit facility. As a result of the recapitalization merger, the
level of funds invested in short-term securities has decreased from
historical levels, thus reducing our exposure to changes in interest
rates.
- FOREIGN EXCHANGE RATES. In the future, we may enter into foreign exchange
forward contracts to hedge some balance sheet exposures and specific
transactions denominated in a foreign currency. We currently have no
foreign exchange forward contracts outstanding. We may be exposed to
credit-related losses in the event of nonperformance by counterparties to
these financial instruments, but do not expect any counterparty to fail to
meet its obligations.
LITIGATION. Four shareholder class action lawsuits have been filed against
us and our former directors in the California Superior Court for the County of
Santa Clara. While the allegations are not identical in the four complaints,
they all allege essentially the same grounds for relief, namely that the
individual defendants breached their fiduciary duty to our former shareholders
in connection with our recapitalization merger with Fox Paine by failing to
maximize the value of our company using an appropriate process for eliciting and
evaluating bids. The complaints also allege that the individual defendants had
conflicts of interest and committed a breach of fiduciary duty in order to
entrench themselves in office, enrich themselves financially and receive
unspecified additional perquisites. All four complaints seek a declaration that
the defendants breached their fiduciary duties, unspecified damages and various
forms of injunctive and equitable relief, including rescission of the
recapitalization merger and awards of attorneys' fees. We entered into a
memorandum of understanding in January 2000 in which plaintiffs' counsel agreed
in
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principle to settle the litigation, subject to, among other things, their
completion of discovery and judicial approval. For a more detailed description
of these suits, see "Business--Legal Proceedings."
CHANGES IN INDEPENDENT AUDITORS. In connection with our change of
ownership, we engaged the accounting firm of Arthur Andersen LLP to replace
Deloitte & Touche LLP as our independent auditors. Our board of directors
approved this change in May 2000.
The former independent auditors' reports on our financial statements as of
and for the fiscal years ended December 31, 1997 and 1998 did not contain an
adverse opinion, a disclaimer of opinion, or any qualifications or modifications
related to any uncertainty, or any limitation of audit scope or application of
accounting principles. In 1997 and 1998, there were no disagreements with our
former independent auditors on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure with respect to
our consolidated financial statements up through the time of replacement, that
if not resolved to the former independent auditors' satisfaction, would have
caused them to make reference to the subject matter of the disagreement in
connection with their report.
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BUSINESS
OVERVIEW
We design, develop and manufacture innovative, high quality broadband
communications products that enable voice, data and image transport over fiber
optic, broadband cable and wireless communications networks around the world.
Our products are comprised of advanced, highly functional components and
integrated assemblies which address the RF challenges of both current and next
generation broadband communications networks. These products are used in the
network infrastructure supporting and facilitating mobile communications,
broadband high speed data transmission and enhanced voice services. Our core
expertise in gallium-arsenide, or GaAs, semiconductor and thin-film technology,
coupled with our exceptional RF design and manufacturing capabilities, have
enabled us to attain a leadership position in these broadband communications
markets.
INDUSTRY BACKGROUND
Over the last decade, there have been significant developments in the
communications industry, as evidenced by the emergence of the Internet, wireless
communications and digital television services. Growing demand for voice, video
and data services, as well as high speed Internet access, has increased the need
for communications networks capable of handling large volumes of traffic.
Simultaneously, the deregulation of the communications industry and the
resulting competition among service providers has forced these service providers
to seek to differentiate themselves in an effort to attract and retain
subscribers. As the constraints of the traditional communications infrastructure
have limited service providers' ability to meet the growing demand for broadband
access, these service providers have been upgrading their systems, as well as
deploying next-generation broadband communications technologies including fiber
optic, broadband cable and broadband fixed wireless. These enhancements have, in
turn, fueled the demand of consumers and businesses for increased access,
mobility, functionality and bandwidth. As a result, the market for broadband
communications networks is expected to continue to grow significantly over the
next several years.
DEMAND FOR HIGH-SPEED INTERNET ACCESS AND OTHER DATA SERVICES HAS INCREASED
THE NEED FOR BROADBAND ACCESS. According to Ryan, Hankin & Kent, a
communications industry market research firm, Internet traffic is expected to
increase from 350,000 terabytes per month at the end of 1999 to over 15 million
terabytes per month in 2003. Consumers are using the Internet for a variety of
applications including e-mail, audio, streaming video and other multimedia
services. Businesses are also using the Internet for e-commerce, global
marketing, customer support, order fulfillment and supply management.
Furthermore, the growth in the use of corporate data networks and the rising
number of telecommuters and traveling employees have resulted in the need to
transmit large quantities of data to almost any location at high speed.
These trends have increased the demands placed on communications networks.
As a result, communication service providers have focused on implementing system
improvements providing greater capacity and speed. The enhanced performance of
communications networks has attracted new subscribers and led to more
applications and, therefore, resulted in an even greater demand for bandwidth.
Thus, the need for additional network capacity and performance has created a
continuing cycle of network improvements and increases in bandwidth that are
being matched by advances in the applications and services generating this
demand.
GREATER DEMAND FOR BROADBAND ACCESS HAS LED SERVICE PROVIDERS TO DEVELOP AND
DEPLOY NEXT GENERATION TRANSPORT TECHNOLOGIES. The traditional copper wire
communications infrastructure was originally built for voice traffic. This
infrastructure has not been sufficient to meet consumer and business demand for
broadband access, which has led to the implementation and deployment of next
generation communications networks with greater transmission capacity and speed.
These networks are typically comprised of long-haul elements, metro-access
elements and local access elements. The long-haul element of the network
transports voice, video and data over long distances between metropolitan and
regional concentrations of end-users. These long-haul network elements are
typically connected to a metro-access loop which surrounds concentrations of
users and serves as on/off ramps to the long-haul elements of the
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network. In turn, the metro-access element of a network is connected to
businesses and consumers by what is often referred to as the first and last mile
of the network. The capacity and speed of network access experienced by the
end-user is governed by the slowest element of the network. Therefore, to
deliver broadband access to businesses and consumers, service providers must
increase the capacity of the long-haul, metro-access and first and last mile
elements of the network.
Because of its vast capacity, fiber optic transport equipment is generally
being implemented for the long-haul and metro-access segments of the network. In
most cases, however, the implementation cost of fiber optic network equipment
makes it impractical to deploy fiber optic cable directly to the end-user for
all but the highest volume users. In order to provide greater bandwidth to the
small or medium size business and the residential consumer, communications
service providers are deploying lower cost broadband transport technologies
including broadband cable, wireless and digital subscriber line, or DSL, as
illustrated by the diagram below:
This diagram illustrates a ring-based fiber optic network. In the center are
two interlinking rings with the larger ring containing the words "Metro Core
Fiber Optic Ring" and the smaller ring containing the words "Metro Access Fiber
Optic Ring." From the larger ring to the upper-right quadrant extends a band
ending in an arrow which loops around a diagram of the globe. Beneath the band,
the words, "Long Haul Fiber Optic Backbone" appear. The smaller ring connects by
a band to a diagram of buildings located in the lower-left quadrant.
The larger ring also links to schematics located in the upper-left and
lower-right quadrants. The upper-left quadrant shows the access technologies,
"DSL" and "Broadband Cable." "DSL" is represented by a black line from the
larger ring to a home. "Broadband Cable" is connected to the center ring by a
small circle containing the word "Fiber." "Broadband Cable" is represented by
homes.
The lower-right quadrant shows the access technologies, "Mobile
Infrastructure" and "Broadband Cable." The former is attached to the core ring
by a line and is represented by a base station connected, by signal lines, to a
personal device assistant and a cellular phone. The latter is also attached to
the core ring by a line and is represented by a building with a
transmitter/receiver module on top connected, by signal lines, to 3 office
structures. The words "Point-to-Point" and "Point-to-Multipoint" appear next to
the 2 outer office structures.
FIBER OPTIC NETWORKS. Fiber optic networks use laser-generated light to
transmit voice, video and data through ultra-thin strands of glass, which are
characterized by large capacity. These networks have been used for some time
within communications networks for long-haul data transport and are being
extended closer to the end user as bandwidth needs proliferate. One application
of fiber close to the end user is hybrid fiber coaxial cable, commonly referred
to as broadband cable.
- FIBER OPTIC SYSTEMS. The most advanced fiber optic transport technology
commercially available is capable of carrying data at OC-192 transmission
rates. OC-192 systems transmit data at 10 gigabits-per-second, which is
150,000 times the capacity of a standard dial-up twisted-pair copper line.
The majority of fiber optic systems operate at much lower data
transmission rates. To meet the growing bandwidth demand, communications
service providers are deploying additional fiber optic cable and upgrading
the transmission capacity of their existing fiber through higher-speed
transmission technologies. Ryan, Hankin & Kent estimates that the market
for fiber optic components is expected to grow from $6.6 billion in 1999
to over $22.5 billion by 2003.
- BROADBAND CABLE SYSTEMS. Broadband cable is a combination of fiber optic
cable and copper wire, and is predominantly used within cable television
systems. Cable television system owners have been upgrading their
broadband cable infrastructure to enable two-way interactive, high-speed
data, cable telephone and higher channel count video services. According
to Paul Kagan Associates, a communications industry market research firm,
from 1996 through 1999, the cable industry's infrastructure investments
totaled $31 billion. Furthermore, 68% of the 67 million cable homes in the
United States are now passed by activated two-way cable, allowing for the
deployment of interactive, on-line and telephone services to those homes.
They further estimate that by 2003,
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approximately 93% of cable homes will be passed by two-way cable,
requiring continued spending on infrastructure upgrades by cable system
owners.
WIRELESS COMMUNICATIONS NETWORKS. The global wireless communications
industry has grown considerably, driven by the demand for mobile telephone
service. According to International Data Corporation, another communications
industry market research firm, the number of cellular and PCS subscribers
worldwide is expected to increase from 427 million subscribers in 1999 to
1.1 billion subscribers in 2003. These mobile subscribers are increasingly
demanding data services in addition to enhanced voice services. Next-generation
mobile networks are presently being built to provide enhanced voice and data
services.
In addition, fixed wireless communication networks are being deployed as an
alternative to wireline systems to provide high bandwidth access. Broadband
fixed wireless access offers a solution that meets the needs of many consumers
and businesses for which wireline technologies are not cost-effective or
adequate. Through the use of hubs and remote radio transmitters and receivers,
broadband data is transmitted at microwave and millimeter wave frequencies of 2
gigahertz or more. Broadband fixed wireless offers another scalable means of
access to fiber optic networks.
DIGITAL SUBSCRIBER LINE TECHNOLOGY. Digital subscriber line technology,
commonly known as DSL, improves the capacity and transmission speed of existing
twisted-pair copper lines. Various implementations of DSL are being developed
and deployed in an effort to improve network capacity while using the existing
infrastructure. According to Ryan, Hankin & Kent, at the end of 1999, 625,000
households and businesses in the United States and Canada used DSL for broadband
access and, by 2003, there will be 13.6 million DSL connections. The increased
use of DSL as an access technology that connects subscribers to fiber optic
long-haul segments of communications networks will place increased demands on
fiber optic networks to supply the desired applications and data rates.
THE RF CHALLENGE
While the transport medium is very different for fiber optic, broadband
cable and wireless communications networks, the core technology of RF
electronics is common to each. In these networks, signals are transported at RF
frequencies or higher. The design and performance parameters at RF frequencies
are generally more challenging and more complex than those at lower frequencies.
As a result, the demand for broadband communications networks has led to
increased demand for advanced RF products. For example, high speed fiber optic
systems place a premium on stable and reliable oscillators for precise timing,
while wireless systems generally require components that transmit signals with
minimal interference or distortion, which is commonly referred to as high
linearity. In addition, the ability to integrate RF components into higher
level, more complex assemblies and to interface these RF assemblies and
subsystems with other network elements requires a highly specialized engineering
expertise. The knowledge and skills required to design and manufacture RF
components and integrate them into more complex assemblies and subsystems are
unique and can take many years to develop, particularly in a competitive
commercial environment. In addition, the continual pressure to innovate, bring
products to market more quickly and manufacture reliable products
cost-effectively compounds the need for advanced RF design expertise.
Communications equipment manufacturers seek companies with the technical skills
and engineering resources to design, manufacture and integrate advanced products
required by current and future generations of fiber optic and wireless
infrastructure equipment.
THE WJ COMMUNICATIONS SOLUTION
We provide the technology, design expertise and products that enable
solutions addressing the RF challenges common in fiber optic, broadband cable
and wireless communications networks. With the ability to design and manufacture
components, integrate these components into higher level RF assemblies and
interface these assemblies with other network elements, we enable advanced
communications networks that satisfy the demand for the rapid transmission of
large amounts of data, voice and video. Our core technology lies within our
advanced GaAs semiconductor, thin-film substrate and oscillator capabilities. By
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satisfying the critical need for precise, stable and reliable data timing in
fiber optic networks and for linearity in wireless networks, our solutions
improve both network capacity and speed.
With our broad experience and expertise, we provide our customers with a
complete solution to their RF challenges, from technology concept to engineering
design and volume manufacturing. Our RF expertise covers a broad range of
frequencies, from a few megahertz to the microwave and millimeterwave bands,
used in advanced communications networks today. Our solution is comprised of the
following key elements:
ADVANCED DEVICE TECHNOLOGY. We design products using the following core
technologies:
- GAAS SEMICONDUCTOR TECHNOLOGY. GaAs is a crystalline material that is
often used as an alternative to silicon in the production of
semiconductors used in high frequency signal transmission. We have
substantial expertise in highly linear GaAs semiconductor products that
amplify and transform signals with minimal distortion and interference. We
believe that our devices are more efficient, consume less power and
produce less heat than competitive products, and, consequently, enable RF
systems to achieve optimal performance.
- THIN-FILM SUBSTRATE TECHNOLOGY. Thin-film substrates are ceramic circuit
boards on which thin conductive and resistive films have been deposited.
Thin-film substrates conduct signals at high frequencies with less signal
loss than printed circuit boards. Our thin-film substrate technology
includes several features that enhance performance at high frequencies
while reducing the assembly cost of integrated products.
- OSCILLATOR TECHNOLOGY. Oscillators are components that enable wireless
systems to convert RF signals from one frequency to another. Oscillators
are typically used to reduce transmission frequency so that signal
processing equipment operating at lower frequencies can extract
information from the signal. Oscillators also provide the timing function,
or clock, for fiber optic communications networks. We have oscillator
technology that provides the precision, stability and reliability required
by high speed broadband networks.
RF DESIGN EXPERTISE. We have been designing RF and microwave products for
more than 40 years and have developed significant RF design expertise. Our team
of over 80 highly qualified and talented engineers is capable of applying this
expertise to fiber optic, broadband cable and wireless communications products.
When combined into more complex assemblies, RF components can interact with each
other and other network elements. As a result, specialized integration skills
are needed. We have developed the skills necessary to excel at integrating RF
components into higher level assemblies. This broad range of RF design expertise
allows us to create products from the component level through the more complex
assembly level that are optimized to achieve high performance with minimum cost.
MANUFACTURABILITY. Our ability to rapidly convert new technologies and
designs into completed products results from our flexible manufacturing
operations and our manufacturing engineering expertise. Our manufacturing
operations are comprised of a number of individual manufacturing cells. Cells
can be added or reconfigured to respond to changes in product demand. This
cell-based architecture provides us with the flexibility to use a cell to
manufacture one product in the morning and a different product in the afternoon.
Our emphasis on test and assembly automation, coupled with our judicious use of
outsourcing, has resulted in a robust, cost-effective set of manufacturing
processes. Using these processes, we can rapidly transition from prototype to
volume manufacturing with exceptional product quality and performance.
BUSINESS STRATEGY
Our objective is to be the leading supplier of innovative, proprietary RF
solutions to communications equipment companies and service providers. To meet
this goal, we intend to:
LEVERAGE OUR TECHNOLOGY LEADERSHIP AND OUR DESIGN AND INTEGRATION EXPERTISE
TO GROW WITH GROWING MARKETS. We intend to participate in the rapid growth of
the global fiber optic and wireless communications markets by leveraging our
leading technology and our superior design skills and by
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capitalizing on the need for higher level, more complex assemblies. We intend to
apply our RF design expertise to develop additional leading-edge products in
each of the rapidly growing areas of the communications markets. We also intend
to use our integration expertise to design cost-effective, high performance
integrated assemblies for our customers. Due to the commonality of the RF
challenge in fiber optic, broadband cable and wireless communications networks,
we have the flexibility to allocate our design and engineering resources to any
or all of these markets and intend to use this flexibility to take advantage of
market opportunities as they arise.
MAINTAIN AND DEVELOP STRONG COLLABORATIVE CUSTOMER RELATIONSHIPS WITH
INDUSTRY LEADERS. We believe our reputation for product quality, technical
performance, customer responsiveness, on-time delivery and cost competitiveness
will help us to continue to maintain and develop a loyal customer base. We
collaborate with many of our customers to design and develop new products for
them as they develop new products. We plan to maintain our current, and develop
new, customer relationships with industry leaders within the fiber optic,
broadband cable and wireless communications markets.
EXPAND MANUFACTURING CAPABILITIES. We intend to expand our manufacturing
capabilities through a combination of outsourcing and in-house manufacturing. We
also intend to continue to pursue automation in both assembly and testing for
robust processes that produce repeatable and reliable product performance.
ACQUIRE AND DEVELOP NEW TECHNOLOGIES. We intend to continue to augment our
existing technology base and design capabilities by acquiring complementary
technologies, design capabilities, manufacturing processes and product offerings
for broadband communications applications. In addition, we intend to continue to
focus our research and development efforts on emerging communications and RF
technologies.
PRODUCTS AND TECHNOLOGY
We are committed to being a technology leader and product development
innovator within the growing broadband communications markets. By applying our
sophisticated integration expertise to high level assembly design, we are able
to develop cost-effective, high performance products suitable for volume
manufacturing. Many of our design engineers, because of the breadth of their
experience and expertise, are capable of working effectively at both the
semiconductor level and the integrated assembly level. As a result, we are able
to focus our expertise and resources to quickly address specific market
opportunities as they arise. Our product offerings fall into the following three
categories:
- SEMICONDUCTOR PRODUCTS
- FIBER OPTIC COMMUNICATIONS PRODUCTS
- WIRELESS COMMUNICATIONS PRODUCTS
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The relationship between our core technologies and product solutions is
portrayed in the following diagram:
TECHNOLOGY AND PRODUCT RELATIONSHIP
[CHART]
SEMICONDUCTOR PRODUCTS
Our semiconductor products include a broad array of high performance GaAs
semiconductors and thin-film substrates that we manufacture for our own use as
well as for sale to others. The primary markets for our GaAs semiconductor and
thin-film substrate products are the fiber optic, broadband cable, mobile
wireless infrastructure and broadband fixed wireless markets.
GAAS SEMICONDUCTOR PRODUCTS. Our GaAs semiconductor products are comprised
primarily of amplifiers, mixers and transistors. Amplifiers and transistors
increase the level of signals, while mixers translate a signal from one
frequency to another. The strength of our GaAs semiconductor technology lies in
our ability to design and manufacture highly linear products. High linearity is
one of the most critical performance parameters for broadband cable and wireless
networks. While our GaAs semiconductor products form a solid technological
foundation for our own integrated product offerings, we sell approximately 90%
of these products to customers. We are currently developing additional highly
linear amplifier and mixer products for point-to-point and point-to-multipoint
wireless access systems, which are expected to offer significant performance and
cost advantages over other currently available products. We believe these
products will provide a portion of the cost reduction necessary to expand
broadband fixed wireless networks into more price sensitive applications and
markets. The table below illustrates the wide range of applications for which
our GaAs semiconductor products are used:
<TABLE>
<CAPTION>
AMPLIFIERS MIXERS TRANSISTORS
---------- -------- -----------
<S> <C> <C> <C>
Fiber optic............................................. X N/A X
Broadband cable......................................... X X X
Broadband fixed wireless................................ X X X
Second and third generation wireless base stations...... X X X
</TABLE>
THIN-FILM SUBSTRATE PRODUCTS. Our semiconductor products also include
thin-film substrates designed and manufactured using several advanced processes.
Our thin-film substrates incorporate solid via technology, which improves the
electrical performance of the circuits while enabling increased circuit density.
