<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-41302
[ENDWAVE LOGO]
--------------------------------------------------------------------------------
6,000,000 SHARES
COMMON STOCK
--------------------------------------------------------------------------------
This is the initial public offering of Endwave Corporation and we are offering
6,000,000 shares of our common stock. Our common stock has been approved for
listing on the Nasdaq National Market under the symbol "ENWV."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 6.
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.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS
PRICE AND PROCEEDS TO
TO PUBLIC COMMISSIONS ENDWAVE
<S> <C> <C> <C>
Per Share $ 14.00 $ 0.98 $ 13.02
Total $84,000,000 $5,880,000 $78,120,000
</TABLE>
We have granted the underwriters the right to purchase up to 900,000 additional
shares to cover over-allotments.
DEUTSCHE BANC ALEX. BROWN
J.P. MORGAN & CO.
U.S. BANCORP PIPER JAFFRAY
EPOCH PARTNERS
The date of this prospectus is October 17, 2000
<PAGE>
DESCRIPTION OF INSIDE FRONT COVER OF PROSPECTUS:
THE INSIDE FRONT COVER IS ENTITLED "ENDWAVE PRODUCTS" AND HAS FOUR SECTIONS
SHOWING PICTURES OF ENDWAVE'S FOUR DIFFERENT PRODUCT CATEGORIES TOGETHER WITH
THE NAME OF THE PRODUCT AS FOLLOWS: RF MODULES; INTEGRATED TRANSCEIVERS;
BROADBAND ANTENNAS; AND OUTDOOR UNITS.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED IN GREATER DETAIL
ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU
SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND THE FINANCIAL
STATEMENTS, CAREFULLY BEFORE MAKING AN INVESTMENT DECISION.
OUR BUSINESS
We provide radio frequency, or RF, subsystems that enable the
transmission and reception of data signals in high data rate, or broadband,
wireless systems. We sell our products to wireless systems integrators that
provide the broadband wireless equipment used by communications service
providers to offer data services. Our customers use our products in high speed
cellular backhaul, point-to-point access, and point-to-multipoint access
applications. Wireless systems integrators that use our products in their
broadband wireless systems include Allgon, Hughes Network Systems, Nokia, Nortel
Networks, P-Com, Rockwell International, Toshiba and WinNet MCS.
Demand for high speed data services and the bandwidth limitations of
existing access networks are driving the growth in the broadband wireless access
market. Communications networks consist of subscribers' internal networks; the
trunking network, which transports data aggregated from multiple network points;
and access networks, which link the subscriber networks to the trunking network.
While the trunking and subscriber networks generally support high data
transmission rates, existing access networks are a bottleneck and limit a
communications service provider's ability to offer high speed data services. We
believe that broadband wireless access technologies offer the best solution to
this bottleneck in many networks because they can be deployed faster and more
economically than alternative access technologies. The Strategis Group, an
independent research firm, estimates that the customer premises equipment market
alone will grow from approximately $443 million in 2000 to $5.4 billion in 2004.
This market encompasses sales of the equipment installed at subscribers'
premises to complete the link of a broadband wireless access system to the
subscribers' networks.
We leverage our proprietary technologies and RF design expertise to
design and manufacture products at multiple levels of integration to best meet
our customers' requirements. Our products include RF modules, integrated
transceivers, broadband antennas and outdoor units. We have developed
proprietary circuit technologies that enable us to design RF circuits to
minimize labor costs and the use of expensive gallium arsenide material. Because
we design our own RF circuits, we have the flexibility to optimize our product
designs by not being limited to standard, commercially available gallium
arsenide devices. We do not operate a facility to manufacture these devices.
Instead, we use third-party semiconductor fabrication facilities to manufacture
the gallium arsenide devices we design. Our use of third-party semiconductor
facilities gives us the flexibility to use the process technology that is best
suited for each application and eliminates the need for us to invest in and
maintain our own semiconductor fabrication facilities.
In March 2000, we merged with TRW Milliwave, an RF subsystems supplier
that was a wholly-owned subsidiary of TRW. As a result of the merger, we
substantially increased our customer base and design and manufacturing capacity,
making us one of our industry's largest commercial suppliers of RF subsystems.
In addition, we established a strategic relationship with TRW that includes a
long term supply agreement with TRW for gallium arsenide devices. We also
entered into two agreements with TRW that license to us TRW circuit technologies
and provide us access to technical support and design expertise. On a pro forma
basis giving effect to our merger with Milliwave, we had total revenues of $18.6
million and loss from operations of $27.1 million in the six months ended June
30, 2000, and $15.0 million in total revenues and loss from operations of $39.5
million in the fiscal year ended December 31, 1999.
We were originally incorporated in California in 1991 and reincorporated
in Delaware in 1995. We changed our name from Endgate Corporation to Endwave
Corporation in connection with our merger with Milliwave. Our principal
executive offices are located at 321 Soquel Way, Sunnyvale, California 94085.
Our telephone number is (408) 522-3100.
1
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered........................................ 6,000,000 shares
Common stock outstanding after this offering................ 32,543,266 shares
Use of proceeds............................................. For general corporate purposes and to further
expand our operations, expected to be applied
approximately 50% to working capital
requirements, approximately 25% to research and
development expenses and approximately 25% to
costs of manufacturing. For further detail,
see "Use of Proceeds."
Nasdaq National Market symbol............................... ENWV
</TABLE>
The number of shares to be outstanding after the offering is based on the
number of shares of common stock outstanding as of June 30, 2000 and gives
effect to the conversion of all outstanding shares of our preferred stock into
shares of common stock upon the closing of this offering. See "Description of
Capital Stock." This number excludes:
o 4,486,138 shares that we may issue upon exercise of options
outstanding as of June 30, 2000 with a weighted average exercise price
of $4.79 per share; and
o 322,641 shares that we may issue upon the exercise of warrants
outstanding as of June 30, 2000 with a weighted average exercise price
of $8.05 per share. Substantially all of these warrants expire upon
the closing of this offering if not exercised prior to the closing.
---------------
When we refer to "us," "we," "our" or "Endwave" in this prospectus, we are
referring to Endwave Corporation. When we refer to our business or other
corporate activities prior to March 31, 2000, the date of the merger, we are
generally referring to Endgate's business and corporate activities unless
otherwise specified.
Endwave and the Endwave logo are our trademarks. All other trademarks or
service marks appearing in this prospectus are trademarks or service marks of
the respective companies that own them.
Except where we state otherwise, the information we present in this
prospectus:
o assumes that the underwriters do not exercise their option to purchase
900,000 additional shares after the closing of this offering;
o gives effect to the conversion of all of our 25,881,302 outstanding
shares of preferred stock into the same number of shares of common
stock upon the closing of this offering at a weighted average
conversion price of $9.50 per share; and
o excludes an aggregate of 428,572 shares of our common stock we issued
to DMC Stratex Networks on October 2, 2000 at a purchase price of
$14.00 per share.
2
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
On March 31, 2000, Endgate merged with TRW Milliwave Inc., a wholly-owned
subsidiary of TRW Inc. Endgate, renamed Endwave, was the surviving corporation
in the merger, and Milliwave ceased to exist as a separate legal entity.