In addition, we use laser machining technology in the production of our
thin-film substrates, which allows us to cut our products into virtually any
shape. Accordingly, these custom-shaped thin-film substrates allow RF and
microwave modules to be manufactured with consistency at low cost. We use our
thin-film products in the design and production of our fiber optic and wireless
communications products and sell them to customers. We are currently developing
thin-film processes for six-inch substrates, which will further increase the
productivity and lower the manufacturing cost of broadband fixed wireless
networks.
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<PAGE>
FIBER OPTIC COMMUNICATIONS PRODUCTS
Our fiber optic communications products include both high data-rate fiber
optic and broadband cable network products. Our fiber optic products are used in
the long haul, metro-access and local access elements of networks. Our broadband
cable products are used to provide high bandwidth local access to consumers and
small businesses.
FIBER OPTIC PRODUCTS. Fiber optic systems are being upgraded continuously
to provide higher data transmission rates as a means of increasing network
capacity. The highest transmission rate systems that are currently commercially
available are the OC-192 systems, which operate at a 10 gigabit-per-second rate.
At these high rates, the time between consecutive pieces of data is extremely
short, making system timing critical. Our highly stable oscillator assemblies
provide the timing function, or clock, that delivers the precision and
reliability needed to keep the overall system synchronized. We currently produce
oscillator assemblies for OC-192 systems and are working with our customers to
develop similar products for next-generation OC-768 systems, which will operate
at 40 gigabits-per-second. We are also expanding our product base to include
transmit and receive functions for high speed fiber optic systems as we
integrate the RF electronics with other elements of these networks. The
following diagram illustrates an example of a ring-based fiber optic network:
The diagram will consist of 2 interlinking circles connected to 2
schematics. The larger ring contains the words "Metro Core Fiber Optic Ring;"
the smaller ring contains the words "Metro Access Fiber Optic Ring." From the
larger ring extends a band ending in an arrow which loops around a diagram of a
globe. Beneath the band are the words "Long Haul Fiber Optic Backbone." The
smaller ring connects by a band to a diagram of buildings.
BROADBAND CABLE PRODUCTS. New broadband cable networks are currently being
deployed to provide two-way data services, enhanced voice services, more
television channels and high definition TV. These broadband cable networks are
often called hybrid fiber coax networks because they contain both fiber optic
lines as well as coaxial cable. Our highly linear amplifiers and mixers are
being used within hybrid fiber coax systems in the cable headends and
neighborhood nodes. The cable headend is the point from which signals and data
are transmitted to subscribers. The neighborhood node is the equipment that
converts the signals and data between these two types of transmission media. We
are also designing and developing complete hybrid fiber coax nodes which will
include our highly linear amplifiers and mixers, along with a variety of other
components, including optical detectors and laser transmitters.
The following diagram illustrates an example of a broadband cable network:
The diagram will show a "Fiber" ring connected to 6 images of homes.
WIRELESS COMMUNICATIONS PRODUCTS
Our wireless communications products include broadband fixed wireless
equipment and mobile infrastructure equipment. Broadband fixed wireless systems
provide a means of delivering high speed data, video and voice transmission to
businesses and consumers at fixed locations using high frequency radio
transmitters and receivers. Mobile wireless infrastructure equipment provides a
combination of voice and data services to mobile users. Second generation mobile
systems primarily offer voice services with very limited data capability. The
third generation systems currently in development are being designed to deliver
significantly higher data rates to mobile subscribers.
BROADBAND FIXED WIRELESS EQUIPMENT. Our broadband fixed wireless products
include transceivers and equipment used at the subscriber's premises for
broadband fixed wireless systems, including point-to-point and
point-to-multipoint systems in a variety of bands and frequencies. Broadband
fixed wireless systems are designed to provide the first and last mile access to
high speed data networks as a high speed alternative to traditional copper wire.
Point-to-point and point-to-multipoint systems operate in both licensed and
unlicensed frequency bands over short or long distances and provide a variety of
data rates ranging from 2 to 45 megabits-per-second. They also provide a variety
of output powers enabling extended range. The following diagram illustrates a
typical network deploying both point-to-point and point-to-multipoint systems:
The diagram will consist of a large building with a transmitter/receiver
module on top connected, by signal lines, to 3 office structures.
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The initial target market for broadband fixed wireless service providers is
small-to-medium businesses. We currently manufacture point-to-point and
point-to-multipoint transceivers for several domestic and international
broadband fixed wireless equipment providers operating in the microwave
multipoint distribution system 2.7 gigahertz band, the unlicensed 3.5 gigahertz
band, the unlicensed national information infrastructure 5.8 gigahertz band and
the 26 gigahertz band. We expect to develop broadband fixed wireless products
for other frequency bands.
MOBILE WIRELESS INFRASTRUCTURE EQUIPMENT. We have an extensive array of
integrated products for the mobile wireless infrastructure market. These
products include base station RF front ends, diagnostic and support equipment
and repeaters. The following diagram illustrates several elements of a mobile
wireless network:
The diagram will show a base station connected, with signals, to a repeater.
Both the base station and repeater are also connected by signal lines to
personal device assistants and cellular phones.
- BASE STATION RF FRONT ENDS. Base station RF front ends, which consist of
filters and frequency converters, are used in virtually every
communications system to translate signals from one frequency to another.
Our base station RF front ends incorporate our highly linear amplifiers
and mixers to receive signals from and transmit signals to mobile
subscribers. The resulting frequency can either be higher than the
original frequency, which is called up-conversion, or lower, which is
called down-conversion. Up- and down-converters are required by systems
because signal processors, which are those parts of the system that encode
and decode the signals, cannot operate at the high frequencies used to
carry information over the air or through the network. Our base station RF
front ends operate in wireless PCS air interface and frequency band. Our
expertise in this area derives from our diverse radio technology,
integration skill and ability to rapidly develop and deploy these
products. These products perform a variety of functions on both the
receive and transmit side as well as on the support side.
- DIAGNOSTIC AND SUPPORT EQUIPMENT. Our diagnostic and support equipment is
used within base stations to distribute signals and to determine the
health and status of the base station. These are custom-designed products
and rely heavily on our RF integration expertise to prevent various
signals from interfering with each other.
- REPEATERS. We also design, develop and manufacture both outdoor and indoor
repeaters for all major wireless air interfaces and frequency bands.
Repeaters are used primarily to extend the range of a particular cellular
site to cover areas where the signal does not reach. They are often used
along long stretches of highways and in tunnels or other places where the
signal is obstructed.
CUSTOMERS
We sell our semiconductor, fiber optic and wireless communications
components and subassemblies principally to equipment manufacturers that, in
turn, integrate our products into network infrastructure equipment solutions. In
some cases, we also sell products directly to network service providers. We
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believe that we have strong relationships with market leaders in the fiber
optic, broadband cable, and wireless markets. Our largest revenue-producing
customers include:
<TABLE>
<S> <C> <C>
ACT Manufacturing Jabil Circuit Orion Technology
Aimtronics Kisan Telecom Pemstar
Bartley RF Systems LG Information Communications QUALCOMM
Cisco Systems Lucent Technologies Richardson Electronics
Elcoteq Network Marconi Samsung
Ericsson Nokia Sanmina
GSS/Array Technology Nortel Networks Sprint PCS
Harris NU Horizons Stellex Microwave Systems
Hung Chang Omnipoint Communications Systec Research
</TABLE>
For the first quarter 2000, 45% and 14% of our sales were derived from
Nortel Networks and Lucent Technologies, respectively. While our sales have
historically been concentrated with several key communications equipment
manufacturers, we have diversified our customer base over the last few years and
we have expanded our product offering from wireless mobile infrastructure
products to include fiber optic, broadband cable and fixed wireless products.
SALES AND MARKETING
We sell and market our products primarily through the following three sales
channels:
DIRECT SALES. We have a dedicated team of direct sales people who are
responsible for maintaining relationships with our key customers and generating
new business with both existing and potential customers. We cultivate strong
direct relationships with our key customers through major account teams that are
led by our sales professionals and are comprised of engineers and product
managers. These teams are designed to address the specific product needs of our
key customers.
MANUFACTURER SALES REPRESENTATIVES. Manufacturer sales representatives are
responsible for calling on potential clients as well as maintaining
relationships with non-major accounts. We use manufacturer sales representatives
to augment our own direct sales force.
DISTRIBUTORS. We sell our GaAs semiconductor products to component
distributors that resell them through catalog, e-commerce and direct channels.
FACILITIES AND MANUFACTURING
We have two manufacturing facilities: a building in Milpitas, California
with over 35,000 square feet and two buildings in Palo Alto, California totaling
over 100,000 square feet. GaAs semiconductor and thin-film products are
manufactured in Milpitas, while our other products are manufactured in Palo
Alto.
The leased Milpitas facility has two GaAs semiconductor and two thin-film
manufacturing lines. The two GaAs manufacturing lines include one three-inch and
one four-inch wafer processing line. Considerable manufacturing capacity exists
within these two GaAs lines. Our GaAs products are packaged in The Philippines,
Hong Kong and France at vendor facilities. The thin-film manufacturing lines are
capable of processing two-inch, three-inch and four-inch substrate squares.
The Palo Alto facility produces our fiber optic and wireless communications
products. These products are assembled in either of two ways: surface mount or
hybrid modules. Surface mount technology is generally used for products
operating at frequencies below 10 gigahertz. Hybrid modules are necessary for
products operating above 10 gigahertz. We contract with external surface mount
manufacturers for high volume manufacturing, using both turnkey and consignment
material arrangements with these surface mount contract manufacturers depending
on the characteristics of the assembly. We have used a number of
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capable surface mount manufacturers. Once the surface mount assembly operations
are completed, the products are shipped to our facilities for testing and final
configuration. Hybrid modules are manufactured internally using automated
processes for both assembly and testing.
We intend to relocate our Palo Alto operations to a new leased facility in
San Jose, California in the summer of 2000. The facility will consist of two
buildings, totaling approximately 124,000 square feet. Prior to the
recapitalization merger, we sold the long-term leases for three buildings at our
Palo Alto facility, and are required to vacate these facilities by October 31,
2000. In addition, we recently entered into an amended sublease agreement with a
third-party providing an option to purchase our long-term lease on our fourth
building in Palo Alto.
EMPLOYEES
One of our most important assets is our base of well-trained and experienced
employees. As of March 31, 2000, we had 303 employees, none of whom were
represented by a collective bargaining agreement. As of March 31, 2000, our
employees were comprised as follows:
- 29 executive and administrative employees;
- 12 sales and marketing employees;
- 176 manufacturing, facilities and operations employees; and
- 86 engineering and technical employees.
We have historically experienced relatively low turnover. Our employees have
an average of almost seven years with us. Many of our engineering and technical
staff have been with us for even longer. We believe that many of our engineers,
as a result of their tenure and their defense electronics background, are among
the most experienced high frequency engineers in the United States. We believe
that the relationship with our employees is good.
INTELLECTUAL PROPERTY
We rely on patent, copyright, trademark and trade secret laws, as well as
confidentiality procedures and contractual provisions, to protect our
proprietary rights. We believe that one of our competitive strengths is our core
competence in engineering, manufacturing and understanding our customers and
markets, and we take aggressive steps to protect that knowledge. We have been
active in securing patents and entering into agreements to protect our
proprietary technologies and know-how resulting from our ongoing research and
development.
We have 19 United States patents and three foreign patents. We currently
have seven patent applications pending in the United States. Our existing United
States patents will expire between June 2007 and March 2017. We have chosen to
pursue foreign patent protection only in selected foreign countries. Our failure
to pursue foreign protection in these countries and the fact that patent rights
may be unavailable or limited in some foreign countries could make it easier for
our competitors to utilize our intellectual property. We cannot assure you that
any patent will be issued as a result of our pending applications or any future
applications or that, if issued, these patents will be sufficient to protect our
technology. In addition, we cannot assure you that any existing or future United
States or foreign patents will not be challenged, invalidated or circumvented,
or that any patent granted will provide us with adequate protection or any
competitive advantages.
We generally enter into non-disclosure agreements with our vendors,
customers and licensees. Our employees are generally required to enter into
agreements providing for the maintenance of confidentiality and the assignment
of rights to inventions made by them while in our employ. We generally control
access to the distribution of documentation and other information concerning our
intellectual property. We also
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<PAGE>
have entered into non-disclosure agreements to protect our confidential
information delivered to third parties, in connection with possible strategic
partnerships and for other purposes.
We have entered into license agreements in connection with some of our
recent business dispositions with respect to some of our intellectual property
used in these sold businesses. We cannot assure you that the other parties to
these license agreements will honor the terms of the agreements or aggressively
prevent the misappropriation or infringement of our intellectual property.
Further, under these license agreements, some of our intellectual property may
be licensed to one or more of our competitors.
The telecommunications industry is characterized by the vigorous protection
and pursuit of intellectual property rights. From time to time, we have
received, and may continue to receive in the future, notices of claims of
infringement, misappropriation or misuse of other parties' proprietary rights,
including allegations directed at our operations and our sold businesses. We
cannot assure you that we will prevail in these actions, or that other actions
alleging infringement by us of third-party intellectual property,
misappropriation or misuse by us of third-party trade secrets or the invalidity
of the patents held by us will not be asserted or prosecuted against us, or that
any assertions of infringement, misappropriation or misuse or prosecutions
seeking to establish the invalidity of our patents will not harm our competitive
position or reputation or result in significant monetary expenditures.
COMPETITION
The markets for our products are extremely competitive and are characterized
by rapid technological change, new product development, product obsolescence and
evolving industry standards. We compete primarily on the basis of product
performance and design, reliability, delivery and price. We face competition
from other component manufacturers, as well as companies with product
integration capabilities. In addition, we compete with the captive manufacturing
operations of large communications original equipment manufactures such as Cisco
Systems, Ericsson, Lucent Technologies, Motorola and Nortel Networks. Some of
our competitors are large public companies that have significantly greater
financial, technical, marketing and other resources than us. As a result, these
competitors may be able to devote greater resources to the development,
promotion, sale and support of their products. Furthermore, those of our
competitors that have large market capitalization or cash reserves may be better
positioned than we are to acquire other companies in order to gain new
technologies or products that may displace our product lines.
ENVIRONMENTAL REGULATION
Our operations are subject to federal, state and local laws and regulations
governing the use, storage, disposal of and exposure to hazardous materials, the
release of pollutants into the environment and the remediation of contamination.
Our former Scotts Valley site and our current Palo Alto site have significant
environmental liabilities for which we have entered into and funded fixed price
remediation contracts and obtained cost-overrun and unknown pollution conditions
insurance coverage.
The Scotts Valley site is a federal Superfund site. Chlorinated solvent and
other contamination was identified at the site in the early 1980s, and by the
late 1980s we had installed a groundwater extraction and treatment system. In
1991, we entered into a consent decree with the United States Environmental
Protection Agency providing for remediation of the site. In July 1999, we signed
a remediation agreement with an environmental consulting firm, ARCADIS
Geraghty & Miller. Pursuant to this remediation agreement, we paid approximately
$3.0 million in exchange for which ARCADIS agreed to perform the work necessary
to assure satisfactory completion of our obligations under the consent decree.
The agreement also contains a cost overrun guaranty from ARCADIS up to a total
project cost of $15.0 million. In addition, the agreement included procurement
of a ten-year, claims-made insurance policy to cover overruns of up to
$10.0 million from Reliance Insurance Company, along with a ten-year, claims
made $10-million policy to cover various unknown pollution conditions at the
site.
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Our Palo Alto site is a state Superfund site and is within a larger,
regional state Superfund site. As with the Scotts Valley site, contamination was
discovered in the 1980s, and groundwater extraction and treatment systems have
been operating for several years at both our site and the regional site. In
July 1999, we entered into a remediation agreement with an environmental
consulting firm, SECOR. Pursuant to this remediation agreement, we paid
approximately $2.4 million in exchange for which SECOR agreed to perform the
work necessary to assure satisfactory completion of our obligations under the
applicable remediation orders. The payment included the premium for a 30-year,
claims-made insurance policy to cover cost overruns up to $10.0 million from
AIG, along with a ten-year claims-made $10.0 million insurance policy to cover
various unknown pollution conditions at the site.
With respect to our remaining current or former production facilities, to
date either no contamination of significance has been identified or reported to
us or the regulatory agency involved has granted closure with respect to the
identified contamination. Nevertheless, we may face environmental liabilities
related to these sites in the future.
LEGAL PROCEEDINGS
In 1999, four shareholder class action lawsuits were filed against us and
our former directors in the California Superior Court for the County of Santa
Clara: ROSENZWEIG V. WATKINS-JOHNSON COMPANY, ET AL., CASE NO. CV885528;
SOSHTAIN V. WATKINS-JOHNSON CO., ET AL., CASE NO. CV785560; LEONG V. WATKINS-
JOHNSON CO., ET AL., CASE NO. CV785683; FONG V. WATKINS-JOHNSON CO., ET AL.,
CASE NO. CV785683. While the allegations are not identical in the four
complaints, they all allege essentially the same grounds for relief, namely that
the individual defendants breached their fiduciary duty to our former
shareholders in connection with our recapitalization merger with Fox Paine by
failing to maximize the value of our company using the appropriate process for
eliciting and evaluating bids. The complaints also allege that the individual
defendants had conflicts of interest and committed this breach of fiduciary duty
in order to entrench themselves in office, enrich themselves financially and
receive unspecified additional perquisites. All four complaints seek a
declaration that the defendants breached their fiduciary duties, unspecified
damages and various forms of injunctive and equitable relief, including
rescission of the recapitalization merger, and an award of attorneys' fees.
Pursuant to a non-binding memorandum of understanding, dated January 14,
2000, the plaintiffs' counsel in these above-referenced suits agreed in
principle to settle the litigation, subject to their completion of discovery,
judicial approval and various other contingencies. Under the terms of the
memorandum, the defendants agreed that we would engage an additional financial
advisor to opine as to the fairness of the price to be paid to our former
shareholders, and such an opinion was rendered to our board in January 2000 by
the firm of Dain Rauscher Incorporated. In addition, pursuant to the terms of
the memorandum of understanding, Fox Paine irrevocably agreed to reduce the
amount of the termination fee payable under certain circumstances, as described
in the agreement and plan of merger, from $13.25 million to $8.75 million. As of
the date of this prospectus, it is not known whether or not plaintiffs' counsel,
upon their completion of discovery, will determine to proceed with the
settlement. If plaintiffs' counsel determines to proceed with the settlement on
the basis agreed upon in the memorandum of understanding, the claims of persons
who held shares of our stock during the period from October 26, 1999 through
January 31, 2000 would, upon court approval of the terms of the settlement, be
released, and further claims against us and the individual defendants with
respect to the recapitalization merger would be barred. If plaintiffs' counsel
decides not to proceed with the settlement, these suits will presumably proceed
through the normal processes of litigation.
We currently are involved in litigation and regulatory proceedings
incidental to the conduct of our business and expect that we will be involved in
other litigation and regulatory proceedings from time to time.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our senior management team is comprised of experienced engineering and
wireless communications industry professionals, many of whom have over 15 years
of experience with us. Set forth below is information concerning our directors
and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------
<S> <C> <C>
Malcolm J. Caraballo...................... 44 President, Chief Executive Officer and
Director
R.E. Hoover, Jr........................... 48 Senior Vice President--Worldwide Sales and
Marketing
Thomas R. Kritzer......................... 46 Senior Vice President--Semiconductor
Products
Ronald N. Buswell......................... 52 Vice President--Integrated Products
Michael L. Gabitass....................... 38 Vice President--Integrated Product
Operations
Andrew J. Graven.......................... 37 Vice President--GaAs and Thin-Film
Products
Rainer N. Growitz......................... 44 Vice President--Finance and Secretary
W. Dexter Paine, III...................... 39 Chairman of the Board
J. Thomas Bentley......................... 50 Director
Saul A. Fox............................... 46 Director
Jason B. Hurwitz.......................... 27 Director
James R. Kroner........................... 38 Director
Charles E. Robinson....................... 66 Director
Wray T. Thorn............................. 29 Director
</TABLE>
MALCOLM J. CARABALLO was appointed the President, Chief Executive Officer and a
director of WJ Communications following the recapitalization merger on
January 31, 2000. From 1993 through January 31, 2000, Mr. Caraballo was
President of the wireless products group which, since January 2000, has been WJ
Communications' sole business. At the time of his appointment in 1993, this
business was largely a defense and space microwave products business and, since
then, has been successfully transitioned to commercial applications. Prior to
his assignment as President of the wireless products group, Mr. Caraballo served
as Vice President of the devices sales group and was responsible for sales and
marketing of modular components, tunable devices and subsystems product lines
worldwide. He also was responsible for the field sales organizations in the
United States and Europe. Previous responsibilities included engineering and
manufacturing management, program management, and design engineering.