However, because TRW owned more than half of Endwave's outstanding capital stock
immediately after the merger, Milliwave is treated as the acquiring company for
accounting purposes. As a result, Endgate ceased to be a separate accounting
entity as of the date of the merger. Endwave's financial statements prior to the
merger are those of Milliwave. Milliwave and Endwave have a fiscal year end of
December 31. Prior to the merger, Endgate's fiscal year end was June 30.
The following table sets forth our statement of operations data for 1999
and the six months ended June 30, 1999 and 2000 on a pro forma basis as if our
merger with Milliwave had been completed on January 1, 1999. The pro forma
statement of operations data excludes an $11.7 million expense for acquired
in-process research and development because it is a non-recurring charge. Pro
forma net loss per share data and pro forma share data used in computing pro
forma net loss per share have been calculated by assuming that all of Endwave's
outstanding shares of preferred stock had been converted, as of their original
issuance dates, into shares of Endwave's common stock and that Endwave's common
stock was outstanding for all periods presented.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ----------------------------------
1999 1999 2000
--------------- ---------------- ----------------
<S> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA
(UNAUDITED):
Revenues:
Product revenues........................................ $ 13,745 $ 3,829 $ 16,059
Development fees........................................ 1,302 221 2,551
--------------- ---------------- ----------------
Total revenues........................................ 15,047 4,050 18,610
Costs and expenses:
Cost of product revenues................................ 18,499 6,927 23,976
Research and development................................ 10,925 5,431 6,556
Sales and marketing..................................... 1,316 595 1,291
General and administrative.............................. 3,870 2,191 2,917
Amortization of goodwill and other intangible assets.... 19,208 9,604 9,604
Amortization of deferred stock compensation............. 710 -- 1,391
--------------- ---------------- ----------------
Total costs and expenses.............................. 54,528 24,748 45,375
Loss from operations....................................... (39,481) (20,698) (27,125)
Interest expense and other, net............................ (585) (638) (324)
--------------- ---------------- ----------------
Net loss................................................... $ (40,066) $ (21,336) $ (27,449)
=============== ================ ================
Basic and diluted pro forma net loss per share............. $ (2.18) $ (1.34) $ (1.11)
=============== ================ ================
Shares used to compute pro forma net loss per share, basic
and diluted............................................. 18,401 15,864 24,623
=============== ================ ================
</TABLE>
3
<PAGE>
The following table is a summary of Milliwave's statement of operations
data for the fiscal years ended December 31, 1997, 1998 and 1999 and the six
months ended June 30, 1999 and 2000. Milliwave accounted for the merger with
Endgate using the purchase method of accounting. The data for the six months
ended June 30, 2000 includes the results of operations of Endgate for the three
months ended June 30, 2000 because the merger occurred on March 31, 2000.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
---------- ------------ ----------- ------------ -----------
MILLIWAVE STATEMENT OF OPERATIONS DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues......................... $ 5,250 $ 7,030 $ 12,419 $ 3,367 $ 14,537
Development fees......................... -- -- -- -- 946
---------- ------------ ----------- ------------ ------------
Total revenues......................... 5,250 7,030 12,419 3,367 15,483
Cost of product revenues...................... 4,350 5,992 11,221 3,880 19,196
Research and development...................... 254 286 326 142 3,732
Selling, general and administrative........... 1,222 2,964 2,370 1,352 3,140
Amortization of goodwill and other intangible
assets..................................... 384 1,536 1,536 768 5,186
In-process research and development........... -- -- -- -- 11,700
Loss from operations.......................... (960) (3,748) (3,034) (2,775) (28,381)
Net loss...................................... $ (761) $ (2,898) $ (2,516) $ (2,075) $ (27,401)
</TABLE>
The following table is a summary of Endgate's historical statement of
operations data for the fiscal years ended June 30, 1997, 1998 and 1999 and the
nine months ended March 31, 1999 and 2000.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
---------------------------------------- --------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
ENDGATE STATEMENT OF OPERATIONS DATA: (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues....................... $ 1,133 $ 1,560 $ 1,084 $ 875 $ 2,384
Development fees....................... 239 373 519 458 2,689
------------ ------------ ------------ ------------ ------------
Total revenues....................... 1,372 1,933 1,603 1,333 5,073
Cost of product revenues.................. 3,957 4,230 5,836 4,500 9,011
Research and development expenses......... 6,236 6,128 9,824 7,265 8,133
Sales and marketing expenses.............. 474 489 751 531 904
General and administrative expenses....... 1,303 1,528 1,843 1,218 1,548
Loss from operations...................... (10,598) (10,442) (16,651) (12,181) (15,714)
Net loss.................................. $ (10,298) $ (10,575) $ (17,258) $ (12,763) $ (16,338)
</TABLE>
The following table summarizes our balance sheet as of June 30, 2000:
o on an actual basis;
o on a pro forma basis to reflect the conversion of our preferred stock
into common stock upon the closing of this offering; and
o on the same pro forma basis, as adjusted to reflect the sale of
6,000,000 shares of common stock in this offering at an initial public
offering price of $14.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses.
4
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
(UNAUDITED)
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- --------------
<S> <C> <C> <C>
ENDWAVE BALANCE SHEET DATA:
Cash and cash equivalents......................................... $ 36,918 $ 36,918 $ 112,938
Working capital................................................... 36,588 36,588 112,608
Goodwill and other intangible assets.............................. 104,376 104,376 104,376
Total assets.................................................. 181,027 181,027 257,047
Long term obligations, less current portion....................... 1,596 1,596 1,596
Total stockholders' equity.................................... 156,541 156,541 232,561
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND ALL OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS BEFORE PURCHASING OUR COMMON STOCK.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IF ANY OF THE
FOLLOWING RISKS OCCURS, OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
COULD BE SERIOUSLY IMPAIRED. IN ADDITION, THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE DUE TO ANY OF THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE EXPECT TO CONTINUE INCURRING OPERATING LOSSES AND MAY NOT BE PROFITABLE IN
THE FUTURE.
We have not achieved profitability and may not achieve or sustain
profitability in the future. Our failure to achieve profitability within the
time frame that investors expect may cause the market price of our common stock
to decline. On a pro forma basis giving effect to our merger with Milliwave, we
had operating losses of $27.1 million in the six months ended June 30, 2000 and
$39.5 million in 1999.
We are amortizing the goodwill and other intangible assets recorded in
connection with our merger with Milliwave for periods up to six years, which
will add to our loss from operations during that time period. Further, in the
future we may reassess the value of the goodwill and other intangible assets
acquired in our merger and may be required to amortize these assets in fewer
than six years. Additionally, as a result of the merger, we may be limited in
our ability to utilize any of our net operating loss carryforwards generated
prior to the merger to offset any future taxable income we may have.
Our cost of product revenues has exceeded our product revenues due in part
to the historically low volumes of products we have sold and our investments in
increasing manufacturing capacity. We may be unable to increase our revenues or
attain or maintain positive gross margins on product revenues.