Mr. Caraballo joined WJ Communications in 1977 as a member of the technical
staff. He received a B.S.E.E. from the University of California, Berkeley and an
M.B.A. from the University of Santa Clara.
R.E. HOOVER, JR. is Senior Vice President--Worldwide Sales and Marketing.
Mr. Hoover is responsible for all sales and marketing activities. These
responsibilities include business development, account management, and sales
channel management for all product lines. Mr. Hoover has been associated with
our commercial communications business since its inception in 1995. Mr. Hoover
joined WJ Communications in 1980 and has held sales positions across various
product groups and geographic locations. From 1995 to 1997, Mr. Hoover was
director of telecommunications sales and responsible for the sales of
telecommunications and microwave products. Mr. Hoover is a veteran of the U.S.
Air Force having served from 1973 to 1977. Mr. Hoover received a B.S. from
California State University Long Beach.
THOMAS R. KRITZER is Senior Vice President--Semiconductor Products. Mr. Kritzer
is responsible for the semiconductor product lines and advanced technology
development. These products include GaAs semiconductor devices and thin-film
substrates for hybrid module applications. Responsibilities include strategic
planning, design engineering and profit and loss. Prior to this assignment, he
was responsible for the fiber optic and wireless communications product lines.
He was one of the first participants in our efforts to create commercial
communications products during 1995 from the original defense technology
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and product base which included specialized assemblies for original equipment
manufacturers and cell extender products for service providers. At that time, he
was also responsible for strategic planning, design engineering and new product
development for all commercial communications. Since joining WJ Communications
as a member of the technical staff in 1978, Mr. Kritzer has held various
technical and managerial positions including product line experience in both the
defense and communications businesses. Mr. Kritzer earned a B.A. in Physics from
the University of North Carolina, Chapel Hill and an M.S. in Physics from Purdue
University.
RONALD R. BUSWELL is Vice President--Integrated Products. Mr. Buswell is
responsible for the fiber and wireless communications business. These products
include assemblies for fiber optic networks, customer premise equipment for
fixed wireless access networks, assemblies for PCS base stations and repeaters
for both PCS and cellular networks. From 1997 through 1999, Mr. Buswell was
director of original equipment manufacturer products and was responsible for RF
integrated assemblies for wireless communications. In this position, he focused
on expanding business opportunities with several key customers and directed
design engineering and new product development activities. During 1995 and 1996,
Mr. Buswell, as manager of integrated assembly marketing, was responsible for
product marketing for our initial wireless communications business. As we
developed products for the wireless market, he assumed additional responsibility
for product line management. Mr. Buswell received a B.S.E.E. from Michigan
Technological University and an M.S.E.E. from the University of Michigan.
MICHAEL L. GABITASS is Vice President--Integrated Product Operations.
Mr. Gabitass is responsible for the manufacturing of surface mount technology
and thin-film hybrid integrated subsystem products. He is also responsible for
supply chain management. Prior to that, Mr. Gabitass was responsible for
establishing the first high volume integrated subsystem-manufacturing line.
Mr. Gabitass has been with WJ Communications since 1988 and has also served as a
technical staff member and project manager. Mr. Gabitass received a B.S. in
Electrical Engineering from the University of California, Los Angeles.
ANDREW J. GRAVEN is Vice President--GaAs and Thin-Film Operations. Mr. Graven is
responsible for the manufacturing of GaAs and thin-film products. From 1997 to
1999, he was responsible for GaAs and thin film product line management.
Mr. Graven joined WJ Communications in 1985. From 1985 to 1997, Mr. Graven held
a variety of both technical and managerial positions for product design,
technology development, process engineering management and hybrid module
manufacturing management. Mr. Graven received his B.S. and M.S.E.E. from Santa
Clara University. He holds a patent for work related to the development of an
electro static chuck for high density plasma semiconductor manufacturing.
RAINER N. GROWITZ is Vice-President--Finance and Secretary. Mr. Growitz is
responsible for directing our financial planning and management in order to
optimize maximum revenue growth consistent with corporate return on investment
and profitability objectives. From 1997 until January 2000, Mr. Growitz served
as Director of Finance. Mr. Growitz joined WJ Communications in 1978 and held a
variety of finance, contracts and managerial positions. Mr. Growitz received a
B.S. in Accounting from San Jose State University.
W. DEXTER PAINE, III, the Chairman of our Board of Directors since
January 2000, is the co-founder of Fox Paine & Company and has been its
President since its inception in 1997. Mr. Paine also serves as a director of
Alaska Communications Systems Group Inc., the leading diversified
facilities-based telecommunications provider in Alaska. From 1994 until founding
Fox Paine, Mr. Paine served as a senior partner of Kohlberg & Company. Prior to
joining Kohlberg & Company, Mr. Paine served as a general partner at Robertson
Stephens & Company. Mr. Paine has a B.A. in economics from Williams College.
J. THOMAS BENTLEY, a director since May 2000, is a Managing Partner and a
founder of Alliant Partners, a leading firm for technology company mergers and
acquisitions. Mr. Bentley was formerly with Berkeley International Capital
Corporation where he initiated and led the leveraged buyout business. Prior to
that, Mr. Bentley worked in the leveraged buyout and investment banking business
of Citicorp and, before that,
45
<PAGE>
he was with the World Bank and International Finance Corporation. Mr. Bentley
received his B.A. from Vanderbilt University and his M.S. from M.I.T.
SAUL A. FOX, a director since January 2000, is the co-founder of Fox Paine &
Company and has been its Chief Executive Officer since its inception in 1997.
Mr. Fox also serves as a director of Alaska Communications Systems Group Inc.
From 1984 until founding Fox Paine, Mr. Fox was at Kohlberg Kravis & Roberts &
Co. Prior to joining Kohlberg Kravis & Roberts, Mr. Fox was an attorney at
Latham & Watkins, a law firm headquartered in Los Angeles, California. Mr. Fox
has a B.S. in communications and computer science from Temple University and a
J.D. from the University of Pennsylvania Law School.
JASON B. HURWITZ, a director since January 2000, has been employed at Fox
Paine & Company since June 1997. Mr. Hurwitz has served as an Associate and Vice
President, and is currently a Director of Fox Paine. Before joining Fox Paine,
Mr. Hurwitz was an associate at McCown De Leeuw & Co. from August 1996 to
June 1997 and was an analyst at James D. Wolfensohn Incorporated from July 1994
to July 1996. Mr. Hurwitz has a B.S. in economics from The Wharton School at the
University of Pennsylvania.
JAMES R. KRONER, a director since January 2000, has been a Managing Director of
Fox Paine & Company since January 2000. Before joining Fox Paine, Mr. Kroner
served as a managing director and co-head of insurance investment banking at JP
Morgan & Co. Mr. Kroner also served as a managing director and head of the
insurance industry M&A practice at Salomon Smith Barney and a director in the
financial institutions M&A practice at Merrill Lynch & Co. From 1995 to 1997,
Mr. Kroner served as senior vice president and treasurer of American Re
Corporation. Mr. Kroner has a B.A. in political science from Northwestern
University and an M.B.A. from Northwestern's Kellogg School of Management.
CHARLES E. ROBINSON, a director since January 2000, has over four decades of
experience in the telecommunications industry. Since 1997, Mr. Robinson has
served as Chairman and Chief Executive Officer of Alaska Communications Systems
Group Inc. Mr. Robinson served as President and Chief Operating Officer of
Pacific Telecom from 1981 until its sale in 1997 and was appointed Chairman and
Chief Executive Officer of Pacific Telecom in 1989. Mr. Robinson has been a
member of the National Security Telecommunications Advisory Committee for the
last 18 years, having been appointed by President Reagan. Mr. Robinson has also
served on the Board of Directors of the United States Telephone Association from
1993 to 1995.
WRAY T. THORN, a director since January 2000, has also been a Director of Fox
Paine & Company since January 2000. Mr. Thorn also serves as a director of
Alaska Communications Systems Group Inc. Prior to joining Fox Paine, Mr. Thorn
was a principal and founding member of Dubilier & Company. Prior to joining
Dubilier & Company in 1996, Mr. Thorn was an associate in the Acquisition
Finance Group of Chase Securities. Mr. Thorn has an A.B. in government from
Harvard University.
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors currently consists of eight directors. We anticipate
that one additional director will be elected after the closing of this offering.
All of the officers identified above serve at the discretion of our board of
directors. In May 2000, our board of directors established an executive
committee, a compensation committee and an audit committee. The initial members
of the executive committee are Messrs. Caraballo, Paine and Thorn. The initial
members of the compensation committee are Messrs. Paine, Robinson and Thorn. The
initial members of the audit committee are Messrs. Bentley, Paine and Thorn. We
expect to replace one or more of our current audit committee members after the
closing of the offering.
The functions of the audit committee are to:
- recommend annually to our board of directors the appointment of our
independent auditors;
46
<PAGE>
- discuss and review in advance the scope and the fees of our annual audit
and review the results thereof with our independent auditors;
- review and approve non-audit services of our independent auditors;
- review compliance with our existing major accounting and financial
reporting policies;
- review the adequacy of major accounting and financial reporting policies;
and
- review our management's procedures and policies relating to the adequacy
of our internal accounting controls and compliance with applicable laws
relating to accounting practices.
The functions of the compensation committee are to review and approve annual
salaries, bonuses, and grants of stock options under our stock incentive plans
for all executive officers and other key members of management, and to review
and approve the terms and conditions of all employee benefit plans or changes to
these plans. The compensation committee consists of directors who are not
otherwise our employees.
The executive committee will have the authority to exercise the powers of
our board of directors, other than those reserved to the audit committee and the
compensation committee or to our full board of directors, between meetings of
our full board of directors.
47
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation of the
President and Chief Executive Officer and the other most highly compensated
officers as of December 31, 1999 based on salary and bonus in 1999. As of
March 31, 2000, our Chief Executive Officer and four other most highly
compensated officers were Messrs. Caraballo, Buswell, Growitz, Hoover and
Kritzer.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ----------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (1) OPTIONS (2)(3) COMPENSATION (4)
--------------------------- -------- -------- -------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
OUR FORMER MANAGEMENT
W. Keith Kennedy (5)......... 1999 $463,646 $510,144 -- -- $ 6,400
President and Chief Executive 1998 481,442 -- 25,047 1,200,000 6,400
Officer 1997 463,726 474,854 18,347 500,000 6,400
Scott G. Buchanan (5)........ 1999 218,400 140,332 -- 500,000 6,400
Executive Vice President, 1998 226,760 -- 12,665 240,000 6,400
Chief Financial Officer and 1997 216,644 127,808 9,014 50,000 6,400
Treasurer
Robert G. Hiller (6)......... 1999 200,200 175,809 -- 300,000 6,400
President, Telecommunications 1998 200,200 -- 5,533 400,000 6,400
Group 1997 158,425 76,687 2,951 -- 6,400
OUR CURRENT MANAGEMENT
Malcolm J. Caraballo (7)..... 1999 253,347 358,629 -- 500,000 6,400
President, Wireless Products 1998 235,154 190,944 11,021 320,000 6,400
Group 1997 198,165 182,845 7,608 50,000 6,400
R.E. Hoover, Jr. (8)......... 1999 174,901 109,677 -- 400,000 6,400
Vice President, Sales-- 1998 157,920 132,028 -- -- 6,379
Wireless Products Group 1997 116,550 14,646 -- 120,000 5,952
</TABLE>
----------------
(1) Represents the interest accrued on salary electively deferred in accordance
with the Top Management Deferred Compensation Plan which was terminated in
1998.
(2) Options to purchase shares of common stock. See "--Option Grants."
(3) Number of shares reflects a 20 for 1 stock split on January 31, 2000.
(4) Represents matching contributions of $4,800 to the 401(k) portion of the
Employees' Investment Plan and contributions of $1,600 to the Employee Stock
Ownership Plan, which was terminated prior to our recapitalization merger in
January 2000.
(5) Messrs. Kennedy and Buchanan resigned upon completion of the
recapitalization merger on January 31, 2000. All of their stock options were
cancelled in exchange for a cash "spread" payment upon their resignation.
(6) Mr. Hiller resigned upon completion of the sale of the telecommunications
group in January 2000. All of his stock options were cancelled in exchange
for a cash "spread" payment upon his resignation.
(7) Mr. Caraballo was appointed our President and Chief Executive Officer on
January 31, 2000.
(8) Mr. Hoover did not serve as an executive officer in 1999, but was among our
five most highly compensated employees in 1999. He was appointed Senior Vice
President, Worldwide Sales and Marketing, on January 31, 2000.
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<PAGE>
OPTION GRANTS IN 2000
All of our previously issued outstanding stock options were cancelled on
January 31, 2000 as part of our recapitalization merger. The following table
sets forth stock options granted in 2000 immediately after the recapitalization
merger to the officers named above:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF TOTAL POTENTIAL REALIZABLE VALUE
SECURITIES STOCK AT ASSUMED ANNUAL RATES
UNDERLYING OPTIONS OF STOCK PRICE
STOCK GRANTED TO MARKET APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE PRICE ON OPTION TERM
GRANTED IN FISCAL PRICE PER DATE OF EXPIRATION ----------------------------------
NAME (SHARES) 2000 SHARE GRANT DATE 0% 5% 10%
---- ---------- ---------- --------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Malcolm J.
Caraballo.......... 1,439,927 15% $2.05625 $2.05625 Jan. 2010 $0 $1,862,000 $4,719,000
R.E. Hoover, Jr...... 701,578 7 2.05625 2.05625 Jan. 2010 0 907,000 2,299,000
</TABLE>
OPTION VALUES
The following table sets forth the number and value of all unexercised stock
options of the officers named above at March 31, 2000:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
STOCK OPTIONS AT MARCH 31, VALUE OF UNEXERCISED IN-THE-MONEY
2000 EXERCISABLE/ STOCK OPTIONS AT MARCH 31, 2000(1)
UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--------------------------- ----------------------------------
<S> <C> <C>
Malcolm J. Caraballo.......... 482,594/957,333 $0/0
R.E. Hoover, Jr............... 49,245/652,333 $0/0
</TABLE>
--------------
(1) The fair market value of stock options as of March 31, 2000 was $2.05625 per
share.
COMPENSATION OF DIRECTORS
Our compensation committee has not yet met, but will meet in the near
future. Our compensation committee will formulate policies for compensating
non-employee directors, including meeting fees and annual retainers. We
currently do not and will not compensate our employee directors for serving as
directors. We will reimburse all directors for the reasonable and necessary
expenses they incur in performing their duties as directors.
EMPLOYMENT AGREEMENTS
We entered into new employment agreements with some of our employees
relating to their employment with us, their ownership of our common stock and
grant of options to them to purchase shares of our common stock following the
completion of our recapitalization merger.
EMPLOYMENT AGREEMENT WITH MALCOLM J. CARABALLO. Under the employment
agreement between us and Malcolm J. Caraballo, effective as of January 31, 2000,
Mr. Caraballo is employed to serve as our Chief Executive Officer and President
for a three-year period with automatic one-year extensions, unless either we or
Mr. Caraballo gives no less than 90 days advance written notice of an intention
not to extend the term. Mr. Caraballo's initial annual base salary is $275,000,
which may be increased in the years following the first year of employment, but
may not be decreased. Mr. Caraballo is eligible for an annual bonus with a
target bonus equal to 60% of his annual base salary for each fiscal year if we
meet business targets
49
<PAGE>
determined by us in good faith. Mr. Caraballo's employment agreement also
provides for other customary benefits including the right to participate in
fringe benefit plans, life and disability insurance plans, expense reimbursement
and vacation in accordance with our top management vacation policy.
Under Mr. Caraballo's employment agreement, if his employment is terminated
by him for good reason or by our board of directors without cause, or if our
board of directors elects not to extend the employment period upon its
expiration, Mr. Caraballo is entitled to receive:
- 150% of his annual base salary over the 18-month period immediately
following such termination of employment; plus
- for a one-year period after termination, benefits under our benefit plans,
or a cash payment sufficient to enable him to purchase comparable benefits
in the case of benefit plans that do not permit such continued
participation.
Alternatively, if his employment is terminated within three months following
a change of control, Mr. Caraballo is entitled to receive:
- 299% of his annual base salary over the 36-month period immediately
following such termination of employment; plus
- for a three-year period after termination, benefits under our benefit
plans, or a cash payment sufficient to enable him to purchase comparable
benefits in the case of benefit plans that do not permit such continued
participation.
Mr. Caraballo's employment agreement also provides that during the 12-month
period following any termination of his employment, Mr. Caraballo will not
directly, indirectly or as an agent on behalf of or in conjunction with any
person, firm, partnership, corporation or other entity:
- hire, solicit, encourage the resignation of, or in any other manner seek
to engage or employ any person who is then, or within the prior three
months had been, an employee, whether or not for compensation and whether
or not as an officer, consultant, adviser, independent sales
representative, independent contractor or participant; or
- contact, solicit, service or otherwise have any dealings related to the
sale, manufacture, distribution, marketing or provision of products,
components, equipment, hardware, other technology or services of any sort
in the wireless communications industry or any other industry or business
or prospective industry or business in which we participate or contemplate
participating in as of such termination in employment, with any person or
entity with whom we have a current or known prospective business
relationship or who is or was at the time of his employment with us,
including any predecessor or successor entity, a customer, vendor or
client of ours, or a known prospective customer, vendor or client, in each
case such activity by Mr. Caraballo does or could reasonably be expected
to have a material adverse effect on the relationship between us and any
such third party.
The employment agreement with Mr. Caraballo also provides for the protection
of our confidential information and for the ownership by us or the assignment to
us of any employment-related inventions of Mr. Caraballo.
EMPLOYMENT AGREEMENTS WITH RAINER N. GROWITZ, RALPH E. HOOVER, JR. AND
THOMAS R. KRITZER. On January 31, 2000, we entered into employment agreements
with Rainer N. Growitz, Ralph E. Hoover, Jr. and Thomas R. Kritzer. These
agreements employ Messrs. Growitz, Hoover and Kritzer to the executive offices
set forth under "Management--Executive Compensation," and are substantially
similar to that of Mr. Caraballo, except as follows:
- Messrs. Hoover and Kritzer will receive an initial annual base salary of
$200,200; Mr. Growitz will receive an initial annual base salary of
$150,020;
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<PAGE>
- Messrs. Growitz, Hoover and Kritzer are each eligible for an annual bonus
with a target bonus equal to 35% of his annual base salary for each fiscal
year if we meet specific business targets;
- the severance benefit payable to each of Messrs. Growitz, Hoover and
Kritzer upon the termination of his employment by him for good reason, or
by our board of directors without cause, or if our board of directors
elects not to extend the employment period upon its expiration, is an
amount equal to his annual base salary payable over the twelve-month
period immediately following such termination; and
- the severance benefit payable to each of Messrs. Growitz, Hoover and
Kritzer upon the termination of his employment within three months
following a change of control is an amount equal to 150% of his annual
base salary payable over the 12-month period immediately following such
termination.
EMPLOYEE STOCK OWNERSHIP. In connection with our recapitalization merger,
we invited our employees to purchase shares of common stock with:
- cash;
- the proceeds paid to these employees as a result of the cancellation of
their stock options pursuant to the recapitalization merger; and
- the proceeds paid to these employees under our phantom stock appreciation
rights plan for the fourth quarter of 1999 which was terminated upon the
closing of the recapitalization merger.
A total of 251 employees took the opportunity to invest in our common stock,
and, as of March 31, 2000, 14.6% of our common stock, calculated on the same
basis as provided under the section entitled "Principal Stockholders," was held
by our employees. With respect to each employee who elected to buy we granted
stock options to purchase additional shares under our 2000 stock incentive plan.
OUR 2000 STOCK INCENTIVE PLAN
On January 31, 2000, we adopted our 2000 stock incentive plan under which we
may grant options to purchase shares of our common stock, restricted shares of
our common stock and stock appreciation rights to participants, which include
non-employee directors, officers and employees of and consultants to us and our
affiliates. The purpose of the stock incentive plan is to give us and our
affiliates a competitive advantage in attracting, retaining and motivating
officers, employees, non-employee directors and consultants, and to provide us
and our affiliates with a stock plan providing incentives linked to the
financial results of our business and increases in shareholder value. The total
number of shares of our common stock reserved and available for grant under the
2000 stock incentive plan is 11 million. Our compensation committee, or our
board of directors, is authorized to make grants and various other decisions
under the stock incentive plan. Unless otherwise determined by the committee or
the board, any participant granted an award under the stock incentive plan must
agree to be bound by our shareholders' agreement.
Stock options may include incentive stock options, nonqualified stock
options or both, in each case, with or without stock appreciation rights. The
term of each stock option is fixed by the committee or the board and stated in
the option agreement, but in no event may the term be more than ten years from
the date of grant. Stock options are not transferable other than by will or the
laws of descent and distribution. Vested stock options may be exercised in whole
or in part by payment of the exercise price by certified or bank check or other
instrument as we may accept or, if approved by the committee or the board, in
the form of unrestricted common stock already owned by the participant for at
least six months of the same class as the common stock subject to the stock
option. In addition, the committee or the board, in its discretion, may allow
the cashless exercise of stock options. After this offering, the committee or
the board, in its discretion, may allow payment of the exercise price by the
delivery to us of a properly executed exercise notice, together with a copy of
irrevocable instructions to a broker to deliver promptly to us the
51
<PAGE>
amount of sale or loan proceeds to pay the purchase price, and, if requested by
us, the amount of any federal, state, local or foreign withholding taxes. When
the participant's employment with us or one of our applicable affiliates is
terminated for cause, all stock options held by the participant are immediately
terminated and cancelled. Upon a participant's death or when the participant's
employment with us or one of our applicable affiliates is terminated for any
reason other than for cause, the participant's then-unvested stock options are
forfeited and the participant or his or her legal representative may, within
90 days if such termination of employment is for any reason other than death or
disability, or within one year in the case of the participant's death or
disability, exercise any previously vested stock options.
Stock appreciation rights may be granted in conjunction with all or part of
any stock option award and are generally exercisable only at the time or times
and to the extent the related stock options are exercisable. Upon the exercise
of a stock appreciation right, the participant is entitled to receive an amount
equal to the product of (a) the excess of the fair market value of one share of
common stock over the exercise price per share specified in the related stock
option times (b) the number of shares in respect of which the stock appreciation
right has been exercised, in cash, shares of common stock or both, with the
committee having the right to determine the form of payment. Upon termination or
exercise of the related stock option, stock appreciation rights terminate and
are no longer exercisable. Stock appreciation rights are transferable only with
the related stock options.
Upon a change of control transaction as described in the stock incentive
plan, the committee or the board may, in its sole discretion, do one or more of
the following:
- shorten the period during which stock options are exercisable, provided
they remain exercisable for at least 30 days after the date notice of the
shortening is given to the participants;
- accelerate any vesting schedule to which a stock option or restricted
stock award is subject;
- arrange to have the surviving or successor entity or any parent entity
thereof assume the restricted stock awards and the stock options or grant
replacement options with appropriate adjustments in the exercise prices
and adjustments in the number and kind of securities issuable upon
exercise or adjustments so that the stock options or their replacements
represent the right to purchase the shares of stock, securities or other
property, including cash, as may be issuable or payable as a result of the
change of control transaction with respect to or in exchange for the
number of shares of common stock purchasable and receivable upon exercise
of the stock options had such exercise occurred in full prior to the
change of control transaction; or
- cancel stock options or unvested stock awards upon payment to the
participants in cash, with respect to each stock option or restricted
stock award to the extent then exercisable or vested, including, if
applicable, any stock options or restricted stock awards as to which the
vesting schedule has been accelerated by decision of the committee because
of the change of control transaction, of an amount that is the equivalent
of the excess of the fair market value of the common stock at the
effective time of the change of control transaction over, in the case of
stock options, the exercise price of the stock option.
The committee or the board may also provide for one or more of the foregoing
alternatives in any particular award agreement.
The committee or the board may grant to any participant, on terms and
conditions determined by the committee, the right to receive cash payments to be
paid at that time if an award results in compensation income to the participant
in order to assist the participant in paying the resulting taxes.
The stock incentive plan will terminate on January 31, 2010. However, awards
outstanding at that time will not be affected or impaired by the stock incentive
plan's termination. Our board and the committee have authority to amend, alter
or discontinue the stock incentive plan and awards granted thereunder, but no
amendment may impair the rights of any participant thereunder without the
participant's consent.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our outstanding common stock, including the percent of the total
voting power, as of May 31, 2000, and as adjusted to reflect the completion of
the offering, by:
- each holder of more than 5% of our common stock;
- each of our directors;
- each of our five most highly compensated officers named in
"Management--Executive Compensation;" and
- all of our directors and our named officers as a group.
Except as otherwise indicated in the footnotes below, each beneficial owner
has the sole power to vote and to dispose of all shares held by that holder. You
should keep the following points in mind as you read the information in the
table:
- Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Under these rules, a person is deemed
to be a "beneficial owner" of a security if that person has or shares
voting power, which includes the power to vote or to direct the voting of
the security, or investment power, which includes the power to dispose of
or to direct the disposition of the security. A person is also deemed to
be a beneficial owner of any securities with respect to which that person
has a right to acquire beneficial ownership within 60 days. More than one
person may be deemed a beneficial owner of the same security and a person
may be deemed to be a beneficial owner of securities as to which that
person has no economic interest.
- The percentage of our common stock outstanding is based on the 31,671,821
shares of our common stock outstanding as of May 31, 2000. In computing
the number of shares beneficially owned by a person and the percentage
ownership of that person, we include shares of common stock subject to
options held by that person that are currently exercisable or will become
exercisable within 60 days from May 31, 2000, while these shares are not
included for purposes of computing percentage ownership of any other
person.
53
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED PERCENTAGE BENEFICIALLY OWNED
---------------------------------- ----------------------------------
NAME PRIOR TO OFFERING AFTER OFFERING PRIOR TO OFFERING AFTER OFFERING
---- ----------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C>
Fox Paine Capital, LLC (1)..... 25,531,913 25,531,913 80.6%
Fox Paine Capital Fund (1)..... 23,386,753 23,386,753 73.8%
FPC Investors, L.P. (1)........ 347,016 347,016 1.1%
W. Dexter Paine, III (1)....... 25,531,913 25,531,913 80.6%
Saul A. Fox (1)................ 25,531,913 25,531,913 80.6%
Jason B. Hurwitz (1)........... 25,531,913 25,531,913 80.6%
Wray T. Thorn (1).............. 25,531,913 25,531,913 80.6%
James R. Kroner (1)............ 25,531,913 25,531,913 80.6%
Charles E. Robinson (2)........ -- -- --
J. Thomas Bentley.............. -- -- --
The Watkins Trust (3).......... 2,400,000 2,400,000 7.6%
W. Keith Kennedy, Jr........... -- -- --
Scott G. Buchanan.............. -- -- --
Robert G. Hiller............... -- -- --
Malcolm J. Caraballo (4)....... 1,221,458(5) 1,221,458 3.8%
R.E. Hoover, Jr. (5)........... 101,506(6) 101,506 * *
All directors and executive
officers as a group (14
persons) (6)................. 27,585,137 27,585,137
</TABLE>
--------------
* The percentage of shares beneficially owned does not exceed 1%.
(1) Fox Paine Capital, LLC is General Partner or Manager of Fox Paine Capital
Fund, FPC Investors, L.P., WJ Coinvestment Fund I, LLC, WJ Coinvestment Fund
II, LLC, WJ Coinvestment Fund III, LLC and WJ Coinvestment Fund IV, LLC and
possesses voting and investment power over all shares held by each of these
entities. Fox Paine Capital is not the record owner of any shares of our
common stock. Messrs. Fox and Paine are members of Fox Paine Capital and
share voting power of Fox Paine Capital. Mr. Kroner is a managing director
and Messrs. Hurwitz and Thorn are directors of Fox Paine Capital. None of
the shares shown as beneficially owned by Messrs. Fox, Paine, Kroner,
Hurwitz and Thorn are owned of record by these individuals. Each of Messrs.
Fox, Paine, Kroner, Hurwitz and Thorn disclaims beneficial ownership of the
shares owned by the entities of which Fox Paine Capital is General Partner
or Manager, except to the extent of his pecuniary interest in those shares.
The address of Fox Paine Capital, Fox Paine Capital Fund, FPC Investors and
Messrs. Fox, Paine, Kroner, Hurwitz and Thorn is c/o Fox Paine & Company,
LLC, 950 Tower Lane, Suite 1950, Foster City, CA 94404.
(2) The address of Mr. Robinson is c/o Alaska Communications Systems
Group, Inc., 510 L. Street, Suite 500, Anchorage, Alaska 99501.
(3) The address of The Watkins Trust is c/o WJ Communications, Inc., 3333
Hillview Avenue, Palo Alto, California 94304.
(4) Includes 738,864 shares held of record by Mr. Caraballo and 482,594 shares
issuable under currently exercisable options.
(5) Includes 52,261 shares held of record by Mr. Hoover and 49,245 shares
issuable under currently exercisable options.
(6) Includes shares deemed to be beneficially owned by Messrs. Fox, Paine,
Hurwitz, Thorn and Kroner as a result of their relationships with and to Fox
Paine Capital. Excluding such shares, all directors and executive officers
as a group beneficially own 1,201,909 shares held of record and
851,315 shares issuable under currently exercisable options.
54
<PAGE>
CERTAIN TRANSACTIONS
MANAGEMENT AGREEMENT
On January 31, 2000, as part of the recapitalization merger, we entered into
a management agreement with Fox Paine & Company. Under that agreement, we paid
Fox Paine an aggregate of $3.5 million for assisting us in obtaining debt
financing and advisory services. In addition, we agreed to pay Fox Paine a
management fee of $110,000 for the year ended December 31, 2000 and, for each
subsequent year, a fee in the amount of 1% of our net income before interest
expense, interest income, income taxes, depreciation and amortization and equity
in earnings (losses) of minority investments, calculated without regard to the
fee. In connection with this agreement, we have agreed to indemnify Fox Paine
against various liabilities that may arise as a result of the management
services it will perform for us. We have also agreed to reimburse Fox Paine for
its expenses incurred in providing these services.
SHAREHOLDERS' AGREEMENT
On January 31, 2000, we entered into a shareholders' agreement with Fox
Paine Capital Fund, investors affiliated with Fox Paine Capital Fund and several
non-fund investors, including co-investors, The Watkins Trust and some of our
employees. Under the shareholders' agreement, following completion of the
offering and subject to limited exceptions,
- Fox Paine Capital Fund and its affiliates, as a group, may make up to five
demands for registration under the Securities Act of their shares of
common stock;
- The Watkins Trust may make one demand for registration under the
Securities Act of its shares of common stock; and
- In the event the Company registers any of its equity securities under the
Securities Act, or shares of common stock of Fox Paine Capital Fund or The
Watkins Trust pursuant to a demand registration, each of our other
shareholders may exercise piggyback registration rights to include all or
a portion of its shares of common stock in the registration.
In the event that either Fox Paine Capital Fund and its affiliates or The
Watkins Trust makes a demand for registration, we have agreed to pay all
expenses related to that registration. We have also agreed to indemnify Fox
Paine Capital Fund and The Watkins Trust against various liabilities associated
with such registration.
The other material provisions of the shareholders' agreement expire upon
completion of the offering, except that rights and obligations under the
shareholders' agreement relating to indemnification in connection with
securities registrations survive indefinitely.
OTHER TRANSACTIONS
In connection with our recapitalization merger, CIBC World Markets acted as
our financial advisor and rendered a fairness opinion, for which it received
customary fees, and extended us a senior secured credit facility, under which we
borrowed $40.0 million. CIBC World Markets is an underwriter in this offering.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100 million shares of common stock,
par value $0.01 per share and 10 million shares of preferred stock. As of
May 31, 2000, we had 31,671,821 shares of common stock outstanding, which were
held by 255 holders. After this offering, there will be shares of common
stock outstanding, without giving effect to the exercise of the underwriters'
over-allotment option.
COMMON STOCK
Subject to the rights of the holders of any preferred stock that may be
outstanding, each holder of common stock on the applicable record date is
entitled to receive dividends as may be declared by our board of directors out
of funds legally available to pay dividends, and, in the event of liquidation,
to share ratably in any distribution of our assets after payment or providing
for the payment of liabilities and the liquidation preference of any outstanding
preferred stock. Shares of common stock will vote together as a single class on
all matters presented to a vote of stockholders, including the election of
directors. Each holder of common stock is entitled to one vote for each share
held of record on the applicable record date for all of these matters. Holders
of common stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities, and there are no
conversion rights or redemption or sinking fund provisions with respect to
common stock. All outstanding shares of common stock are, and the shares of
common stock sold in the offerings will be when issued, fully paid and
nonassessable.
PREFERRED STOCK
Our charter authorizes our board of directors to issue shares of preferred
stock in one or more series and to determine, by resolution, the voting powers,
and designations, preferences and relative, participating, optional or other
rights, if any, and the qualifications, limitations or restrictions thereof, if
any, including the number of shares in each series (which our board of directors
may increase or decrease as permitted by Delaware law), liquidation preferences,
dividend rates, conversion rights and redemption provisions of the shares
constituting any series, without any further vote or action by the stockholders.
Any shares of preferred stock so issued would have priority over the common
stock with respect to dividend or liquidation rights or both. Although our board
of directors has no present plans to do so, it could issue one or more series of
preferred stock, without stockholder approval, that could, depending on the
terms of such series, impede the completion of a merger, tender offer or other
takeover attempt.
ACTION BY WRITTEN CONSENT
Under the Delaware General Corporation Law, unless the certificate of
incorporation expressly prohibits action by the written consent for
stockholders, any action required or permitted to be taken by our stockholders
at a duly called annual or special meeting of stockholders may be taken by a
consent in writing executed by stockholders possessing the requisite votes for
the action to be taken. Our certificate of incorporation does not expressly
prohibit action by the written consent of stockholders. As a result, Fox Paine,
as holder of % of our total voting power after this offering, will be able
to take any stockholder action without holding a stockholder meeting. We intend,
however, to hold annual stockholder meetings.
DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law generally prevents
Delaware corporations from engaging under particular circumstances in a business
combination with any interested stockholder for three years following the date
that the stockholder became an interested stockholder. We have opted out of the
provisions of Section 203.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be ChaseMellon
Shareholder Services, L.L.C.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for our common stock.
Future sales of substantial amounts of common stock in the public market, or the
perception that substantial sales may occur, could adversely affect the
prevailing market price of the common stock. After completion of the offering,
there will be shares of common stock outstanding. Of these shares, the
shares of common stock sold in the offering, or shares if the
underwriters' option to purchase additional shares is exercised in full, will be
freely transferable without restriction under the Securities Act, except by
persons who may be deemed to be our affiliates. All the remaining shares of
common stock may not be sold unless they are registered under the Securities Act
or are sold pursuant to an exemption from registration, including an exemption
contained in Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, including an affiliate, who beneficially owns
"restricted securities" may not sell those securities until they have been
beneficially owned for at least one year. Thereafter, the person would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
- 1% of the then outstanding shares of common stock, or approximately
shares after the offering; and
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the SEC.
Sales under Rule 144 are subject to restrictions relating to manner of sale,
notice and the availability of current public information about us and may be
effected only through unsolicited brokers' transactions.
A person who is not deemed an "affiliate" of us at any time during the
90 days preceding a sale would, except for the shareholders' agreement described
above and the "lock-up" arrangements described below, be entitled to sell his,
her or its restricted shares under Rule 144 without regard to the volume or
other limitations described above, once two years have elapsed since the
restricted shares were acquired from us or one of our affiliates.
Our officers, directors and stockholders have agreed with the underwriters
that, during the period beginning from the date of this prospectus and
continuing to and including the date 180 days after the date of this prospectus,
they will not, directly or indirectly, offer, sell, contract to sell, transfer
the economic risk of ownership in, make any short sale, pledge or otherwise
dispose of any shares of common stock or any securities convertible into or
exchangeable or exercisable for or any other rights to purchase or acquire
common stock (other than, in our case, pursuant to our existing employee
compensation plans) without the prior written consent of Chase Securities,
except for the shares of common stock offered in connection with the offering.
The lock-up agreements by these persons, other than WJ Communications, cover an
aggregate of approximately shares.
No prediction can be made as to the effect, if any, that market sales of
restricted shares or the availability of restricted shares for sale will have on
the market price of our common stock prevailing from time to time. Nevertheless,
sales of substantial amounts of common stock, or the perception that such sales
could occur, could adversely affect prevailing market prices for our common
stock and could impair our future ability to raise capital through an offering
of our equity securities.
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U.S. FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of our common stock
by a non-U.S. holder. As used in this prospectus, the term non-U.S. holder is a
person other than:
- a citizen or individual resident of the United States for U.S. federal
income tax purposes,
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the United States,
- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source, or
- a trust, in general, if it is subject to the primary supervision of a
court within the United States and the control of one or more U.S.
persons.
This discussion does not consider:
- U.S. state and local or non-U.S. tax consequences;
- specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is a
partnership, that the U.S. tax consequences of holding and disposing of
our common stock may be affected by determinations made at the partner
level;
- the tax consequences for the stockholders or beneficiaries of a non-U.S.
holder;
- special tax rules that may apply to some non-U.S. holders, including
without limitation, banks, insurance companies, dealers in securities and
traders in securities who elect to apply a mark-to-market method of
accounting; or
- special tax rules that may apply to a non-U.S. holder that holds our
common stock as part of a "straddle," "hedge," "conversion" or
"constructive sale" transaction.
The following is based on provisions of the U.S. Internal Revenue Code of
1986, as amended, applicable Treasury Regulations, and administrative and
judicial interpretations, all as of the date of this prospectus, and all of
which may change, retroactively or prospectively. The following summary is for
general information. Accordingly, each non-U.S. holder should consult a tax
advisor regarding the U.S. federal, state, local and non-U.S. income and other
tax consequences of acquiring, holding and disposing of shares of our common
stock.
DIVIDENDS
In the event that dividends are paid on shares of common stock, dividends
paid to a non-U.S. holder of common stock generally will be subject to
withholding of U.S. federal income tax at a 30% rate, or such lower rate as may
be provided by an applicable income tax treaty. Non-U.S. holders should consult
their tax advisors regarding their entitlement to benefits under a relevant
income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment, or, in the case of an individual, a
"fixed base," in the United States, as provided in that treaty, which we refer
to as U.S. trade or business income, are generally subject to U.S. federal
income tax on a net income basis at regular graduated rates, but are not
generally subject to the 30% withholding tax if the non-U.S. holder files the
appropriate U.S. Internal Revenue Service form with the payor. Any U.S. trade or
business income received by a non-U.S. holder that is a corporation may also,
under particular circumstances, be subject to an additional "branch profits tax"
at a 30% rate or such lower rate as specified by an applicable income tax
treaty.
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Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. For dividends paid after
2000:
- a non-U.S. holder of common stock who claims the benefit of an applicable
income tax treaty rate generally will be required to satisfy applicable
certification and other requirements;
- in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of the
partnership and the partnership will be required to provide information,
including a U.S. taxpayer identification number; and
- look-through rules will apply for tiered partnerships.