The development of our technologies and products has required significant
expenditures to hire and retain our research and development staff. In addition,
many of our major customers typically require high levels of product
customization that generally requires the commitment of significant research and
development resources. Following this offering, we intend to significantly
increase expenditures in all areas, including research and development, to
execute our business strategy. As a result of these and other factors, we expect
to continue to incur significant quarterly losses for at least the next several
quarters. If our revenues fail to grow at anticipated rates or if our expenses
increase faster than we anticipate, our losses may increase and we may not
become profitable.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, YOU MAY HAVE DIFFICULTY EVALUATING
OUR BUSINESS AND FUTURE PROSPECTS.
We have only limited financial data that you can use to evaluate our future
prospects in the broadband wireless access market. Furthermore, because our
merger with Milliwave occurred in March 2000, we have a limited operating
history as a combined company. Originally founded in 1992, from 1994 through
1999, we focused primarily on providing RF modules, transceivers and antennas to
wireless systems integrators and equipment manufacturers. Our outdoor units are
designed for the point-to-multipoint market, which did not emerge until
recently. These outdoor units have been purchased primarily for site
demonstrations and initial commercial deployments. We shipped our first outdoor
units for a system trial in August 1998. We received the first commercial order
for these products in December 1999.
6
<PAGE>
WE DEPEND UPON A SMALL NUMBER OF CUSTOMERS, AND THE LOSS OF ANY OF THEM, OR
THEIR FAILURE TO SELL THEIR SYSTEMS, WOULD LIMIT OUR ABILITY TO GENERATE
REVENUES.
We depend, and expect to remain dependent, on a small number of
wireless systems integrators for sales of our products. If our customers reduce
orders for our products, we could lose revenues and suffer damage to our
reputation in the industry. On a pro forma basis giving effect to our merger
with Milliwave, Hughes Network Systems, Nokia and Nortel Networks and its
affiliates (which we refer to as "Nortel Networks") accounted for 29%, 21% and
26% of our revenues in the six months ended June 30, 2000. On the same pro forma
basis, they accounted for 7%, 35% and 8% of our total revenues in the year ended
December 31, 1999. We have production and supply contracts with TRW under which
we deliver products to Nokia and Nortel Networks in satisfaction of TRW's direct
contractual obligations with them. Separately, we also ship some RF subsystems
to Nokia under direct purchase orders. The terms of our contracts with TRW are
substantially similar to the terms in TRW's corresponding contracts with Nokia
and Nortel Networks. However, the terms of these agreements are not commercially
satisfactory to us for reasons including low prices, wide latitude for customer
modification of delivery requirements, and generous payment terms to the
customer. Additionally, the indirect nature of the agreements whereby TRW is an
intermediary with the end customer results in additional administrative burden
to us. TRW's contract with Nortel Networks, and our corresponding agreement with
TRW, expire in October 2000. TRW's contract with Nokia, and our corresponding
agreement with TRW, will expire in July 2001. We have established a direct
customer relationship with Nokia with respect to the products we deliver under
purchase orders, and are negotiating definitive agreements with Nokia and Nortel
Networks that would take effect upon the expiration of their agreements with TRW
under which we deliver products to them. We may not be able to successfully
negotiate these contracts on favorable terms, or at all. Our failure to replace
these agreements would result in a significant loss of product revenues.
Our customers may not have or use the financial, marketing, technological
and other resources necessary to ensure that their solutions will succeed in a
marketplace characterized by rapid technological changes and intense
competition. For example, communications service providers may insist that
wireless systems integrators provide extensive financing for the deployment of
large broadband wireless access networks, and our customers may be unwilling or
unable to provide the necessary financial resources. If the wireless systems
integrators that we supply are not successful in selling their broadband
wireless access systems for any reason, our operating results would be harmed.
BECAUSE OUR COST OF PRODUCT REVENUES HISTORICALLY HAS EXCEEDED OUR PRODUCT
REVENUES, AND BECAUSE WE EXPECT COMPETITIVE CONDITIONS WILL FORCE US TO REDUCE
PRICES IN THE FUTURE, WE MUST ACHIEVE COST REDUCTIONS IN ORDER TO BECOME
PROFITABLE.
Since our inception, our cost of product revenues has exceeded our revenues
and, accordingly, we have reported negative gross margins. If we are not able to
reduce our per unit cost of product revenues to a sufficient degree, we will not
become profitable. We expect that market conditions, particularly declining
prices for competing broadband access solutions will force us to reduce our
prices in the future. In order to reduce these costs, we must migrate our
products to technologies that enable low cost, automated manufacturing
techniques so that we can increase manufacturing volume and yield. The volume of
our orders may not be sufficiently large to make use of these technologies and,
as a result, we may not be able to achieve these cost reductions.
We have limited experience in manufacturing our circuits using our
proprietary "flip-chip" technology and have not produced products in the volume
and at the prices requested by our customers to date. We may be unable to
produce products using this technology in significant volume in the future. We
believe our "flip-chip" technology is critical to our future success. Our
inability to successfully use our "flip-chip" technology for high volume
manufacturing will
7
<PAGE>
significantly diminish our ability to lower our per unit manufacturing costs
and, as a result, will delay or may even prevent our achieving profitability.
OUR OPERATING RESULTS HAVE HISTORICALLY FLUCTUATED SIGNIFICANTLY AND ARE LIKELY
TO CONTINUE TO DO SO IN FUTURE PERIODS. THESE RESULTS MAY FAIL TO MEET THE
EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, CAUSING OUR STOCK PRICE TO
FALL.
Our quarterly and annual operating results are difficult to predict and are
likely to continue to fluctuate significantly from period to period. In
particular, we expect product revenues in the third quarter of 2000 to be only
slightly higher than those in the second quarter of 2000. If our operating
results fall below the expectations of securities analysts or investors, the
price of our common stock could fall substantially. Our operating results may
fluctuate for several reasons, including:
o variations in the timing and size of, or cancellations or reductions
of, customer orders and shipments;
o variations in the availability, cost and quality of components from
our suppliers, particularly from our single source suppliers and
suppliers of scarce components;
o competitive factors, including pricing, availability and demand for
competing products;
o constraints on our manufacturing capacity;
o variability of the product development and sales cycle with our
customers;
o variations in our manufacturing yields and other factors affecting our
manufacturing costs;
o changes in our sales prices;
o changes in the mix of products with different gross margins;
o failure to meet milestones under any significant development
contracts;
o obsolescence of our component inventories;
o hiring and loss of personnel, particularly in manufacturing, research
and development and sales and marketing;
o failure to timely or successfully complete the integration of our
operations with those of Milliwave; and
o product defect claims and associated warranty expenses.
WE HAVE A LENGTHY PRODUCT DEVELOPMENT AND SALES CYCLE. AS A RESULT, WE MUST
INVEST SUBSTANTIAL FINANCIAL AND TECHNICAL RESOURCES IN A POTENTIAL SALE BEFORE
WE KNOW WHETHER THE SALE WILL OCCUR. IF THE SALE DOES NOT OCCUR, WE MAY NOT HAVE
THE OPPORTUNITY TO SELL PRODUCTS TO THAT CUSTOMER UNTIL ANOTHER GENERATION OF
ITS SYSTEM IS DEVELOPED.