A non-U.S. holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit of
any excess amounts withheld by filing an appropriate claim for a refund with the
Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
- the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S. holder;
- the non-U.S. holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue
Code, is present in the U.S. for more than 182 days in the taxable year of
the disposition and meets other requirements;
- the non-U.S. holder is subject to tax pursuant to the provisions of the
U.S. tax law applicable to some U.S. expatriates; or
- we are or have been a "U.S. real property holding corporation" for U.S.
federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition or the period that the
non-U.S. holder held our common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
plus its other assets used or held for use in a trade or business. We believe
that WJ Communications has not been and is not currently, and we do not
anticipate it becoming, a "U.S. real property holding corporation" for U.S.
federal income tax purposes. The tax relating to stock in a "U.S. real property
holding corporation" will not apply to a non-U.S. holder whose holdings, direct
and indirect, at all times during the applicable period, constituted 5% or less
of the common stock, provided that the common stock was regularly traded on an
established securities market.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes, unless an applicable estate tax or other
treaty provides otherwise and, therefore, may be subject to U.S. federal estate
tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under some circumstances, U.S. Treasury Regulations require information
reporting and backup withholding at a rate of 31% on specified payments on
common stock. Under currently applicable law,
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non-U.S. holders of common stock generally will be exempt from these information
reporting requirements and from backup withholding on dividends paid prior to
2001 to an address outside the U.S. For dividends paid after 2000, however, a
non-U.S. holder of common stock that fails to certify its non-U.S. holder status
in accordance with applicable U.S. Treasury Regulations may be subject to backup
withholding at a rate of 31% on payments of dividends.
The payment of the proceeds of the disposition of common stock by a holder
to or through the U.S. office of a broker or through a non-U.S. branch of a U.S.
broker generally will be subject to information reporting and backup withholding
at a rate of 31% unless the holder either certifies its status as a non-U.S.
holder under penalties of perjury or otherwise establishes an exemption. The
payment of the proceeds of the disposition by a non-U.S. holder of common stock
to or through a non-U.S. office of a non-U.S. broker will not be subject to
backup withholding or information reporting unless the non-U.S. broker is a
"U.S. related person." In the case of the payment of proceeds from the
disposition of common stock by or through a non-U.S. office of a broker that is
a U.S. person or a "U.S. related person," information reporting, but currently
not backup withholding, on the payment applies unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying its
non-U.S. status or the broker has documentary evidence in its files that the
holder is a non-U.S. holder and the broker has no actual knowledge to the
contrary. For this purpose, a "U.S. related person" is:
- a "controlled foreign corporation" for U.S. federal income tax purposes;
- a foreign person 50% or more of whose gross income for specified periods
is derived from the conduct of a U.S. trade or business; or
- effective after 2000, a foreign partnership if, at any time during its
taxable year, (a) at least 50% of the capital or profits interest in the
partnership is owned by U.S. persons, or (b) the partnership is engaged in
a U.S. trade or business.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a non-U.S. office of a broker that is a U.S.
person or a U.S. related person unless certification requirements are satisfied
or an exemption is otherwise established and the broker has no actual knowledge
or reason to know that the holder is a U.S. person. Non-U.S. holders should
consult their own tax advisors regarding the application of the information
reporting and backup withholding rules to them, including changes to these rules
that will become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, PROVIDED that the required information is
furnished to the Internal Revenue Service.
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UNDERWRITING
Chase Securities Inc., CIBC World Markets Corp. and Thomas Weisel Partners
LLC are the representatives of the underwriters. Subject to the terms and
conditions of the underwriting agreement, the underwriters named below, through
their representatives, have severally agreed to purchase from us the following
respective numbers of shares of common stock.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
Chase Securities Inc........................................
CIBC World Markets Corp.....................................
Thomas Weisel Partners LLC..................................
Total...................................................
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to various conditions precedent, including the absence of any
material adverse change in our business and the receipt of various certificates,
opinions and letters from us, our counsel and the independent auditors. The
underwriters are committed to purchase all of the shares offered by us if they
purchase any shares.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares.
UNDERWRITING DISCOUNTS AND COMMISSIONS
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
EXERCISE EXERCISE
-------------- --------------
<S> <C> <C>
Per Share.......................................
Total...........................................
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $ million.
The underwriters propose to offer the shares directly to the public at the
initial public offering price set forth on the cover page of this prospectus and
to certain dealers at that price less a concession not in excess of $ per
share. The underwriters may allow and such dealers may re-allow a concession not
in excess of $ per share to various other dealers. If all of the shares
are not sold at the initial public offering price, the representatives may
change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to additional
shares of common stock at the initial public offering price, less the
underwriting discount set forth on the cover page of the prospectus. To the
extent that the underwriters exercise this option, each of the underwriters will
have a firm commitment to purchase approximately the same percentage of these
option shares which the number of shares of common stock to be purchased by it
shown in the above table bears to the total number of shares of common stock
offered by this prospectus. We will be obligated, pursuant to this option, to
sell shares to the underwriters to the extent the option is exercised. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of shares of common stock in this offering.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
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We have agreed to indemnify the underwriters against particular liabilities
specified in the underwriting agreement, including liabilities under the
Securities Act, and to contribute to payments the underwriters may be required
to make with respect to these liabilities.
Our officers, directors and stockholders have agreed with the underwriters
that, during the period beginning from the date of this prospectus and
continuing to and including the date 180 days after the date of this prospectus,
they will not, directly or indirectly, offer, sell, contract to sell, transfer
the economic risk of ownership in, make any short sale, pledge or otherwise
dispose of any shares of common stock or any securities convertible into or
exchangeable or exercisable for or any other rights to purchase or acquire
common stock without the prior written consent of Chase Securities Inc., except
for shares of common stock offered in connection with the offering. We have
agreed that we will not, without the prior written consent of Chase Securities
Inc., offer, sell or otherwise dispose of any shares of common stock, options or
warrants to acquire shares of common stock or securities exchangeable for or
convertible into shares of common stock for a period of 180 days following the
date of this prospectus, except that we may issue shares upon the exercise of
options granted prior to the date of this prospectus, and may grant additional
options under our stock option plans. Without the prior written consent of Chase
Securities Inc., any additional options granted shall not be exercisable during
this 180-day period.
We have applied for quotation of the common stock on the Nasdaq National
Market under the symbol WJCI.
Some persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the shares at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purposes of pegging, fixing or
maintaining the price of the shares. A syndicate covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the effecting of
any purchase to reduce a short position created in connection with the offering.
A penalty bid means an arrangement that permits the underwriters to reclaim a
selling concession from a syndicate member in connection with the offering when
shares sold by the syndicate member are purchased in syndicate covering
transactions. These transactions may be effected on The Nasdaq National Market,
in the over-the-counter market, or otherwise. This stabilizing, if commenced,
may be discontinued at any time.
The underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority that exceed 5% of the total number of shares of
common stock offered by them.
Prior to this offering, there has been no public market for our shares of
common stock. The initial public offering price for the shares has been
determined by negotiations among us and the representatives. Among the factors
considered in determining the initial public offering will be prevailing market
and economic conditions, our revenue, the prospects for our future earnings,
market valuations of other companies engaged in activities similar to our
business operations and our management. The estimated initial public offering
price range set forth on the cover of this preliminary prospectus is subject to
change as a result of market conditions or other factors.
At our request, the underwriters have reserved up to shares of common
stock for sale at the initial public offering price to our directors, officers,
employees, business associates and related persons. The number of shares of
common stock available for sale to the general public will be reduced if such
persons purchase the reserved shares. Any reserved shares which are not so
purchased may be offered by the underwriters to the general public on the same
basis as the other shares offered by this prospectus.
Some of the underwriters have provided from time to time, and expect to
provide in the future, financial advisory and investment banking services to us
and our affiliates, for which the underwriters have received and will receive
customary fees and commissions. In particular, CIBC World Markets acted as our
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financial advisor and received fees as an agent with respect to our
$40.0 million senior secured credit facility, in connection with our
recapitalization merger with an affiliate of Fox Paine.
Under Rule 2710(c)(8) of the Conduct Rules of the National Association of
Securities Dealers, Inc., if more than 10% of the net proceeds of a public
offering of equity securities are to be paid to members of the NASD that are
participating in the offering, or affiliated or associated persons, the price of
the equity securities distributed to the public must be no higher than that
recommended by a qualified independent underwriter, as defined in
Rule 2720(c)(3) of the Conduct Rules of the NASD. CIBC World Markets is a member
of the NASD and an underwriter in this offering. Because CIBC World Markets will
receive more than 10% of the net proceeds of this offering as a result of the
repayment of amounts outstanding under our credit facility with CIBC World
Markets, we will appoint a qualified independent underwriter in connection with
this offering. Chase Securities Inc. will act as our qualified independent
underwriter and in this role it has performed due diligence investigations and
has reviewed and participated in the preparation of the registration statement
of which this prospectus is a part. The initial public offering price will be no
lower than that recommended by Chase Securities Inc. as the qualified
independent underwriter. We and the other underwriters have agreed to indemnify
Chase Securities in its capacity as qualified independent underwriter against
various liabilities, including liabilities under the Securities Act of 1933, or
to contribute to payments Chase Securities Inc. in its capacity as qualified
independent underwriter may be required to make in respect of those liabilities.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
162 filed public offerings of equity securities, of which 114 have been
completed, and has acted as a syndicate member in an additional 95 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with us
pursuant to the underwriting agreement entered into in connection with this
offering.
LEGAL MATTERS
The validity of the shares of common stock will be passed upon for us by
Wachtell, Lipton, Rosen & Katz, New York, New York and for the underwriters by
Simpson Thacher & Bartlett, Palo Alto, California. Wachtell, Lipton, Rosen &
Katz owns 243,161 shares of common stock. Irell & Manella LLP owns 121,586
shares of common stock.
EXPERTS
The audited consolidated financial statements, as of December 31, 1999 and
for the one-year period then ended and the related schedule included in this
prospectus and elsewhere in the registration statement, to the extent and for
the period indicated in their report, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as expert in giving said report.
The consolidated financial statements included in this prospectus and the
related financial statement schedule included elsewhere in the registration
statement as of December 31, 1998 and for each of the two years in the period
then ended have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement (which report on the consolidated financial statements expresses an
unqualified opinion and includes an explanatory paragraph referring to the
restatement of the consolidated financial statements for 1997 and 1998 to
reflect the telecommunications segment as a discontinued operation as a result
of the sale of this segment in January 2000), and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the common stock offered in this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits and schedules to that registration statement. For
further information with respect to us and the common stock, we refer you to
this registration statement and its exhibits and schedules. Statements contained
in this prospectus as to the contents of any contract or other document are
summaries of material terms of those documents and, in each instance, reference
is made to the copy of that contract or document filed as an exhibit to the
registration statement, each of these statements being qualified in all respects
by that reference. The registration statement, including exhibits thereto, may
be inspected and copied at the public reference facilities maintained by the SEC
at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
and at the SEC's Regional Offices located at Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of these materials may be obtained from the Public
Reference Room of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a
web site (HTTP://WWW.SEC.GOV) that contains reports, proxy and information
statements and other information regarding registrants such as us which file
electronically with the SEC. The registration statement, including all exhibits
thereto and amendments thereof, is available on that web site.
We intend to furnish to our stockholders our annual reports containing
consolidated financial statements audited by our independent auditors and
quarterly reports containing unaudited consolidated financial statements for
each of the first three quarters of each fiscal year.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Arthur Andersen LLP, Independent Public
Accountants............................................... F-2
Report of Deloitte & Touche LLP, Independent Auditors....... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Comprehensive Income (Loss)...... F-6
Consolidated Statements of Stockholders' Equity............. F-7
Consolidated Statements of Cash Flows....................... F-8
Notes to Consolidated Financial Statements.................. F-9
</TABLE>
F-1
<PAGE>
After the reincorporation discussed in Note 14 to WJ Communications, Inc.'s
consolidated financial statements, we expect to be in a position to render the
following audit report:
Arthur Andersen LLP
San Jose, California
May 24, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Stockholders and Board of Directors of
WJ Communications, Inc.:
We have audited the accompanying consolidated balance sheet of
WJ Communications, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1999, and the related consolidated statements of operations,
comprehensive income (loss), stockholders' equity, and cash flows for the year
ended December 31, 1999. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WJ
Communications, Inc. and subsidiaries at December 31, 1999, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
San Jose, California
May 24, 2000 (except with respect to the matters in
Note 14, as to which the date is , 2000)
F-2
<PAGE>
REPORT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
The Stockholders and Board of Directors
of WJ Communications, Inc.:
We have audited the accompanying consolidated balance sheet of WJ
Communications, Inc. (previously known as Watkins-Johnson Company) and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity, and cash flows
for each of the two years in the period then ended. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of WJ Communications, Inc. and
subsidiaries at December 31, 1998, and the results of their operations and their
cash flows for each of the two years in the period then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 10, the accompanying consolidated financial statements
for 1997 and 1998 have been restated to reflect the Telecommunications segment
as a discontinued operation as a result of the sale of this segment in
January 2000.
Deloitte & Touche LLP
San Jose, California
January 31, 2000
F-3
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- MARCH 31,
1998 1999 2000
---------------------- -------- -----------
(AS RESTATED--NOTE 10) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents.................................... $ 19,271 $131,065 $ 15,552
Short-term investments.................................. 45,353 42,747 --
Receivables (net of allowance for doubtful accounts of
$500, $504 and $504 at December 31, 1998, 1999 and
March 31, 2000, respectively)......................... 12,803 11,362 12,251
Inventories............................................. 4,093 5,146 8,345
Deferred income taxes................................... 23,653 2,642 2,365
Income taxes receivable................................. 13,570 -- --
Deposits................................................ -- 11,101 --
Net current assets of discontinued operations........... 27,922 20,237 7,494
Other................................................... 3,665 2,412 2,031
-------- -------- --------
Total current assets.................................... 150,330 226,712 48,038
-------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 14,447 13,663 14,447
OTHER ASSETS:
Net noncurrent assets of discontinued operations........ 9,053 -- --
Other................................................... 10,759 3,245 5,908
-------- -------- --------
$184,589 $243,620 $ 68,393
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt....................... $ -- $ -- $ 1,113
Accounts payable........................................ 8,825 11,493 7,351
Accrued expenses........................................ 5,874 2,722 3,515
Provision for losses on contracts....................... 2,962 3,500 3,137
Payroll and profit sharing.............................. 5,805 5,637 2,539
Income taxes............................................ 8,282 4,046 4,095
-------- -------- --------
Total current liabilities............................... 31,748 27,398 21,750
-------- -------- --------
LONG-TERM DEBT, net of current portion...................... -- -- 38,813
OTHER LONG-TERM OBLIGATIONS................................. 19,162 14,085 14,027
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value-authorized and
unissued, 10,000,000 shares........................... -- -- --
Common stock, $0.01 par value-authorized, 100,000,000
shares at March 31, 2000; outstanding: 130,953,740,
133,664,980, and 29,115,910 shares, respectively;
subscribed: 0, 0 and 2,512,000, respectively.......... 34,454 37,798 65,035
Retained earnings (deficit)............................. 99,073 164,542 (66,067)
Subscriptions receivable................................ -- -- (5,165)
Other comprehensive income (loss)....................... 152 (203) --
-------- -------- --------
Total stockholders' equity (deficit).................... 133,679 202,137 (6,197)
-------- -------- --------
$184,589 $243,620 $ 68,393
======== ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
--------------------------------------------- ------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 26, MARCH 31,
1997 1998 1999 1999 2000
------------- ------------- ------------- ----------- ----------
(AS RESTATED--NOTE 10) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales....................................... $ 31,174 $ 63,568 $ 82,404 $ 23,528 $ 17,051
Cost of goods sold.......................... 25,591 43,400 50,534 16,095 10,075
----------- ----------- ----------- ----------- ----------
Gross profit................................ 5,583 20,168 31,870 7,433 6,976
Operating expenses:
Research and development................ 10,204 14,124 16,806 3,934 4,145
Selling and administrative.............. 2,219 4,035 5,331 1,262 2,569
Corporate administrative................ 1,240 1,811 4,391 739 322
Recapitalization merger and other (Note
1).................................... -- -- 3,223 -- 35,453
----------- ----------- ----------- ----------- ----------
Total operating expenses.............. 13,663 19,970 29,751 5,935 42,489
----------- ----------- ----------- ----------- ----------
Income (loss) from operations............... (8,080) 198 2,119 1,498 (35,513)
Interest income............................. 2,198 5,681 5,070 844 1,026
Interest expense............................ (795) (601) (520) (120) (872)
Other income (expense)--net................. (249) 1,220 412 184 (519)
Gain on disposition of real property
(Note 12)................................. 7,609 14,973 61,652 -- --
----------- ----------- ----------- ----------- ----------
Income (loss) from continuing operations
before income taxes....................... 683 21,471 68,733 2,406 (35,878)
Income tax (provision) benefit.............. (240) (6,978) (26,383) (782) 10,764
----------- ----------- ----------- ----------- ----------
Income (loss) from continuing operations.... 443 14,493 42,350 1,624 (25,114)
Discontinued operations (Note 10):
Income (loss) from discontinued
operations, net of taxes.............. 2,805 (63,701) 9,661 1,229 212
Gain on disposition, net of taxes....... 29,677 -- 15,829 -- 31,379
----------- ----------- ----------- ----------- ----------
Net income (loss)........................... $ 32,925 $ (49,208) $ 67,840 $ 2,853 $ 6,477
=========== =========== =========== =========== ==========
Basic per share amounts:
Income (loss) from continuing
operations............................ $ 0.00 $ 0.09 $ 0.33 $ 0.01 $ (0.38)
Income (loss) from discontinued
operations............................ 0.02 (0.41) 0.08 0.01 --
Gain on disposition of discontinued
operations............................ 0.18 -- 0.12 -- 0.47
----------- ----------- ----------- ----------- ----------
Net income (loss)........................... $ 0.20 $ (0.32) $ 0.52 $ 0.02 $ 0.10
=========== =========== =========== =========== ==========
Basic average shares........................ 165,160 154,740 128,389 131,157 66,400
Diluted per share amounts:
Income (loss) from continuing
operations............................ $ 0.00 $ 0.09 $ 0.32 $ 0.01 $ (0.38)
Income (loss) from discontinued
operations............................ 0.02 (0.40) 0.07 0.01 --
Gain on disposition of discontinued
operations............................ 0.17 -- 0.12 -- 0.47
----------- ----------- ----------- ----------- ----------
Net income (loss)........................... $ 0.19 $ (0.31) $ 0.51 $ 0.02 $ 0.10
=========== =========== =========== =========== ==========
Diluted average shares...................... 170,180 157,140 132,227 132,905 66,400
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
--------------------------------------------- -------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 26, MARCH 31,
1997 1998 1999 1999 2000
------------- ------------- ------------- ------------ ----------
(AS RESTATED--NOTE 10) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss).......................... $ 32,925 $ (49,208) $ 67,840 $ 2,853 $ 6,477
Unrealized holding gains (losses) on
securities arising during period..... -- 192 (329) (70) (6)
Less: reclassification adjustment
for gains included in net
income........................... -- (40) (26) (26) 209
------------ ------------ ------------ ------------ --------
Net unrealized holding gains (losses)
on securities--net of income tax
benefit (provision) of $--, $(97),
$130, $(36) and $(130),
respectively......................... -- 152 (355) (96) 203
------------ ------------ ------------ ------------ --------
Comprehensive income (loss)................ $ 32,925 $ (49,056) $ 67,485 $ 2,757 $ 6,680
============ ============ ============ ============ ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK RETAINED OTHER STOCKHOLDERS'
----------------------- EARNINGS COMPREHENSIVE SUBSCRIPTIONS EQUITY
SHARES DOLLARS (DEFICIT) INCOME (LOSS) RECEIVABLE (DEFICIT)
------------ -------- --------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996..................... 166,584,960 $ 38,998 $ 156,007 $ -- $ -- $ 195,005
------------ -------- --------- -------- -------- ---------
Net income............. -- -- 32,925 -- -- 32,925
Dividends declared--
$0.02 per share...... -- -- (3,974) -- -- (3,974)
Stock option
transactions......... 2,719,760 2,778 -- -- -- 2,778
Repurchases of common
stock................ (4,084,000) (1,145) (4,602) -- -- (5,747)
------------ -------- --------- -------- -------- ---------
Balance, December 31,
1997..................... 165,220,720 40,631 180,356 -- -- 220,987
Net loss............... -- -- (49,208) -- -- (49,208)
Dividends declared--
$0.02 per share...... -- -- (3,685) -- -- (3,685)
Stock option
transactions......... 1,649,020 1,605 -- -- -- 1,605
Repurchases of common
stock................ (35,916,000) (7,782) (28,390) -- -- (36,172)
Unrealized holding
gains on
securities--net of
taxes of $97......... -- -- -- 152 -- 152
------------ -------- --------- -------- -------- ---------
Balance, December 31,
1998..................... 130,953,740 34,454 99,073 152 -- 133,679
Net income............. -- -- 67,840 -- -- 67,840
Dividends declared--
$0.02 per share...... -- -- (2,371) -- -- (2,371)
Stock option
transactions......... 2,711,240 3,344 -- -- -- 3,344
Unrealized holding
losses on
securities--net of
taxes of $130........ -- -- -- (355) -- (355)
------------ -------- --------- -------- -------- ---------
Balance, December 31,
1999..................... 133,664,980 37,798 164,542 (203) -- 202,137
Net income
(unaudited).......... -- -- 6,477 -- -- 6,477
Stock option
transactions
(unaudited).......... 91,660 154 -- -- -- 154
Common stock redemption
related to
recapitalization
merger (unaudited)... (131,356,640) (33,017) (237,086) -- -- (270,103)
Common stock issued
(unaudited).......... 26,715,910 54,935 -- -- -- 54,935
Subscription for common
stock................ 2,512,000 5,165 -- -- (5,165) --
Unrealized holding
gains (losses) on
securities--net of
taxes of $130
(unaudited).......... -- -- -- 203 -- 203
------------ -------- --------- -------- -------- ---------
Balance, March 31, 2000
(unaudited).............. 31,627,910 $ 65,035 $ (66,067) $ -- $ (5,165) $ (6,197)
============ ======== ========= ======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
--------------------------------------------- ---------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 26, MARCH 31,
1997 1998 1999 1999 2000
------------- ------------- ------------- --------- ---------
(AS RESTATED--NOTE 10) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................ $ 32,925 $ (49,208) $ 67,840 $ 2,853 $ 6,477
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating
activities:
Recapitalization merger costs............ -- -- 3,223 -- 35,453
Depreciation and amortization............ 1,116 1,982 2,610 548 711
Net gain on disposal of property, plant
and equipment.......................... (6,843) (13,587) (61,077) -- (52)
Deferred income taxes.................... (5,556) (5,234) 21,932 19,872 100
Results of discontinued operations and
(gain) loss on disposal................ (32,482) 63,701 (25,490) (1,229) (31,593)
Net changes in:
Receivables.......................... (1,045) (4,970) 1,441 92 (889)
Inventories.......................... 175 (2,116) (1,053) (218) (3,199)
Other assets......................... (1,466) (20,634) 4,096 1,984 8,854
Accruals and payables................ 30,212 (9,074) (10,014) (3,671) (6,817)
Advances on contracts................ 800 (576) -- -- --
Provision for losses on contracts.... 3,150 748 538 -- --
-------- --------- -------- ------- ---------
Net cash provided (used) by continuing
operating activities....................... 20,986 (38,968) 4,046 20,231 9,045
Net cash provided (used) by discontinued
operations................................. 23,607 (3,358) 22,349 (27,317) (15,119)
-------- --------- -------- ------- ---------
Net cash provided (used) by operating
activities................................. 44,593 (42,326) 26,395 (7,086) (6,074)
-------- --------- -------- ------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment... (2,887) (5,705) (4,825) (1,366) (1,562)
Purchase of short-term investments........... -- (101,046) (24,869) -- --
Proceeds from sale of short-term
investments................................ -- 55,943 26,867 5,155 43,080
Proceeds from sale of discontinued
operations................................. 77,884 -- 19,878 -- 59,456
Proceeds on real property sales and assets
retirements................................ 8,475 16,331 70,747 -- 132
-------- --------- -------- ------- ---------
Net cash provided (used) by investing
activities................................. 83,472 (34,477) 87,798 3,789 101,106
-------- --------- -------- ------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt..... -- -- -- -- 40,000
Payments on long-term borrowings............. (2,362) (136) (149) (39) (79)
Proceeds from issuance of common stock....... 2,778 1,605 3,344 248 59,864
Repurchase of common stock................... (5,747) (36,172) -- -- (274,877)
Recapitalization merger costs................ -- -- (3,223) -- (35,453)
Dividends paid............................... (3,974) (3,685) (2,371) (788) --
-------- --------- -------- ------- ---------
Net cash provided (used) by financing
activities................................. (9,305) (38,388) (2,399) (579) (210,545)
-------- --------- -------- ------- ---------
Net increase (decrease) in cash and
equivalents.................................... 118,760 (115,191) 111,794 (3,876) (115,513)
Cash and equivalents at beginning of year........ 15,702 134,462 19,271 19,271 131,065
-------- --------- -------- ------- ---------
Cash and equivalents at end of year.............. $134,462 $ 19,271 $131,065 $15,395 $ 15,552
======== ========= ======== ======= =========
Other cash flow information:
Income taxes paid (net of refunds)............... $ 3,143 $ 9,478 $ (9,622) (890) (40)
Interest paid.................................... 718 501 520 120 309
-------- --------- -------- ------- ---------
Noncash investing and financing activities:
Reclassification of plant held for sale from
"Property, Plant and Equipment" to "Other
Assets", at book value which is below
market(1)...................................... -- $ 6,422 -- -- --
-------- --------- -------- ------- ---------
</TABLE>
------------------
(1) The company's San Jose, California plant was vacated in 1998 and held for
sale. See additional information in Note 12 to the consolidated financial
statements.
See notes to consolidated financial statements.
F-8
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY
WJ Communications, Inc. (formerly Watkins-Johnson Company, the "Company")
was founded in 1957 in Palo Alto, California. The Company has been incorporated
in California since its inception and is expected to reincorporate in Delaware
in 2000. For more than 30 years, the Company developed and manufactured
microwave devices for government electronics and space communications systems
used for intelligence gathering and communication. In 1996, the Company began to
develop commercial applications for its military technologies. The Company's
continuing operations design, develop and manufacture innovative, high quality
broadband communications products that enable voice, data and image transport
over fiber optic, broadband cable and wireless communications networks around
the world. The Company's products are comprised of advanced, highly functional
components and integrated assemblies which address the radio frequency
challenges faced by both current and next generation broadband communications
networks. The Company's products are used in the network infrastructure
supporting and facilitating mobile communications, broadband high speed data
transmission and enhanced voice services. The Company previously operated
through other segments and has treated the Government Electronics, Semiconductor
Equipment and Telecommunication segments as discontinued operations. All
segments treated as discontinued operations had been divested by March 31, 2000.
Effective January 31, 2000, a recapitalization merger of the Company was
completed that included the following transactions, in accordance with the terms
of the recapitalization merger agreement among the Company and FP-WJ Acquisition
Corp. dated October 25, 1999 (the "Agreement"):
- The Company entered into a credit facility ("Facility") with CIBC World
Markets Corp., among others. This Facility is comprised of a
$15.0 million five-year revolver, a $25.0 million five-year term A loan,
and a $15.0 million six-year term B loan. The Company borrowed
$25.0 million under the term A loan and $15.0 million under the term B
loan as part of the recapitalization merger.
- The Company incurred approximately $3.6 million in financing costs in
conjunction with the Facility that were capitalized and $35.5 million of
transaction, retention and severance compensation that was charged to
operating expenses. A breakdown of the $35.5 million is as follows (in
thousands):
<TABLE>
<S> <C>
Legal....................................................... $1,200
Consulting and accounting fees.............................. 3,500
Bonus and retention payments................................ 3,400
Severance costs............................................. 6,400
Compensation charge for payment of stock options............ 16,800
Financial services.......................................... 2,600
Other....................................................... 1,600
-------
$35,500
=======
</TABLE>
- The Watkins Trust retained an approximate 8.5% voting and economic
interest in the Company as part of the recapitalization merger.
- The Company redeemed the remainder of the outstanding common stock for a
cash payment of approximately $270 million.
- Fox Paine Capital Fund and affiliates (collectively "Fox Paine") invested
$50.8 million in the Company.
F-9
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include those
of the Company and its subsidiaries after elimination of all intercompany
balances and transactions. The Company disposed of its Government Electronics
segment in October 1997, Semiconductor Equipment segment in July 1999, and
Telecommunications segment in January 2000. The consolidated financial
statements reflect such dispositions and results of operations of these
businesses as discontinued operations. For additional information on
discontinued operations, see Note 10.
INTERIM CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)--The consolidated
financial statements for the three months ended March 26, 1999 and March 31,
2000 and related footnote information are unaudited and have been prepared on
the same basis as the audited consolidated financial statements. In the opinion
of management, the interim unaudited consolidated financial statements include
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of the results of these interim periods. The results for the
three months ended March 31, 2000 are not necessarily indicative of the
operating results to be expected for the entire year.
CASH EQUIVALENTS AND INVESTMENTS--Cash equivalents consist of municipal bond
funds and commercial paper acquired with remaining maturity periods of 90 days
or less and are stated at cost plus accrued interest which approximates market
value. Investments consist of high-grade debt securities (AA rating or better)
with maturity greater than 90 days from the date of acquisition and are
classified as "available-for-sale." Investments classified as available-for-sale
are reported at fair market value with unrealized gains or losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax, until realized.
INVENTORIES--Inventories are stated at the lower of cost, using first-in,
first-out and average-cost basis, or market. Cost of inventory items is based on
purchase and production cost. Inventories at December 31, 1998 and 1999 and
March 31, 2000 consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1998 1999 2000
------------- -------- ---------
<S> <C> <C> <C>
Finished goods.............................................. $ 313 $ 536 $ 945
Work in process............................................. 191 452 861
Raw materials and parts..................................... 3,589 4,158 6,539
------ ------ ------
Total inventories........................................... $4,093 $5,146 $8,345
====== ====== ======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at cost.
Provision for depreciation and amortization is primarily based on the
straight-line method. Costs incurred to maintain property, plant and equipment
that do not increase the useful life of the underlying asset are expensed as
incurred. Leases which at inception assure the lessor full recovery of the fair
market value of the property over the lease term are capitalized and amortized
over the lease term in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 13 "Accounting for Leases."
F-10
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At December 31, 1998, 1999 and March 31, 2000, property, plant and equipment
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1998 1999 2000
------------- -------- ---------
<S> <C> <C> <C>
Land....................................................... $ 466 $ -- $ --
Buildings and improvements................................. 3,871 3,150 3,150
Plant facilities........................................... 11,183 6,982 6,982
Machinery and equipment.................................... 24,282 24,382 25,143
-------- -------- --------
39,802 34,514 35,275
Accumulated depreciation and amortization.................. (25,355) (20,851) (20,828)
-------- -------- --------
Property, plant and equipment-net.......................... $ 14,447 $ 13,663 $ 14,447
======== ======== ========
</TABLE>
OTHER ASSETS--At December 31, 1998, 1999 and March 31, 2000, Other Assets
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Deferred income taxes............................... $ 3,725 $3,056 $2,903
Deferred financing costs............................ -- -- 2,837
Idle facilities..................................... 6,422 -- --
Notes receivable.................................... 412 30 27
Other............................................... 200 159 141
------- ------ ------
$10,759 $3,245 $5,908
======= ====== ======
</TABLE>
REVENUE RECOGNITION--Revenues from product sales are recognized when all of the
following conditions are met: the product has been shipped, the Company has the
right to invoice the customer at a fixed price, the collection of the receivable
is probable and there are no significant obligations remaining. Generally, title
passes upon shipment of the Company's products. Any anticipated losses on
contracts are charged to earnings when identified. The Company provides a
warranty on standard products and components and products developed for specific
customers or program applications. The Company estimates the cost of warranty
based on its historical field return rates. To date, the Company has had no
significant warranty returns.
FORWARD EXCHANGE CONTRACTS--The Company enters into forward exchange contracts
to hedge sales transactions and firm commitments denominated in foreign
currencies. Gains and losses on the forward contracts are recognized based on
changes in exchange rates, as are offsetting foreign exchange gains and losses
on the underlying transactions.
INCOME TAXES--The consolidated statements of operations include provisions for
deferred income taxes using the liability method for transactions that are
reported in one period for financial accounting purposes and in another period
for income tax purposes.
F-11
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PER SHARE INFORMATION--Basic earnings per share is computed using the weighted
average number of shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (such as stock options) were exercised or
converted into common stock, however, such adjustments are excluded when they
are considered antidilutive.
FISCAL YEAR--The Company's fiscal year consists of 52 or 53 weeks ending on
December 31st of each year. The years ended 1997, 1998 and 1999 included 52
weeks each. The quarters ended March 26, 1999 and March 31, 2000 included 13
weeks.
MARKET RISKS--The success of the Company is dependent on a number of factors.
These factors include the ability to manage and adequately finance anticipated
growth, the need to satisfy changing and increasingly complex customer
requirements especially in the fiber optics and wireless markets, dependency on
a small number of customers and a limited number of key personnel and
competition from companies with greater resources.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION--The company continues to account for stock-based
compensation granted to employees and directors under the intrinsic value method
as defined in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Proforma disclosures for net income and earnings per share
as if the fair value based method was used are included in Note 6 in accordance
with SFAS 123 "Accounting for Stock-based Compensation."
RECENT ACCOUNTING PRONOUNCEMENTS--In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." In June 1999,
the FASB issued SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of SFAS 133." These Statements
require companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains and losses resulting from changes in
the fair market values of those derivative instruments would be accounted for
depending on the use of the instrument and whether it qualifies for hedge
accounting. SFAS 133 will be effective for the Company's year ending
December 31, 2001. The Company enters into forward exchange contracts to hedge
sales transactions and firm commitments denominated in foreign currencies.
Management is in the process of evaluating any impact on the Company's financial
condition or results of operations resulting from these Statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements.
SAB 101 provides guidance on applying generally accepted accounting principles
to revenue recognition in financial statements. The Company has adopted SAB 101
and the adoption had no material effect on the accompanying financial
statements.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation--an interpretation of APB No. 25.
F-12
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interpretation No. 44 is effective July 1, 2000. The Interpretation clarifies
the application of Opinion 25 for various issues, specifically:
- the definition of an employee;
- the criteria for determining whether a plan qualifies as a
non-compensatory plan;
- the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a business
combination.
We do not anticipate that the adoption of Interpretation No. 44 will have a
material impact on our financial position or the results of our operations.
3. FINANCIAL INSTRUMENTS AND SHORT-TERM INVESTMENTS
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and equivalents, short-term
investments, receivables, and financial instruments used in hedging
transactions. The Company invests in a variety of financial instruments such as
commercial paper and municipal bond funds, and, by policy, limits the amount of
credit exposure with any one financial institution or commercial issuer.
Concentration of credit risk with respect to trade receivables is limited due to
the variety of customers and market segments into which the Company's products
are sold, as well as their dispersion across geographic areas. The Company
maintains an allowance for doubtful accounts based upon the expected
collectibility of receivables.
The carrying value of cash and equivalents, short-term investments,
receivables, accounts payable and short-term notes payable are a reasonable
approximation of their fair market value due to the short-term maturities of
those instruments. The carrying value of the Company's long-term debt
approximates fair value based on the interest rates currently available to the
Company for long-term debt with similar terms as the borrowings of the Company.
Considerable judgment is required in interpreting market data to develop
estimates of fair value, so these estimates are not necessarily indicative of
the amounts that could be realized or would be paid in a current market
exchange.
The fair value and the amortized cost of available-for-sale securities at
December 31, 1998 and 1999, including unrealized holding gains, are presented in
the table which follows. Fair values are based on quoted market prices.
Available-for-sale securities are classified as current assets and have an
average maturity of less than two years. Gross proceeds from the sale of
marketable securities were $55.9 million, $26.9 million and $43.1 million during
1998, 1999 and for the period ending March 31, 2000, respectively. Gross gains
and losses realized on such sales or maturities were not material. For the
purpose of determining gross realized gains and losses, the cost of securities
sold is based upon specific identification.
F-13
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL INSTRUMENTS AND SHORT-TERM INVESTMENTS (CONTINUED)
Financial instrument and short-term investments are summarized, as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Amortized cost..................................... $45,104 $43,080 $ --
Unrealized holding gains (losses).................. 249 (333) --
------- ------- ------
Market value....................................... $45,353 $42,747 $ --
======= ======= ======
</TABLE>
4. LONG-TERM DEBT
On January 31, 2000, the Company entered into a credit facility ("Facility")
with CIBC World Markets Corp., among others. As of March 31, 2000, obligations
under the Facility are summarized as follows (in thousands):
<TABLE>
<S> <C>
Term A loan, interest at LIBOR plus 3.25% or prime plus
2.25%, as periodically elected by the Company, maturing in
December 2004 (two notes: 9.35% and 9.56% at March 31,
2000)..................................................... $25,000
Term B loan, interest at LIBOR plus 3.75% or prime plus
2.75%, as periodically elected by the Company, maturing in
December 2005 (two notes: 9.74% and 10.06% at March 31,
2000)..................................................... 14,926
-------
39,926
Less: current portion....................................... 1,113
-------
Total long-term debt.................................... $38,813
=======
</TABLE>
The Facility also included a $15 million five-year revolver maturing in
2004. Interest rates for any borrowings under the five-year revolver are at
LIBOR plus 3.25% or prime plus 2.25%, as periodically elected by the Company. At
March 31, 2000, there were no borrowings outstanding under the five-year
revolver.
The Facility is secured by substantially all of the assets of the Company.
The Facility also includes certain financial covenants, as follows: maximum
leverage of no more than 4.5 for the first quarter fiscal 2000 declining to 2.5
for fiscal 2003 and thereafter; minimum interest coverage ratio of 2.0 for
fiscal 2000 increasing to 3.0 for fiscal 2002 and thereafter; minimum fixed
charge ratio of 1.00 through fiscal 2001 increasing to 1.10 for fiscal 2004 and
thereafter; minimum EBITDA of $7.5 million for second fiscal quarter 2000
increasing periodically to $18.0 million in fiscal 2003 and thereafter.
F-14
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
Principal maturities under the Facility as of March 31, 2000 are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 1,113
2001........................................................ 3,650
2002........................................................ 5,650
2003........................................................ 6,650
2004........................................................ 8,650
2005........................................................ 14,213
-------
$39,926
=======
</TABLE>
The Company may prepay the term A and B loans at any time upon adequate
notice to the lender. The Facility requires that a mandatory prepayment of an
estimated $9.3 million be made in August 2000, related to final settlements of
transactions which occurred prior to the recapitalization merger.
The Company has letters of credit of $6.1 million as of March 31, 2000 with
no amount having been drawn.
5. OTHER LONG-TERM OBLIGATIONS
Long-term obligations, excluding amounts due within one year, consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1998 1999 2000
-------- -------- ---------
<S> <C> <C> <C>
Deferred compensation.............................. $ 201 $ -- $ --
Environmental remediation.......................... 3,254 193 193
Capital leases, net of current portion............. 5,066 4,902 4,844
Deferred income taxes.............................. 10,641 8,990 8,990
------- ------- -------
Total.............................................. $19,162 $14,085 $14,027
======= ======= =======
</TABLE>
The current portion of long-term obligations is included in current
liabilities. The expected maturity amounts are as follows: 2000, $5,889,500;
2001, $6,851,000; 2002, $1,396,000; 2003, $1,363,000; 2004, $247,000 thereafter,
$4,228,000.
ENVIRONMENTAL REMEDIATION--As discussed in Note 8, the Company is obligated to
remediate groundwater contamination at its Palo Alto, California, facility.
LEASES--The Company's Palo Alto, California lease is treated as a capital lease
for financial statement purposes. The capital lease has been extended to the
year 2014 with an option to extend to 2029. The Company also has noncancellable
operating leases for the Milpitas facility and equipment expiring through the
year 2006.
F-15
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER LONG-TERM OBLIGATIONS (CONTINUED)
Payment obligations under existing capital and operating leases as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
LEASE PAYMENTS:
2000.................................................... $ 635 $ 543
2001.................................................... 635 478
2002.................................................... 635 411
2003.................................................... 635 408
2004.................................................... 635 408
Remaining years......................................... 6,187 764
------- ------
Total....................................................... 9,362 $3,012
======
Less: Imputed interest...................................... (4,310)
-------
Present value of lease payments (including current portion
of $150).................................................. $ 5,052
=======
</TABLE>
The Company sub-leases a portion of its Palo Alto, California facility under
a short-term operating lease expiring October 2000. Included in Other Income
(Expense), net for 1998 and 1999 is approximately $1.2 million and $400,000,
respectively, of income after expenses from this sub-lease agreement. Rental
income under the sub-lease agreement was not significant prior to 1998.