Our products are highly technical and accordingly our sales efforts involve
a collaborative and iterative process with our customers to determine their
specific requirements and design an appropriate solution. Depending on the
product, the typical product development and sales cycle can take anywhere from
three to twelve months, and we incur significant expenses as part of this
process without any assurance of resulting revenues. During the product
development phase, our engineers typically work with the customer to define the
product and design a prototype product for the customer to evaluate. We generate
revenues only if our product is selected for incorporation into a customer's
system. If our product is not selected, we generally will not have an
opportunity to sell our product to that customer until that customer develops a
new generation of its system. In the past, we have had difficulty meeting some
of our major customers' stated volume and cost requirements. The length of our
product development and sales cycle makes us particularly vulnerable to the loss
of a significant customer or a significant reduction in orders by a customer
because we may be unable to quickly replace the lost or reduced sales.
8
<PAGE>
WE MAY NOT BE ABLE TO DESIGN OUR PRODUCTS AS QUICKLY AS OUR CUSTOMERS REQUIRE,
WHICH COULD CAUSE US TO LOSE SALES AND MAY HARM OUR REPUTATION.
Existing and potential customers typically demand that we design products
for them under difficult time constraints. If we are unable to commit the
necessary resources to complete a project for a potential customer within the
requested timeframe, we may lose a potential sale. Our ability to design
products within the time constraints demanded by a customer will depend on the
number of product design professionals who are available to focus on that
customer's project and the availability of professionals with the requisite
level of expertise is limited.
Each of our products is designed for a specific range of frequencies.
Because different national governments license different portions of the
frequency spectrum for the broadband wireless access market, and because
communications service providers that use broadband wireless access systems
license specific frequencies as they become available, we must adapt our
products rapidly to use different frequencies in order to remain competitive.
This design process can be difficult and time consuming, could increase our
costs and could cause delays in the delivery of products to our customers, which
may harm our reputation and affect the timing of our revenues.
WE MAY NOT BE ABLE TO MANUFACTURE AND DELIVER OUR PRODUCTS AS QUICKLY AS OUR
CUSTOMERS REQUIRE, WHICH COULD CAUSE US TO LOSE SALES OR INCUR PENALTIES AND
WOULD HARM OUR REPUTATION.
We may not be able to manufacture products and deliver them to our
customers at the times and in the volumes they require. If we fail to
manufacture and deliver products in a timely fashion, our reputation may be
harmed, we may lose potential future sales and we may be forced to pay penalties
to our customers. Manufacturing delays and interruptions can occur for reasons
including:
o lack of sufficient capacity;
o the failure of a supplier to deliver needed components on a timely
basis, or with acceptable quality;
o labor disputes;
o manufacturing personnel shortages;
o equipment failures;
o natural disasters;
o infrastructure failures; and
o political instability.
The manufacturing of our products is complex. The yield, or percentage of
products manufactured that conform to required specifications, can decrease for
many reasons, including materials containing impurities, equipment not
functioning in accordance with requirements or human error. If our yield is
lower than we expect, we may not be able to deliver products on time. Our
ability to design, manufacture and deliver products on time could also be harmed
by integration difficulties arising from our recent merger with Milliwave,
because mergers of this type often have a negative effect, at least in the short
term, on the efficiency of manufacturing operations. As part of our growth
strategy, we partially outsource the assembly of our broadband antennas and plan
to continue to outsource some portions of our product manufacturing to
third-party vendors. If these vendors do not provide us with high quality
products and services in a timely manner, or if one or more of these vendors
terminates its relationship with us, we may be unable to obtain satisfactory
replacements to fulfill customer orders on a timely basis. In this event, our
reputation may be harmed and we may lose potential future sales.
9
<PAGE>
WE MUST SUCCESSFULLY INTEGRATE MILLIWAVE'S OPERATIONS WITH OUR OWN, OR WE MAY
EXPERIENCE UNEXPECTED COSTS, DELAYS IN DEVELOPING AND DELIVERING PRODUCTS,
CUSTOMER AND EMPLOYEE DISSATISFACTION AND LOST SALES OPPORTUNITIES.
We are in the process of integrating operations at our recently acquired
Diamond Springs manufacturing and product development facility with those at our
Sunnyvale, California and Santa Clara, California manufacturing facilities. We
have limited experience operating multiple facilities. We may fail to
successfully operate the Diamond Springs facility acquired in our March 2000
merger with Milliwave or to integrate it with our existing business on schedule
or within our budget, which could result in:
o our failure to manage manufacturing capacity to meet product demand;
o our failure to maintain the quality of the Diamond Springs
manufacturing processes;
o the diversion of management time and attention;
o difficulties in coordinating the operations of multiple research and
development facilities;
o the loss of Milliwave employees; and
o the loss of customers.
We must properly manage the integration of Milliwave's business with our
business to ensure that our manufacturing capacity can meet product demand and
to achieve the anticipated cost reductions and synergies from the merger.
Failure to do so could result in unanticipated costs, lost sales and customers
and harm to our reputation.
OUR RELIANCE ON TRW AND OTHER THIRD-PARTY SEMICONDUCTOR PROVIDERS TO MANUFACTURE
OUR GALLIUM ARSENIDE DEVICES MAY CAUSE A SIGNIFICANT DELAY IN OUR ABILITY TO
FILL ORDERS AND LIMIT OUR ABILITY TO ASSURE PRODUCT QUALITY AND CONTROL COSTS.
We do not own or operate a semiconductor fabrication facility. We currently
rely on the semiconductor fabrication facilities of TRW and other third parties
to manufacture substantially all of the gallium arsenide devices incorporated in
our products. The loss of our relationship with any of these third parties or
our use of their semiconductor fabrication facilities, particularly TRW's
facility, and any resulting delay or reduction in the supply of gallium arsenide
devices to us, will impact our ability to fulfill customer orders and could
damage our relationships with our customers. In connection with our merger with
Milliwave, we entered into a supply agreement with TRW for these devices and
expect to obtain a substantial portion of our gallium arsenide devices from TRW
in the foreseeable future. The agreement expires in March 2003. We may not be
able to negotiate an extension to this agreement on favorable terms, if at all.
We also may not be successful in forming alternative supply arrangements that
provide us with a sufficient supply of gallium arsenide devices. Because there
are limited numbers of third-party semiconductor fabrication facilities that use
the particular process technologies we select for our products and have
sufficient capacity to meet our needs, using alternative or additional
third-party semiconductor fabrication facilities would require an extensive
qualification process that could prevent or delay product shipments.
Our reliance on these third-party suppliers involves several additional
risks, including reduced control over manufacturing costs, delivery times,
reliability and quality of the products incorporating these devices. The
fabrication of semiconductor devices is a complex and precise process. There are
many factors that can cause a substantial percentage of wafers to be rejected or
numerous devices on a wafer to be nonfunctional including:
o minute impurities;
o difficulties in the fabrication process;
o defects in the masks used to print circuits on a semiconductor wafer;
and
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o wafer breakage.
We expect that our customers will continue to establish demanding
specifications for quality, performance and reliability that must be met by our
products. Our third-party semiconductor fabrication facilities may not be able
to achieve and maintain acceptable production yields in the future. In the past,
we have experienced delays in product shipments from our third-party
semiconductor fabrication facilities, which in turn delayed product shipments to
our customers. To the extent these suppliers suffer failures or defects, or
delay deliveries to us, we could experience lost revenues, increased costs and
delays in, cancellations or rescheduling of orders or shipments, any of which
would harm our business.