F-16
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER LONG-TERM OBLIGATIONS (CONTINUED)
Rent expense included in continuing operations for property and equipment
relating to operating leases is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Real property............................................... $ 26 $406 $408
Equipment................................................... 568 191 148
---- ---- ----
Total....................................................... $594 $597 $556
==== ==== ====
</TABLE>
6. STOCKHOLDERS' EQUITY
STOCK SPLIT--During the first quarter of fiscal 2000, the Company effected a
stock split of 20 shares of common stock for every one share of outstanding
common stock. All share and per share amounts in these financial statements have
been adjusted to give effect to this stock split.
SUBSCRIBED SHARES (UNAUDITED)--During the first quarter of fiscal 2000, the
Company sold shares to employees as part of the recapitalization merger. At
March 31, 2000, the Company had not yet received approximately $5.2 million for
payment of 2,512,000 shares. The subscription receivables are classified as a
contra-equity account in the accompanying balance sheet as of March 31, 2000.
The outstanding amounts were collected by the Company in April 2000.
STOCK REPURCHASE PROGRAM--In 1998, the Company's Board of Directors
increased the Company's common stock repurchase authorization up to 70,000,000
shares. By December 31, 1998, all 70,000,000 shares were repurchased, of which
4,084,000 and 35,916,000 were repurchased in 1997 and 1998, respectively.
2000 STOCK OPTION PLAN--On January 31, 2000, the Company's "2000 Stock
Incentive Plan" (the "Plan") was adopted and approved by the board of directors.
The Plan may grant incentive awards in the form of options to purchase shares of
the Company's common stock, restricted shares, common stock and stock
appreciation rights to participants, which include non-employee directors,
officers and employees of and consultants to the Company and its affiliates. The
total number of shares of common stock reserved and available for grant under
the stock incentive plan is 11,000,000 shares. Stock options may include
incentive stock options, nonqualified stock options or both, in each case, with
or without stock appreciation rights. During the first quarter of 2000, there
were only grants of stock options as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
2000 (UNAUDITED)
Granted............................................ 9,706,196 $2.06
Exercised.......................................... -- --
Terminated......................................... -- --
At March 31:
Outstanding.................................... 9,706,196 $2.06
Exercisable.................................... 1,479,052 $2.06
Reserved for future grants..................... 1,293,804
</TABLE>
F-17
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning currently outstanding and
exercisable options at March 31, 2000 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
NUMBER YEARS OF REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------------ ----------- -------------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$2.06.................... 9,706,196 9.9 $2.06 1,479,052 $2.06
</TABLE>
ACTIVITY RELATED TO ALL STOCK OPTION PLANS PRIOR TO THE RECAPITALIZATION MERGER
WATKINS-JOHNSON STOCK OPTION PLANS--The Watkins-Johnson Stock Option Plans
(the "Plans") provided for grants of nonqualifying and incentive stock options
to certain key employees and officers. Options were granted at the market price
on the date of grant and expire at the tenth anniversary date. One-third of the
options granted are exercisable on each of the second, third and fourth
anniversary dates following the grant. This plan was terminated at the time of
the recapitalization merger on January 31, 2000.
The Nonemployee Directors Stock Option Plan provides for a fixed schedule of
options to be granted through the year 2005. Nonemployee directors of the
Company are automatically granted 60,000 shares of common stock each year that
they remain a director of the Company. The options are granted at the market
price on the date of grant and expire on the tenth anniversary date. The options
granted become exercisable six months after the date of grant. As included in
the tables below, options for 420,000 shares were granted at $1.34 in 1997,
options for 420,000 shares were granted at $1.33 in 1998 and options for 420,000
shares were granted at $1.24 in 1999. This plan was terminated at the time of
the recapitalization merger on January 31, 2000.
Stock option transactions included in the Consolidated Statements of
Stockholders' Equity are shown net of retirement of outstanding shares used in
payment for options exercised and include tax benefits related to sales under
stock option plans of $719,000, $217,000 and $653,000 for 1997, 1998 and 1999,
respectively.
F-18
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Activity related to all stock option plans prior to the recapitalization
merger is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
1997
Granted........................................... 4,840,000 $1.32
Exercised......................................... 2,719,760 $0.76
Terminated........................................ 3,826,180 $1.74
At December 31:
Outstanding................................... 28,878,800 $1.37
Exercisable................................... 13,879,320 $1.19
1998
Granted........................................... 4,840,000 $1.29
Exercised......................................... 1,649,020 $0.84
Terminated........................................ 3,028,540 $1.48
At December 31:
Outstanding................................... 29,041,240 $1.37
Exercisable................................... 17,175,300 $1.33
1999
Granted........................................... 3,430,000 $1.19
Exercised......................................... 2,711,240 $0.99
Terminated........................................ 5,606,760 $1.69
At December 31:
Outstanding................................... 24,153,240 $1.31
Exercisable................................... 16,129,760 $1.35
2000
Exercised......................................... 91,660 $1.68
Terminated........................................ 24,061,580 $1.31
At March 31:
Outstanding................................... -- $ --
</TABLE>
As part of the recapitalization merger, as discussed in Note 1, vesting of
all outstanding options was accelerated and the fully vested options were
surrendered in exchange for the right to receive $2.05625 per share in cash,
therefore all of the Watkins-Johnson stock option plans discussed above were
terminated.
As discussed in Note 2, the Company applies Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized for its stock-based compensation plans. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value at the grant date for awards under these plans, and
amortized to expense over the vesting period of the awards consistent with the
methodology prescribed under SFAS 123, "Accounting for Stock-Based
Compensation," the Company's pro forma net income (loss) for 1997, 1998 and 1999
would have been $31.7 million, $(50.4) million and $67.4 million, respectively,
or $0.19, $(0.33) and $0.53 per basic and diluted share, respectively.
F-19
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
In accordance with SFAS 123, the impact of outstanding non-vested stock options
granted prior to 1995 has been excluded from the pro forma calculation;
accordingly, the 1997 and 1998 pro forma adjustments are not indicative of
future period pro forma adjustments, when the calculation will apply to all
applicable stock options. The weighted average fair value of options calculated
on the date of grant using the Black-Scholes option-pricing model along with the
weighted average assumptions used are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Fair value............................................. $ 0.40 $ 0.39 $ 0.38
Dividend yield......................................... 1.2% 2.1% 1.5%
Volatility............................................. 38.1% 41.7% 42.9%
Risk free interest rate at the time of grant........... 6.1% 5.4% 4.8%
Expected term to exercise (in months from the vest
date)................................................ 4.5 4.9 6.6
</TABLE>
The Company's calculations are based on a multiple option valuation approach
and forfeitures are recognized as they occur. The Black-Scholes model used by
the Company to calculate option values, as well as other currently accepted
option valuation models, were developed to estimate the fair values of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require highly subjective assumptions, including future stock price volatility,
and expected time until exercise, which greatly affect the calculated values.
7. INCOME TAXES
The provision for income taxes includes deferred taxes reflecting the net
tax effects of temporary differences that are reported in one period for
financial accounting purposes and in another period for income tax purposes.
Deferred tax assets are recognized when management believes realization of
future tax benefits of temporary differences is more likely than not. In
estimating future tax consequences, generally all expected future events are
considered other than enactments of changes in the tax law or rates. The
components of income from continuing operations before federal and state taxes
was $683,000, $21,471,000 and $68,733,000 in 1997, 1998 and 1999, respectively.
Foreign income from continuing operations was insignificant.
The provision for federal and state tax expense (benefit) on income from
continuing operations consists of the amounts below. Foreign tax expense was
insignificant for 1997, 1998 and 1999.
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
U.S............................................... $4,056 $10,205 $ 3,991
State............................................. 3,342 1,910 828
------ ------- -------
Total current......................................... 7,398 12,115 4,819
Deferred:
U.S............................................... (3,831) (3,381) 19,863
State............................................. (3,327) (1,756) 1,701
------ ------- -------
Total................................................. $ 240 $ 6,978 $26,383
====== ======= =======
</TABLE>
F-20
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The differences between the effective income tax rate and the statutory
federal income tax rate are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Statutory federal tax rate............................... 35.0% 35.0% 35.0%
Export sales benefit..................................... (1.7) (0.8) (0.7)
Research credit.......................................... (2.6) (0.7) (0.7)
State taxes net of federal tax........................... 2.1 0.7 3.6
Other.................................................... 2.3 (1.7) 1.2
----- ----- -----
Effective tax rate....................................... 35.1% 32.5% 38.4%
===== ===== =====
</TABLE>
Deferred tax assets are comprised of the following at December 31
(in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred compensation....................................... $ 1,902 $ 80
Loss accruals............................................... 2,313 2,279
Environmental remediation................................... 1,595 214
Vacation accrual............................................ 344 355
Depreciation and amortization............................... 1,228 2,011
Net operating loss carryforwards, credits and tax attributes
carried over from discontinued operations................. 19,359 --
Other....................................................... 636 758
------- ------
Gross deferred tax asset.................................... $27,377 $5,697
======= ======
</TABLE>
8. ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENCIES
In 1991, the Company recorded a $5.2 million charge for estimated
remediation actions and cleanup costs. The Company continues to be in compliance
with the remedial action plans being monitored by various regulatory agencies at
its Palo Alto site and no additional provision has been recorded since 1991.
Expenditures charged against the provision totaled $26,000, $176,000 and
$2,628,000 for the years 1997, 1998 and 1999, respectively. Included in the 1999
expenditures was a payment of $2.4 million for required remedial services to be
performed and a related insurance policy to assure compliance for the duration
of the remedial action plans. In addition, the Company had $532,500 accrued as
of December 31, 1999 primarily related to vacating the Palo Alto site. The
Company believes any remaining unaccrued or uninsured environmental liabilities
associated with the Palo Alto site should not have a material effect on the
Company's results of operations or financial position.
Four purported shareholder class action lawsuits have been filed against the
Company and its directors. These lawsuits allege essentially the same grounds
for relief, namely that the individual defendants breached their fiduciary duty
to the Company's shareowners in connection with the recapitalization merger,
which was completed on January 31, 2000 as discussed more fully in Note 1. On
January 14, 2000, all parties to the class action executed a memorandum of
understanding to settle the lawsuits subject to final negotiations, execution of
an acceptable settlement agreement and approval of the court. An estimated
settlement payment and related legal fees, of approximately $500,000 has been
accrued
F-21
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENCIES (CONTINUED)
and included in the December 31, 1999 results of operations and financial
position. The Company does not expect any additional material adverse impact due
to the class action lawsuits.
In addition to the above matters, the Company is involved in various legal
actions which arose in the ordinary course of its business activities.
Management believes the final resolution of these matters should not have a
material impact on its results of operations, cash flows, or financial position.
9. EMPLOYEE BENEFIT PLANS
The Company has an Employees' Investment 401(k) Plan that covers
substantially all employees and provides that the Company match employees'
salary deferrals up to 3% of eligible employee compensation. The amount charged
to continuing operations was $324,000, $417,000 and $480,000 in 1997, 1998 and
1999, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")--Prior to the recapitalization
merger, the Company had an ESOP to encourage employee participation and
long-term ownership of company stock. This plan was terminated at the time of
the recapitalization merger on January 31, 2000. The Company's Board of
Directors determines each year's discretionary contribution depending on the
performance and financial condition of the Company and was allocated as a
percentage of eligible employee base compensation. All U.S. employees were
eligible to participate in the ESOP and vesting was immediate. The Board
approved a contribution equal to 1% of eligible employee compensation for 1997,
1998 and 1999, which resulted in charges to continuing operations of $119,000,
$67,000 and $159,000, respectively. The ESOP held 3,632,480 and 3,487,400 shares
of common stock at December 31, 1998 and 1999, respectively, and there were no
unallocated or unearned shares held by the ESOP. Dividends paid with respect to
common stock held by the ESOP were used to purchase additional shares and were
not material for all years presented.
F-22
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BUSINESS SEGMENT REPORTING AND DISCONTINUED OPERATIONS
In 1997, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." As discussed below, three divested segments
are being reported as discontinued operations. The Government Electronics
segment was divested in October 1997, the Semiconductor Equipment segment was
divested in July 1999 and the Telecommunications segment was divested in
January 2000. As an integrated telecommunications products provider, the Company
currently has one reportable segment. The Company designs, manufactures and
services radio frequency communications products used in network infrastructure.
The Company's products enable voice, video and data transport over fiber optic,
broadband cable and wireless systems that provide the backbone for cellular and
Internet communications. While the Company's chief decision-maker monitors the
sales of various products, operations are managed and financial performance
evaluated based upon the sales and production of multiple products employing
common manufacturing and research and development resources; sales and
administrative support; and facilities. This allows the Company to leverage its
costs in an effort to maximize return. Management believes that any allocation
of such shared expenses to various products would be impractical and arbitrary,
and currently does not make such allocations internally. The chief
decision-maker does, however, monitor sales by products at a more detailed level
than those depicted in the Company's historical general purpose financial
statements as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
--------------------------------------------- ---------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 26, MARCH 31,
1997 1998 1999 1999 2000
------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Semiconductor............ $ 3,651 $ 9,763 $15,625 $ 2,862 $ 4,877
Fiber optic.............. 676 7,251 15,228 2,821 6,370
Wireless................. 26,847 46,554 51,551 17,845 5,804
------- ------- ------- ------- -------
Total.................... $31,174 $63,568 $82,404 $23,528 $17,051
======= ======= ======= ======= =======
</TABLE>
Sales to individual customers representing greater than 10% of Company
consolidated sales during at least one of the past three years are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
--------------------------------------------- ---------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 26, MARCH 31,
1997 1998 1999 1999 2000
------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Company A................ $20,224 $33,169 $36,107 $16,134 $ 2,449
Company B................ 1,209 7,848 17,876 3,097 7,666
Company C................ 5,005 10,015 8,823 1,348 844
</TABLE>
F-23
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BUSINESS SEGMENT REPORTING AND DISCONTINUED OPERATIONS (CONTINUED)
Sales to unaffiliated customers by geographic area are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
--------------------------------------------- ---------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 26, MARCH 31,
1997 1998 1999 1999 2000
------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
United States............ $28,362 $53,484 $58,110 $19,739 $ 7,795
Export Sales from United
States:
Canada............... 1,228 8,010 18,079 3,112 7,304
Europe............... 175 1,755 3,791 434 1,326
Korea................ 1,387 237 1,194 176 319
Other................ 22 82 1,230 67 307
------- ------- ------- ------- -------
Total.................... $31,174 $63,568 $82,404 $23,528 $17,051
======= ======= ======= ======= =======
</TABLE>
Foreign operations' sales and identifiable assets are less than ten percent
of consolidated totals.
The Company's continuing operations' operating profit (loss) and year-end
long-lived assets by geographic area are substantially all located in the United
States.
The operations of the Government Electronics segment included the
development, manufacture and sale of advanced microwave devices and tactical
electronic systems and devices for guided-missile programs and other government
applications. The operations of the Semiconductor Equipment segment involved the
development, manufacture, sale and service of chemical-vapor-deposition
equipment used in the manufacture of semiconductor products. The operations of
the Telecommunications segment involve the design, manufacture and service of
equipment and related processes with applications in government intelligence,
signal surveillance and military communications. The accompanying financial
statements for 1997 and 1998 have been restated to reflect the
Telecommunications segment as a discontinued operation as a result of the sale
of this segment in January 2000 as discussed below.
F-24
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BUSINESS SEGMENT REPORTING AND DISCONTINUED OPERATIONS (CONTINUED)
Summarized below are the net assets of the discontinued segments. All net
assets are shown as current due to the sale of the segments, except for the net
long-term assets of the Telecommunications segment in 1998 since this sale
occurred in the year 2000 (in thousands).
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1999 2000
------------- ------------- ---------
<S> <C> <C> <C>
Accounts receivable................................ $ 19,139 $ 7,933 $ 2,789
Inventory.......................................... 19,277 6,057 --
Other assets....................................... 13,237 10,251 7,324
Current liabilities................................ (38,689) (9,180) (2,619)
Fixed assets, net.................................. 39,048 8,135 --
Long-term obligations.............................. (24,090) (2,959) --
-------- -------- -------
Net assets of discontinued operations, current..... $ 27,922 $ 20,237 $ 7,494
======== ======== =======
Fixed assets, net.................................. $ 9,144
Long-term obligations.............................. (91)
--------
Net assets of discontinued operations,
noncurrent....................................... $ 9,053
========
</TABLE>
Summarized below are operating results of the discontinued segments (in
thousands).
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
--------------------------------------------- ---------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 26, MARCH 31,
1997 1998 1999 1999 2000
------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................ $335,843 $148,651 $120,556 $41,653 $ 1,873
Gross profit............. 110,913 26,985 44,136 15,450 861
Income (loss) before
income taxes........... 3,855 (94,479) 8,694 1,556 303
Income taxes (benefit)... 1,050 (30,778) (967) 327 91
Gain on disposition--net
of taxes (benefit) of
$20,219, $0, $1,458, $0
and $13,448 for the
periods ending
December 31, 1997, 1998
and 1999, March 26,
1999 and March 31,
2000................... 29,677 -- 15,829 -- 31,379
-------- -------- -------- ------- -------
Net income (loss) from
discontinued
operations............. $ 32,482 $(63,701) $ 25,490 $ 1,229 $31,591
======== ======== ======== ======= =======
</TABLE>
In 1998, the Semiconductor Equipment segment discontinued its
high-density-plasma chemical-vapor-deposition product line and restructured its
operations to focus on its core atmospheric-pressure chemical-vapor-deposition
products. Inventory, demonstration equipment, and specialized fixed assets which
had no market value and no known alternative use were written down in the
restructuring. In addition, employment was reduced from 590 to 430. Terminated
employees were mostly related to the discontinued
F-25
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. BUSINESS SEGMENT REPORTING AND DISCONTINUED OPERATIONS (CONTINUED)
product line. Of the total employees terminated, 120 were from domestic
operations, while 40 were from foreign operations. Employees were notified of
the reduction-in-force in the third quarter of 1998. The segment incurred
charges of $21.1 million, $13.7 million and $3.5 million related to fixed
assets, inventory, severance and other exit costs, respectively, for a total of
$38.3 million. All restructuring charges were incurred or paid out by
December 31, 1999.
Included in the 1998 asset write-down of $21.1 million was a $6.0 million
charge related to the facility in Japan. The asset was written down to fair
market value in accordance with SFAS No. 121, "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Fair market
value was determined based on the intended use of the facility.
In 1998, the Telecommunications segment discontinued its Base2-TM-
base-station product line after reassessing key customer needs and market
conditions. The reassessment concluded that the segment had exhausted all
potential sales avenues for the product, and determined that there was no market
value and alternative use for the specialized fixed assets and equipment. In
addition, employment was reduced from 320 to 290. Terminated employees were
mostly related to the Base2 product line. Employees were notified of the
reduction-in-force in the third quarter of 1998. Inventory, demonstration
equipment, and specialized fixed assets associated with the discontinued product
were written down in the third quarter and subsequently disposed of in the
fourth quarter of 1998. The segment incurred charges of $2.3 million,
$3.4 million and $0.4 million related to fixed assets, inventory, severance and
other exit costs, respectively, for a total of $6.1 million. All restructuring
charges were incurred or paid out by December 31, 1999.
On January 14, 2000, the Company completed the sale of substantially all of
the Telecommunications segment's assets to a unit of Marconi North
America, Inc., a subsidiary of the General Electric Company p.l.c. of the United
Kingdom. Net proceeds from the sale of about $57.0 million and an estimated
pre-tax gain of more than $40.0 million are included in the Company's financial
results in the first quarter of 2000.