BECAUSE OF THE SCARCITY OF SOME COMPONENTS AND OUR DEPENDENCE ON SINGLE
SUPPLIERS FOR SOME OTHER COMPONENTS, WE MAY BE UNABLE TO OBTAIN AN ADEQUATE
SUPPLY OF COMPONENTS, OR WE MAY BE REQUIRED TO PAY HIGHER PRICES OR TO PURCHASE
COMPONENTS OF LESSER QUALITY.
We currently purchase a number of components, some from single source
suppliers for which alternative sources are not readily available, including:
o electronic filters;
o semiconductor devices;
o thin film circuits and circuit boards; and
o frequency references and housings.
In addition, we rely on Hughes Network Systems for components we
incorporate into products we in turn sell to Hughes Network Systems. The market
is also experiencing a shortage of tantalum capacitors and carrier assemblies,
critical components in many of our products. Any delay or interruption in the
supply of these or other components could impair our ability to manufacture and
deliver our products, harm our reputation and cause a reduction in our revenues.
In addition, any increase in the cost of the components that we use in our
products could make our products less competitive and lower our margins. Our
single source suppliers could enter into exclusive agreements with or be
acquired by one of our competitors, increase their prices, refuse to sell their
products to us, discontinue products or go out of business. Even to the extent
alternative suppliers are available to us, identifying them and entering into
arrangements with them is difficult and time consuming, and they may not meet
our quality standards. We may not be able to obtain sufficient quantities of
required components on the same or substantially the same terms. Additionally,
consolidations among our suppliers could result in other sole source suppliers
for us in the future.
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 rapidly and significantly expanding our operations, including the
number of our employees, the geographic scope of our activities and our product
offerings. We have yet to achieve full integration, or to determine the
appropriate manner of integration, of our Diamond Springs facility acquired
through our merger with Milliwave, with our pre-existing Sunnyvale and Santa
Clara facilities. The expansion of our operations has placed a significant
strain on all of our resources. To manage our growth, we must:
o hire, train and manage significant numbers of qualified employees,
particularly research and development, sales and marketing and
manufacturing personnel;
o develop our budgeting and forecasting procedures;
o improve our administrative, accounting and management information
systems and controls;
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o manage our research and development efforts;
o control our levels of inventory; and
o effectively coordinate the activities of the personnel within and
among our various departments.
All of these endeavors will require substantial management effort. Our
failure to manage growth effectively could cause unanticipated costs and delays
in the sale, manufacture and delivery of our products, which could lead to lost
revenues, delays in revenue recognition, customer dissatisfaction and harm to
our reputation.
BECAUSE WE DO NOT HAVE LONG TERM COMMITMENTS FROM MANY OF OUR CUSTOMERS, WE MUST
ESTIMATE CUSTOMER DEMAND, AND ERRORS IN OUR ESTIMATES WOULD HAVE NEGATIVE
EFFECTS ON OUR INVENTORY LEVELS AND REVENUES.
Our sales are generally made on the basis of individual purchase orders,
which may also be later modified or canceled by the customer, rather than long
term purchase commitments. We have historically been required to place firm
orders for products with our suppliers up to six months prior to the anticipated
delivery date and, on occasion, prior to receiving an order for the product,
based on our forecasts of customer demands. Our sales process requires us to
make multiple demand forecast assumptions, each of which may introduce error
into our estimates, causing excess inventory to accrue or a lack of
manufacturing capacity when needed. If we overestimate customer demand, we may
allocate resources to manufacturing products that we may not be able to sell
when we expect or at all. As a result, we would have excess inventory, which
would harm our financial results. Conversely, if we underestimate customer
demand or if insufficient manufacturing capacity is available, we would lose
revenue opportunities, lose market share and damage our customer relationships.
On occasion, we have been unable to adequately respond to unexpected increases
in customer purchase orders and were unable to benefit from this increased
demand.
BECAUSE WE INTEND TO CONTINUE EXPANDING OUR MANUFACTURING CAPACITY IN ADVANCE OF
DEMAND, OUR MANUFACTURING FACILITIES ARE, AND IN THE FUTURE MAY CONTINUE TO BE,
UNDERUTILIZED, WHICH MAY HARM OUR OPERATING RESULTS.
As part of our strategy, we are expanding our manufacturing capacity beyond
the level required for our current sales. As a result, our manufacturing
facilities are and in the future may continue to be underutilized from time to
time as we expand in anticipation of growth in demand. We added substantial
additional manufacturing capacity as a result of the merger with Milliwave. We
have added this additional manufacturing capacity based on industry projections
for future growth, but it is uncertain whether our strategy of increasing our
manufacturing capacity will prove to be accurate. Even if the broadband wireless
industry experiences significant growth, we could still be unsuccessful in
selling our products and growing along with the industry. If demand for our
products does not increase significantly, underutilization of our manufacturing
facilities will likely occur and could harm our profitability and other
operating results. Conversely, if we do not expand our manufacturing capacity
rapidly enough to meet demand for our products, we will lose opportunities for
additional sales. Any failure to develop sufficient manufacturing capacity to
meet demand would harm our market share and operating results.
OUR PRODUCTS MAY CONTAIN MANUFACTURING OR DESIGN DEFECTS OR MAY NOT MEET OUR
CUSTOMERS' PERFORMANCE CRITERIA, WHICH COULD HARM OUR CUSTOMER RELATIONSHIPS,
INDUSTRY REPUTATION, REVENUES AND PROFITABILITY.
We have experienced manufacturing quality problems with our products in the
past and may have similar problems in the future. As a result of these problems,
we have replaced components in some products in accordance with our product
warranties. Our product warranties typically last one
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to three years. As a result of manufacturing or design defects, we may be
required to repair or replace a substantial number of products under our product
warranties. Further, our customers may discover latent defects in our products
that were not apparent when the warranty period expired. These defects may cause
repair or replacement expenses, the loss of customers or damage to our
reputation.
ANY FAILURE TO APPROPRIATELY PROTECT OUR INTELLECTUAL PROPERTY COULD REDUCE OR
ELIMINATE ANY COMPETITIVE ADVANTAGE WE HAVE.
Our success will depend, in part, on our ability to protect our
intellectual property. We rely primarily on a combination of patent, copyright,
trademark and trade secret laws to protect our proprietary technologies and
processes. Nevertheless, these measures may not be adequate to safeguard the
proprietary technology underlying our products. The failure of any patents to
provide protection to our technology might make it easier for our competitors to
offer similar products and use similar manufacturing techniques. A more detailed
discussion of our existing proprietary technology rights is included in this
prospectus under "Business--Patents and Intellectual Property Rights."
We generally enter into confidentiality and assignment of rights to
inventions agreements with our employees, and confidentiality and non-disclosure
agreements with our strategic partners, and generally control access to and
distribution of our documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our products or technology without authorization, develop similar
technology independently or design around our patents. In addition, effective
patent, copyright, trademark and trade secret protection may be unavailable or
limited outside of the United States, Europe and Japan. We may not be able to
obtain any meaningful intellectual property protection in other countries and
territories. Additionally, we may, for a variety of reasons, decide not to file
for patent, copyright, or trademark protection outside of the United States. We
occasionally agree to incorporate a customer's or supplier's intellectual
property into our designs, in which cases we have obligations with respect to
the non-use and non-disclosure of that intellectual property. In particular,
under our agreement with Hughes Network Systems, they retain all rights for the
production and sale of the specific products developed and produced for them for
a period of time following the development phase of the agreement.
Steps taken by us to prevent misappropriation or infringement of the
intellectual property of our company or our customers may not be successful.
Moreover, litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of proprietary rights of others, including our customers. Litigation of
this type could result in substantial costs and diversion of our resources.
AS PART OF THE STRATEGY FOR THE GROWTH AND EXPANSION OF OUR BUSINESS, WE MAY
MAKE ACQUISITIONS THAT COULD DISRUPT OUR BUSINESS AND SEVERELY HARM OUR
FINANCIAL CONDITION.
As part of our business strategy, we may invest in or acquire other
businesses, technologies or assets, or enter into strategic relationships with
third parties. Although we have no current agreements to do so, for future
acquisitions, we may issue additional stock, incur debt, assume liabilities,
incur amortization expenses related to goodwill and other intangible assets or
incur large and immediate write-offs. With the exception of our ongoing
integration related to our merger with Milliwave, we have no experience in
integrating acquired businesses with our existing business. Our operation of any
acquired businesses would involve numerous risks, including:
o problems combining any purchased operations with our own operations;
o unanticipated costs;
o diversion of management's attention from our core business;
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o adverse effects on existing business relationships with customers;
o risks associated with entering markets in which we have no or limited
prior experience; and
o the potential loss of key employees, particularly those of the
purchased organization.
WE DEPEND ON OUR KEY PERSONNEL. SKILLED PERSONNEL IN OUR INDUSTRY ARE IN SHORT
SUPPLY. IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE ADDITIONAL
QUALIFIED PERSONNEL, OUR ABILITY TO DEVELOP AND SUCCESSFULLY MARKET OUR PRODUCTS
WOULD BE HARMED.
We believe that our future success will depend upon our ability to attract,
integrate and retain highly skilled managerial, sales and marketing, research
and development and manufacturing personnel. Skilled personnel in our industry
are in short supply, and this shortage is likely to continue for some time. As a
result, competition for these people is intense, particularly in northern
California where there is a high concentration of technology companies. To
attract and retain qualified personnel, we may be required to grant large option
or other stock-based incentive awards, which may be highly dilutive to other
stockholders. We may also be required to pay significant base salaries and cash
bonuses to attract and retain skilled personnel, which could harm our operating
results. In addition, we believe that prospective employees that we target after
this offering, as well as existing employees, may perceive that the stock option
component of our compensation package is not as valuable as that component was
prior to this offering. Consequently, after this offering, we may have greater
difficulty attracting and retaining the qualified employees that we are seeking.
We are particularly dependent on the continued employment of our senior
management team and other key personnel. If one or more members of our senior
management team or other key personnel were unable or unwilling to continue in
their present positions, these persons would be very difficult to replace, and
our business could be seriously harmed. We do not maintain "key person" life
insurance policies.
OUR ABILITY TO INCREASE OUR SALES IN INTERNATIONAL MARKETS MAY BE LIMITED BY
RISKS RELATED TO INTERNATIONAL TRADE AND MARKETING.
On a pro forma basis giving effect to our merger with Milliwave, for the
six months ended June 30, 2000, 5.2% of our revenues were derived from sales
invoiced and shipped to customers outside the United States. A substantial
portion of our products are sold to TRW on behalf of Nokia and Nortel Networks,
which are companies located outside the United States. We have also recently
begun to sell products to Nokia under direct purchase orders. If we are
successful in entering into new production contracts with Nokia or Nortel
Networks after the expiration of their agreements with TRW, the proportion of
our revenues attributable to sales to customers outside the United States would
substantially increase. In addition, some of our United States-based customers
may sell into international markets. Adverse international economic conditions
or developments could in the future negatively affect our revenues and sales by
our customers into these regions, which would impact our revenues. In addition
to the uncertainty as to our ability to maintain and expand our international
presence, there are certain risks inherent in foreign operations, including:
o difficulties in complying with foreign laws and regulations and
obtaining foreign governmental approvals and permits;
o delays in or prohibitions on exporting products resulting from export
restrictions for our products and technologies;
o fluctuations in foreign currencies and the United States dollar;
o political and economic instability;
o adverse tax consequences; and
o seasonal reductions in business activity.
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In addition, foreign laws treat the protection of proprietary rights and
intellectual property differently from laws in the United States and may not
protect our proprietary rights and intellectual property to the same extent as
United States laws.
COMPLIANCE WITH CURRENT OR FUTURE ENVIRONMENTAL LAWS AND REGULATIONS COULD
IMPOSE SIGNIFICANT BURDENS ON US, WHICH COULD HAVE AN ADVERSE IMPACT ON OUR
OPERATING RESULTS AND FINANCIAL CONDITION.
We use a small number of hazardous substances to produce our products. If
we fail to comply with present or future governmental regulations related to the
use, storage, handling, discharge or disposal of toxic, volatile or otherwise
hazardous chemicals used in our manufacturing processes, we may have our
manufacturing operations suspended and we may be assessed fines. We may also be
required to alter our manufacturing processes or even cease operations in
locations where we cannot become compliant with applicable government
regulation, which would result in significant costs. Governmental regulations
could also require that we incur expensive remediation costs or other expenses
to comply with environmental regulations. We could also face future liabilities
in civil actions for violations of environmental laws and regulations. Liability
for cleanup under the Comprehensive Environmental Response, Compensation and
Liability Act is joint and several. Consequently, if other parties that share
responsibility with us for contamination at any site are unable to pay for their
share of any damages or remediation, we may be held liable to pay for some or
all of their share.
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RISKS RELATED TO OUR INDUSTRY
THE BROADBAND WIRELESS ACCESS INDUSTRY IS NEW AND ITS FUTURE IS UNCERTAIN. IF
SIGNIFICANT DEMAND FOR THIS TECHNOLOGY DOES NOT DEVELOP, WE WILL NOT BE ABLE TO
GENERATE SIGNIFICANT REVENUES.
Broadband wireless access technology is new and unproven in the
marketplace. This technology may prove unsuitable for widespread commercial
deployment, in which case it is unlikely we could generate enough revenues to
obtain and sustain profitability. Many factors will influence the success or
failure of broadband wireless access technology, including:
o its capacity to handle growing demands for faster
transmission of increasing amounts of video, voice and data;
o its cost effectiveness and performance compared to other
forms of broadband access, the prices and performance of
which continue to improve;
o its reliability and security;
o whether the products can be manufactured in sufficient
volume;
o its suitability for a sufficient number of geographic
regions;
o the availability of sufficient frequencies for wireless
communications service providers to deploy products at
commercially reasonable rates;
o the availability of sufficient site locations for wireless
communications service providers to install products at
commercially reasonable rates;
o safety and environmental concerns regarding broadband
wireless transmissions; and
o permission by domestic and international regulatory
authorities to allow construction of new wireless systems.