F-26
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE
Basic and diluted earnings per share were computed as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------ -------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Basic per share amounts:
Net income from continuing operations...... $ 443 $ 14,493 $ 42,350 $ 1,624 $(25,114)
-------- -------- -------- -------- --------
Average shares outstanding................. 165,160 154,740 128,389 131,157 66,400
-------- -------- -------- -------- --------
Basic net income per share................. $ 0.00 $ 0.09 $ 0.33 $ 0.01 $ (0.38)
======== ======== ======== ======== ========
Diluted per share amounts:
Net income from continuing operations...... $ 443 $ 14,493 $ 42,350 $ 1,624 $(25,114)
-------- -------- -------- -------- --------
Average shares outstanding................. 165,160 154,740 128,389 131,157 66,400
Effect of dilutive stock options........... 5,020 2,400 3,838 1,748 --
-------- -------- -------- -------- --------
Dilutive shares outstanding................ 170,180 157,140 132,227 132,905 66,400
-------- -------- -------- -------- --------
Diluted net income per share............... $ 0.00 $ 0.09 $ 0.32 $ 0.01 $ (0.38)
======== ======== ======== ======== ========
</TABLE>
Weighted average options outstanding to purchase 11,280,000, 17,740,000 and
7,860,000 shares of common stock were not included in the computation of diluted
per share amounts in 1997, 1998 and 1999, respectively, because the weighted
average exercise prices were greater than the average market prices of the
common shares. Weighted average exercise prices of $1.98 in 1997, $1.68 in 1998
and $1.99 in 1999 exceeded the average market prices of $1.49, $1.16 and $1.49,
respectively.
12. REAL ESTATE TRANSACTIONS AND DEPOSITS
In 1997, the Company exchanged a portion of its subleasehold interest at its
Palo Alto, California facility for consideration consisting of cash and the
sublessor's leasehold rights in the remaining parcels under the lease. The
exchange resulted in a pre-tax gain of $7.6 million.
In 1998, the Company sold approximately 15 acres of undeveloped land
adjacent to its San Jose, California, facility for net proceeds of
$16.0 million and a pre-tax gain of $15.0 million. The remainder of the San Jose
property was sold in 1999 as described below.
In 1999, the Company completed the sale of its remaining San Jose,
California facility including a 190,000 square foot building resulting in net
proceeds of $16.9 million and a pre-tax gain of $9.7 million. This property was
vacated in 1998 and its carrying value of $6.4 million (which management
believed to be less than market value) was classified in "Other Assets"
(long-term) as of December 31, 1998.
Also in 1999, the Company completed the sale of one of its long-term lease
interests involving approximately 16 acres in Palo Alto, California to Stanford
University resulting in net proceeds of about $54.0 million and a pre-tax gain
of $51.8 million. The escrow for this property included a $5.0 million security
deposit which was released on January 14, 2000 after a letter of guarantee was
posted by CIBC World Markets on behalf of the Company. On December 27, 1999, the
Company paid CIBC World
F-27
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. REAL ESTATE TRANSACTIONS AND DEPOSITS (CONTINUED)
Markets $6.1 million in advance of receiving the funds from escrow, which was
also refunded on January 31, 2000. The $11.1 million aggregate was recorded as a
deposit as of December 31, 1999. As part of the agreement, the Company may
continue to occupy the property until October 2000 in order to allow operational
transition.
13. RELATED PARTY TRANSACTIONS
On January 31, 2000, as part of the recapitalization merger, the Company
entered into a management agreement with Fox Paine. Fox Paine is the majority
stockholder in the Company. Under that agreement, the Company paid Fox Paine an
aggregate of $3.5 million for assistance in obtaining debt financing and
advisory services. In addition, the Company agreed to pay Fox Paine a management
fee of $110,000 for the year ended December 31, 2000 and, for each subsequent
year, a fee in the amount of 1% of net income before interest expense, interest
income, income taxes, depreciation and amortization and equity in earnings
(losses) of minority investments, calculated without regard to the fee. In
connection with this agreement, the Company has agreed to indemnify Fox Paine
against various liabilities that may arise as a result of the management
services it will perform. The Company has also agreed to reimburse Fox Paine for
its expenses incurred in providing these services.
14. SUBSEQUENT EVENTS (UNAUDITED)
REINCORPORATION
On June 2, 2000, the Company's Board of Directors authorized the
reincorporation of the Company in the State of Delaware. This reincorporation
will occur upon the effectiveness of the proposed initial public offering. In
connection with the reincorporation, the Company will be authorized to issue
100,000,000 shares of common stock, $0.01 par value and 10,000,000 shares of
undesignated preferred stock, $0.01 par value.
F-28
<PAGE>
REPORT OF MANAGEMENT
The consolidated financial statements of WJ Communications, Inc and
subsidiaries were prepared by management, which is responsible for their
integrity and objectivity. The statements were prepared in conformity with
generally accepted accounting principles and, as such, include amounts that are
based on the best judgments of management.
The system of internal controls of the Company is designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed in accordance with management's authorization and are reported
properly. The most important safeguard for stockholders is the Company's
emphasis in the selection, training and development of professional accounting
managers to implement and oversee the proper application of its internal
controls and the reporting of management's stewardship of corporate assets and
maintenance of accounts in conformity with generally accepted accounting
principles.
Arthur Andersen LLP, as independent public accountants, are retained to
provide an audit of the consolidated financial statements. They obtain and
maintain an understanding of the Company's accounting and financial controls,
and conduct such tests and related procedures, as they deem necessary to arrive
at an opinion on the fairness of the financial statements.
The Audit Committee of the Board of Directors, composed solely of Directors
from outside the Company, meets periodically, separately and jointly, with the
independent auditors and representatives of management to review the work of
each. The functions of the Audit Committee include recommending the engagement
of the independent auditors, reviewing the scope and results of the audit and
reviewing management's evaluation of the system of internal controls.
<TABLE>
<S> <C>
Malcolm Caraballo Rainer Growitz
President and Chief Executive Officer Vice President, Finance
</TABLE>
F-29
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES
[WJ COMMUNICATIONS LOGO]
COMMON STOCK
-------------
PROSPECTUS
-------------
CHASE H&Q
CIBC WORLD MARKETS
THOMAS WEISEL PARTNERS LLC
------------
, 2000
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO
PERMIT A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS IN THAT JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES ARE REQUIRED TO INFORM
THEMSELVES ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THIS OFFERING AND THE
DISTRIBUTION OF THIS PROSPECTUS APPLICABLE TO THAT JURISDICTION.
UNTIL , 2000, ALL DEALERS THAT BUY, SELL OR TRADE IN OUR SHARES
OF COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
common stock being registered, all of which will be paid by the Registrant:
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
SEC registration fee........................................ $26,400
NASD filing fee............................................. 10,500
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses (including legal fees)........... 7,500
Transfer agent and registrar fees and expenses.............. *
Miscellaneous............................................... *
-------
Total....................................................... $ *
=======
</TABLE>
--------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation has the power to indemnify its officers, directors, employees and
agents (or persons serving in such positions in another entity at the request of
the corporation) against expenses, including attorneys' fees, judgments, fines
or settlement amounts actually and reasonably incurred by them in connection
with the defense of any action by reason of being or having been directors or
officers, if such person shall have acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
corporation (and, with respect to any criminal action, had no reasonable cause
to believe the person's conduct was unlawful), except that if such action shall
be by or in the right of the corporation, no such indemnification shall be
provided as to any claim, issue or matter as to which such person shall have
been judged to have been liable to the corporation unless and to the extent that
the Court of Chancery of the State of Delaware, or another court in which the
suit was brought, shall determine upon application that, in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity. The Registrant's Certificate of Incorporation provides that the
Registrant will indemnify its officers and directors to the fullest extent
permitted by Delaware law.
As permitted by Section 102 of the DGCL, the Registrant's Certificate of
Incorporation provides that no director shall be liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty as a director
other than (i) for breaches of the director's duty of loyalty to the Registrant
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) for the
unlawful payment of dividends or unlawful stock purchases or redemptions under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
The Underwriting Agreement is expected to provide that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act. Reference is made to the form of
Underwriting Agreement to be filed as Exhibit 1.1 hereto.
II-1
<PAGE>
The Registrant maintains directors' and officers' liability insurance for
the benefit of its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of the transactions by the Registrant during the
past three years involving sales of the Registrant's securities that were not
registered under the Securities Act:
(1) Pursuant to a Recapitalization Agreement, dated October 25, 1999, by and
among the Watkins Trust Dated September 19, 1988 (the "Watkins Trust"), the
Registrant and Fox Paine Capital Fund, L.P., the Registrant issued 219,020
shares of the Registrant's Series A Convertible Participating Preferred Stock in
exchange for 219,020 shares of the Registrant's common stock held by the Watkins
Trust.
(2) On January 31, 2000, in connection with and upon the merger of the
Registrant with FP-WJ Acquisition Corp. ("FP-WJ") pursuant to the Agreement and
Plan of Merger dated October 25, 1999, by and between the Registrant and FP-WJ,
each of the 25,531,913 issued and outstanding shares of common stock of FP-WJ
became a share of the Registrant's common stock and each of the 219,020 issued
and outstanding shares of the Registrant's Series A Convertible Participating
Preferred Stock became a share of the Registrant's common stock.
(3) Pursuant to the WJ Communications, Inc. 2000 Stock Incentive Plan
adopted January 31, 2000, the Registrant has granted 50,000 options to Charles
E. Robinson, a director of the Registrant, and 9,793,396 options to officers and
other employees of the Registrant, each such option entitling the holder
thereof, once such option vests, to purchase one share of common stock for
$2.05625 (subject to adjustment). 14,911 of these options have been exercised by
employees of the Registrant.
(4) Pursuant to a Management Subscription Agreement, dated January 31, 2000,
by and between the Registrant and Malcolm J. Caraballo, Thomas R. Kritzer and
Ralph E. Hoover, Jr., (a) Mr. Caraballo purchased 738,864 shares of common stock
for $1,519,289.40 in cash, (b) Mr. Kritzer purchased 252,419 shares of common
stock for $519,036.58 in cash, and (c) Mr. Hoover purchased 48,632 shares of
common stock for $100,000.04 in cash.
(5) Pursuant to subscription agreements, dated as of April 7, 2000, between
the Registrant and certain employees of the Registrant, said employees purchased
an aggregate of 3,389,351 shares of common stock for $6,969,358 in cash.
(6) Pursuant to a Subscription Agreement, dated as of February 1, 2000, by
and between the Registrant and Darryl Quan, Mr. Quan purchased 325,557 shares of
Common Stock for $669,426.58 in cash.
(7) Pursuant to a Subscription Agreement, dated as of February 1, 2000, by
and between the Registrant and Michael Cordano, Mr. Cordano purchased 25,000
shares of Common Stock for $51,406.25 in cash.
The sales described in this Item 15 were made in reliance upon the exemption
from registration set forth in Section 4(2) of the Securities Act relating to
sales by an issuer not involving any public offering. The foregoing transactions
did not involve a distribution or public offering. Except as set forth above, no
underwriters were engaged in connection with the foregoing issuances of
securities, and no commissions or discounts were paid.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
--------------------- -----
<C> <S>
1.1 Form of Underwriting Agreement*
2.1 Agreement and Plan of Merger, dated October 25, 1999, by and
between FP-WJ Acquisition Corp. and the Registrant**
3.1 Certificate of Incorporation of the Registrant*
3.2 By-Laws of the Registrant*
4.1 Specimen of Common Stock Certificate*
4.2 Shareholders' Agreement, dated as of January 31, 2000, by
and among the Registrant, the parties listed on the
signature pages thereto and certain stockholders of the
Registrant*
5.1 Opinion of Wachtell, Lipton, Rosen & Katz (including
consent)*
10.1 Credit Agreement, dated as of January 31, 2000, by and among
the Registrant and Canadian Imperial Bank of Commerce, BT
Commercial Corporation, IBM Credit Corporation, CIBC World
Markets Corp. and certain other lenders listed on the
signature pages thereto*
10.2 First Amendment, dated as of March 21, 2000, to the Credit
Agreement listed as Exhibit 10.1*
10.3 Employment Agreement, dated as of January 31, 2000, by and
between the Registrant and Malcolm J. Caraballo*
10.4 Employment Agreement, dated as of January 31, 2000, by and
between the Registrant and Thomas R. Kritzer*
10.5 Employment Agreement, dated as of January 31, 2000, by and
between the Registrant and Ralph E. Hoover, Jr.*
10.6 Employment Agreement, dated as of January 31, 2000, by and
between the Registrant and Rainer N. Growitz*
10.7 WJ Communications, Inc. 2000 Stock Incentive Plan*
10.8 Lease (Phase I) dated March 24, 2000, by and between the
Registrant and 401 River Oaks, LLC*
10.9 Lease (Phase II) dated March 24, 2000, by and between the
Registrant and 401 River Oaks, LLC*
10.10 Lease and Agreement between the Registrant and Morrco
Properties Company dated October 31, 1975***
10.11 Assignment of Lease Agreement, dated as of December 30,
1997, by and between the Registrant and Taylor Woodrow
Property Company, Inc.****
10.12 Agreement for Option to Amend Sublease, Amendment of
Sublease and Joint Escrow Instructions, dated as of
March 6, 2000, by and between the Registrant and 3333
Hillview Associates, LLC*
10.13 First Amendment, dated as of March 15, 2000 to the Agreement
for Option to Amend Sublease, Amendment of Sublease and
Joint Escrow Instructions listed as Exhibit 10.13*
10.14 Second Amendment, dated as of March 22, 2000 to the
Agreement for Option to Amend Sublease, Amendment of
Sublease and Joint Escrow Instructions listed as Exhibit
10.13*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE
--------------------- -----
<C> <S>
10.15 Third Amendment, dated as of March 29, 2000 to the Agreement
for Option to Amend Sublease, Amendment of Sublease and
Joint Escrow Instructions listed as Exhibit 10.13*
16 Letter re Change in Certifying Accountant from Deloitte &
Touche LLP
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
23.2 Consent of Deloitte & Touche LLP, Independent Auditors
23.3 Consent of Wachtell, Lipton, Rosen & Katz (included in
Exhibit No. 5.1)*
24.1 Power of Attorney (included on page II-6)
27.1 Financial Data Schedule
</TABLE>
--------------
* To be provided by amendment.
** Filed as an exhibit to the Registrant's Form 8-K filed on October 28, 1999,
Commission File No. 1-5631.
*** Filed as an exhibit to the Registrant's Form 10-K for the year ended 1976,
Commission File No. 1-5631.
**** Filed as an exhibit to the Registrant's Form 10-K for the year ended
December 31, 1997, Commission File No. 1-5631.
(B) FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- --------
<S> <C>
II -- Valuation and Qualifying Accounts..................... S-3
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
(3) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to each
purchaser.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of
II-4
<PAGE>
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Palo Alto, State of
California, on the 2nd day of June 2000.
WJ COMMUNICATIONS, INC.
/s/ MALCOLM J. CARABALLO
--------------------------------------
Malcolm J. Caraballo
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, each of the undersigned hereby constitutes
and appoints Malcolm J. Caraballo his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, or any
related registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite or necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MALCOLM J. CARABALLO
--------------------------------- President and Chief Executive Officer June 2, 2000
Malcolm J. Caraballo (principal executive officer), Director
/s/ RAINER N. GROWITZ
--------------------------------- Vice President, Finance and Secretary June 2, 2000
Rainer N. Growitz (principal financial officer)
/s/ DAVID R. PULVINO
--------------------------------- Controller June 2, 2000
David R. Pulvino
/s/ W. DEXTER PAINE, III
--------------------------------- Chairman of the Board June 2, 2000
W. Dexter Paine, III
/s/ SAUL A. FOX
--------------------------------- Director June 2, 2000
Saul A. Fox
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JASON B. HURWITZ
--------------------------------- Director June 2, 2000
Jason B. Hurwitz
/s/ WRAY T. THORN
--------------------------------- Director June 2, 2000
Wray T. Thorn
/s/ CHARLES E. ROBINSON
--------------------------------- Director June 2, 2000
Charles E. Robinson
/s/ JAMES R. KRONER
--------------------------------- Director June 2, 2000
James R. Kroner
/s/ J. THOMAS BENTLEY
--------------------------------- Director June 2, 2000
J. Thomas Bentley
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To WJ Communications, Inc.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of WJ Communications, Inc. as of December 31, 1999 and
for the year then ended included in this Registration Statement and have issued
our report thereon dated May 24, 2000. Our audit was made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
accompanying schedule is the responsibility of the Company's management and is
presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth herein in relation
to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
May 24, 2000
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT OF DELOITTE & TOUCHE LLP
The Board of Directors and Stockholders
WJ Communications, Inc.:
We have audited the consolidated financial statements of WJ Communications,
Inc. and subsidiaries (the "Company") as of December 31, 1998 and for each of
the two years in the period then ended, and have issued our report thereon dated
January 31, 2000 (included elsewhere in this registration statement). Our audits
also included the consolidated financial statement schedule for December 31,
1997 and 1998 listed in Item 16(B)(II) of this Registration Statement. The
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
January 31, 2000
S-2
<PAGE>
WJ COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
DESCRIPTION PERIOD EXPENSES DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Allowance for doubtful accounts............... $500 $ -- $ -- $500
Year Ended December 31, 1998
Allowance for doubtful accounts............... $500 $ -- $ -- $500
Year Ended December 31, 1999
Allowance for doubtful accounts............... $500 $ 8 $ 4 $504
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement*
2.1 Agreement and Plan of Merger, dated October 25, 1999, by and
between FP-WJ Acquisition Corp. and the Registrant**
3.1 Certificate of Incorporation of the Registrant*
3.2 By-Laws of the Registrant*
4.1 Specimen of Common Stock Certificate*
4.2 Shareholders' Agreement, dated as of January 31, 2000, by
and among the Registrant, the parties listed on the
signature pages thereto and certain stockholders of the
Registrant*
5.1 Opinion of Wachtell, Lipton, Rosen & Katz (including
consent)*
10.1 Credit Agreement, dated as of January 31, 2000, by and among
the Registrant and Canadian Imperial Bank of Commerce, BT
Commercial Corporation, IBM Credit Corporation, CIBC World
Markets Corp. and certain other lenders listed on the
signature pages thereto*
10.2 First Amendment, dated as of March 21, 2000, to the Credit
Agreement listed as Exhibit 10.1*
10.3 Employment Agreement, dated as of January 31, 2000, by and
between the Registrant and Malcolm J. Caraballo*
10.4 Employment Agreement, dated as of January 31, 2000, by and
between the Registrant and Thomas R. Kritzer*
10.5 Employment Agreement, dated as of January 31, 2000, by and
between the Registrant and Ralph E. Hoover, Jr.*
10.6 Employment Agreement, dated as of January 31, 2000, by and
between the Registrant and Rainer N. Growitz*
10.7 WJ Communications, Inc. 2000 Stock Incentive Plan*
10.8 Lease (Phase I) dated March 24, 2000, by and between the
Registrant and 401 River Oaks, LLC*
10.9 Lease (Phase II) dated March 24, 2000, by and between the
Registrant and 401 River Oaks, LLC*
10.10 Lease and Agreement between the Registrant and Morrco
Properties Company dated October 31, 1975***
10.11 Assignment of Lease Agreement, dated as of December 30,
1997, by and between the Registrant and Taylor Woodrow
Property Company, Inc.****
10.12 Agreement for Option to Amend Sublease, Amendment of
Sublease and Joint Escrow Instructions, dated as of
March 6, 2000, by and between the Registrant and 3333
Hillview Associates, LLC*
10.13 First Amendment, dated as of March 15, 2000 to the Agreement
for Option to Amend Sublease, Amendment of Sublease and
Joint Escrow Instructions listed as Exhibit 10.13*
10.14 Second Amendment, dated as of March 22, 2000 to the
Agreement for Option to Amend Sublease, Amendment of
Sublease and Joint Escrow Instructions listed as Exhibit
10.13*
10.15 Third Amendment, dated as of March 29, 2000 to the Agreement
for Option to Amend Sublease, Amendment of Sublease and
Joint Escrow Instructions listed as Exhibit 10.13*
16 Letter re Change in Certifying Accountant from Deloitte &
Touche LLP
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- ------------------------------------------------------------
<C> <S>
23.2 Consent of Deloitte & Touche LLP, Independent Auditors
23.3 Consent of Wachtell, Lipton, Rosen & Katz (included in
Exhibit No. 5.1)*
24.1 Power of Attorney (included on page II-6)
27.1 Financial Data Schedule
</TABLE>
--------------
* To be provided by amendment.
** Filed as an exhibit to the Registrant's Form 8-K filed on October 28, 1999,
Commission File No. 1-5631.
*** Filed as an exhibit to the Registrant's Form 10-K for the year ended 1976,
Commission File No. 1-5631.
**** Filed as an exhibit to the Registrant's Form 10-K for the year ended
December 31, 1997, Commission File No. 1-5631.