MANY COMPETING TECHNOLOGIES SERVE OUR TARGET MARKET, AND IF THE BROADBAND
WIRELESS ACCESS TECHNOLOGIES UPON WHICH OUR PRODUCTS ARE BASED DO NOT SUCCEED AS
A SOLUTION FOR BROADBAND ACCESS, WE WILL NOT BE ABLE TO SUSTAIN OR GROW OUR
BUSINESS.
Providers of broadband wireless access solutions compete with providers of
other high speed solutions, including digital subscriber lines, cable, fiber and
other high speed wire, satellite and wireless technologies. Many of these
alternative technologies use existing installed infrastructure and have achieved
significantly greater market acceptance and penetration than broadband wireless
access technologies. Moreover, current broadband wireless access technology has
inherent technical limitations that may inhibit its widespread adoption in many
areas, including the need for line-of-sight installation and reduced
communication distance in bad weather. In addition, the need for communications
service providers to obtain the rights to install broadband wireless access
equipment on rooftops and in other locations may inhibit its widespread
adoption. We expect broadband access technologies to face increasing competitive
pressures from both current and future alternative technologies. In light of
these factors, many communications service providers may be reluctant to invest
heavily in broadband wireless access solutions and, accordingly, the market for
these solutions may fail to develop or may develop more slowly than we expect.
Either outcome would limit our sales opportunities and make it difficult or
impossible for us to achieve profitability.
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THE BROADBAND WIRELESS ACCESS INFRASTRUCTURE EQUIPMENT INDUSTRY IS INTENSELY
COMPETITIVE, AND OUR FAILURE TO COMPETE EFFECTIVELY COULD REDUCE OUR REVENUES
AND MARGINS.
Competition in the market for RF subsystems for broadband wireless access
systems is intense. In the markets for RF modules, transceivers and outdoor
units, we primarily compete with:
o Celeritek;
o Filtronics;
o Infineon Technologies;
o MTI Technology;
o Raytheon;
o REMEC;
o Signal Technologies;
o Telaxis Communications;
o Thomson-CSF; and
o WJ Communications.
In the market for antennas, we primarily compete with:
o Andrew Corporation;
o Electromagnetic Sciences;
o Nurad Technologies;
o Radio Waves; and
o REMEC.
We believe that the principal competitive factors in our industry
are:
o technical leadership;
o the ability to migrate to low cost solutions;
o manufacturing capability and capacity;
o time-to-market in the design and manufacturing of products;
o price;
o product breadth;
o access to semiconductor materials and components; and
o customer support services.
In addition to those companies listed above, with whom we may compete with
directly, there are wireless systems integrators, for example, Ericsson, that
design and manufacture their own RF subsystems for internal use. To the extent
wireless systems integrators presently, or may in the future, produce their own
RF subsystems, we lose the opportunity to gain a customer and the related sales
opportunities.
Many of our current and potential competitors are substantially larger than
us and have greater financial, technical, manufacturing and marketing resources.
If we are unable to compete successfully, our future operations and financial
results would be harmed.
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WE MUST ADAPT TO THE RAPID TECHNOLOGICAL CHANGES INHERENT IN THE BROADBAND
WIRELESS ACCESS INDUSTRY IN ORDER TO SUCCEED.
In order to succeed, we must improve current products and develop and
introduce new products that are competitive in terms of price, performance and
quality and that adequately address the changing requirements of wireless
systems integrators, their customers and subscribers and emerging industry
standards. To accomplish this, we make substantial investments in the research
and development of new products for and improvements to existing products. If
these investments do not result in competitive products that generate large
volume orders, we may be unable to generate sufficient revenues to achieve
profitability. On a pro forma basis giving effect to our merger with Milliwave,
our research and development expenses were $10.9 million in 1999 and $6.6
million in the six months ended June 30, 2000. We intend to continue to incur
substantial research and development and product development expenses. It is
possible that these investments will not generate product revenues sufficient to
offset the original investment expense.
GOVERNMENT REGULATION OF THE COMMUNICATIONS INDUSTRY COULD LIMIT THE GROWTH OF
THE MARKETS THAT WE SERVE OR COULD REQUIRE COSTLY ALTERATIONS OF OUR CURRENT OR
FUTURE PRODUCTS.
The markets that we serve are highly regulated. Communications service
providers must obtain regulatory approvals to operate broadband wireless access
networks within specified licensed bands of the frequency spectrum. The FCC and
foreign regulatory agencies have adopted regulations that impose stringent RF
emissions standards on the communications industry. Changes to these regulations
may require that we alter the performance of our products.
The enactment by governments of new laws or regulations or a change in the
interpretation of existing regulations could adversely affect the market for our
products. Although there is a present trend toward deregulation and current
regulatory developments are favorable to the promotion of new and expanded
wireless services, this could change at any time, and future regulatory changes
could have a negative impact on us. Further, the increasing demand for wireless
communications has exerted pressure on regulatory bodies worldwide to adopt new
standards for broadband wireless access products, generally following extensive
investigation and deliberation over competing technologies. In the past, the
delays inherent in this governmental approval process have caused, and in the
future may cause, the cancellation, postponement or rescheduling of the
installation of communications systems by our customers. These delays could
affect our ability to allocate our research and development resources
effectively, cause our existing and potential customers to delay orders and
otherwise harm our ability to generate revenues.
OUR INDUSTRY IS CHARACTERIZED BY VIGOROUS PROTECTION AND PURSUIT OF INTELLECTUAL
PROPERTY RIGHTS. THIS COULD CAUSE US TO BECOME INVOLVED IN COSTLY AND LENGTHY
LITIGATION, WHICH COULD SUBJECT US TO LIABILITY, PREVENT US FROM SELLING OUR
PRODUCTS OR FORCE US TO REDESIGN OUR PRODUCTS.
The wireless access industry is characterized by vigorous protection and
pursuit of intellectual property rights. We have received and may receive in the
future notices of claims of infringement of other parties' proprietary rights.
For example, we are in the process of responding to inquiries that claim that
some of our antenna technologies infringe upon a European patent. In addition,
the invalidity of our patents may be asserted or prosecuted against us.
Furthermore, in a patent or trade secret action, we could be required to
withdraw the product or products as to which infringement was claimed from the
market or redesign products offered for sale or under development. We have also
at times agreed to indemnification obligations in favor of our customers and
strategic partners that could be triggered upon an allegation or finding of our
infringement of other parties' proprietary rights. These indemnification
obligations would be triggered for reasons including our sale or supply to a
customer or strategic partner of a product which was later discovered to
infringe upon another party's proprietary rights. Irrespective of the validity
or successful assertion of intellectual property claims, we would likely incur
significant costs and diversion of our resources with respect to the
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defense of any claims. To address any potential claims or actions asserted
against us, we may seek to obtain a license under a third-party's intellectual
property rights. However, in such an instance, a license may not be available on
commercially reasonable terms, if at all.
RISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK
THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO FLUCTUATE. AS A RESULT, YOU
MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING
PRICE.
Prior to this offering, our common stock has not traded publicly. The
initial public offering price of our common stock will be determined by
negotiation among us and representatives of the underwriters of this offering
and may not be indicative of the price that will prevail in the open market
after this offering. In addition, the market price of our common stock could
fluctuate significantly for many reasons, including:
o our financial performance or the performance of our
competitors;
o technological innovations or other trends or changes in the
broadband wireless access industry;
o successes or failures at significant product evaluations or
site demonstrations;
o the introduction of new products by us or our competitors;
o the arrival or departure of key personnel;
o acquisitions, strategic alliances or joint ventures
involving us or our competitors;
o changes in estimates of our performance or recommendations
by securities analysts;
o decisions by major participants in the communications
industry not to purchase products from us or to pursue
alternative technologies;
o decisions by investors to de-emphasize investment
categories, groups or strategies that include our company or
industry; and
o market conditions in the industry, the financial markets and
the economy as a whole.
In addition, the stock market has recently experienced extreme price and
volume fluctuations. These fluctuations are often unrelated to the operating
performance of particular companies and the market prices for securities of
technology companies have been especially volatile. These broad market
fluctuations may cause declines in the market price of our common stock. When
the market price of a company's stock drops significantly in a short time
period, stockholders often institute securities class action lawsuits against
the company. A lawsuit against us could cause us to incur substantial costs and
could divert the time and attention of our management and other resources.
OUR ABILITY TO ACHIEVE OUR BUSINESS GOALS IS SUBSTANTIALLY DEPENDENT ON OUR
ACCESS TO SUFFICIENT CAPITAL.
If we do not have sufficient capital to fund our operations, we may be
forced to discontinue product development, reduce our sales and marketing
efforts and forego attractive business opportunities, and we may lose the
ability to respond to competitive pressures. Following our use of the proceeds
from this offering, we may need to raise additional funds, and additional
financing may not be available on favorable terms, if at all. We may also
require additional capital to acquire or invest in complementary businesses or
products or obtain the right to use complementary technologies. If we issue
additional equity securities to raise funds, the ownership percentage of our
existing stockholders would be reduced. New investors may demand rights,
preferences or privileges senior to those of existing holders of our common
stock. If we issue debt securities to
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raise funds, we may incur significant interest expense, which would harm our
profitability. The issuance of debt securities may also require us to agree to
various restrictions typical of debt securities, including limitations on
further borrowing and our right to pay dividends.
AFTER THIS OFFERING, TRW AND OUR OFFICERS AND DIRECTORS WILL OWN A LARGE
PERCENTAGE OF OUR COMMON STOCK AND WILL BE ABLE TO CONTROL THE OUTCOME OF
MATTERS REQUIRING STOCKHOLDER APPROVAL.
Based on our capitalization as of June 30, 2000, upon the completion of
this offering, executive officers, directors and holders of five percent or more
of our outstanding common stock will, in the aggregate, beneficially own
approximately 57% of our common stock. In particular, based on our
capitalization as of June 30, 2000, TRW will beneficially own approximately 43%
of our common stock. As a result, our executive officers, directors and five
percent stockholders as a group will be able to effectively control all matters
requiring approval of our stockholders, including the election of directors and
approval of significant corporate transactions. TRW alone will be able to
significantly influence matters on which the stockholders vote. This
concentration of ownership may also delay, deter or prevent a change in control
and may make some transactions more difficult or impossible to complete without
the support of these stockholders, even if the transaction is favorable to our
stockholders. In addition, because of their ownership of our common stock, these
stockholders will be in a position to significantly affect our corporate actions
in a manner that could conflict with the interests of our public stockholders.
SUBSTANTIAL SALES OF COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD CAUSE OUR
STOCK PRICE TO FALL.
The market price of our common stock could decline if our existing
stockholders sell substantial amounts of our common stock in the public market
after this offering. These sales also might make it more difficult for us to
sell equity securities in the future at a time and at a price that we deem
appropriate. Upon completion of this offering, based on the number of
outstanding shares as of June 30, 2000, we will have 32,543,266 outstanding
shares of common stock. Of these shares, including shares sold in this offering,
6,440,084 shares will be freely tradable without restriction. Of the remaining
shares, approximately 25,906,000 shares held by our existing stockholders are
subject to lock-up agreements providing that these stockholders will not sell or
otherwise dispose of any of their shares for a period of 180 days following the
date of the final prospectus for this offering without the prior written consent
of Deutsche Bank Securities Inc. Deutsche Bank Securities Inc. can release these
lock-up agreements at any time. In addition, as of June 30, 2000, options to
purchase 4,486,138 shares of our common stock were outstanding, and we may grant
additional options under our existing equity incentive plans and issue
additional shares under our employee stock purchase plan. Following this
offering, we expect to register the shares underlying these options and shares
so that they are freely tradable, subject to the lock-up agreements described
above and vesting restrictions.
After this offering, the holders of 27,782,488 shares of common stock will
be entitled to rights with respect to registration of shares under the
Securities Act of 1933. If these holders, by exercising their registration
rights, cause a large number of securities to be registered and sold in the
public market, these sales could have an adverse effect on the market price for
our common stock. If we were to initiate a registration and include shares held
by these holders pursuant to the exercise of their registration rights, these
sales may have an adverse effect on our ability to raise capital.
OUR CERTIFICATE OF INCORPORATION, BYLAWS AND ARRANGEMENTS WITH EXECUTIVE
OFFICERS CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL.
Upon the completion of this offering, we will be subject to the Delaware
anti-takeover laws. These laws prevent us from engaging in a merger or sale of
more than 10% of our assets with any stockholder, including all affiliates and
associates of any stockholder, who owns 15% or more of
20
<PAGE>
our outstanding voting stock, for three years following the date that the
stockholder acquired 15% or more of our voting stock unless the board of
directors approved the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, or upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of our voting stock
of the corporation, or the business combination is approved by our board of
directors and authorized by 66-2/3% of our outstanding voting stock not owned by
the interested stockholder. A corporation may opt out of the Delaware
anti-takeover laws in its charter documents, however we have not chosen to do
so. Additionally, our certificate of incorporation and bylaws include a number
of provisions that may deter or impede hostile takeovers or changes of control
or management, including a staggered board of directors, the elimination of the
ability of our stockholders to act by written consent, discretionary authority
given to our board of directors as to the issuance of preferred stock, and
indemnification rights for our directors and executive officers. These
anti-takeover provisions are described in greater detail under "Description of
Capital Stock" in this prospectus.
In connection with our merger with Milliwave, our board of directors
approved a plan providing for the acceleration of vesting of a percentage of the
stock options granted to our officers. Under this plan, an unvested portion of
each officer's stock options will become vested and, in addition, severance
benefits will be paid to the officer, if we undergo a change in control
transaction or the officer is terminated without cause. This plan may make us a
less attractive acquisition target or may reduce the amount a potential acquiror
may otherwise be willing to pay for our company.
IF YOU PURCHASE SHARES IN THIS OFFERING, YOU WILL INCUR IMMEDIATE AND
SUBSTANTIAL DILUTION OF YOUR INVESTMENT.
The initial public offering price is substantially higher than the pro
forma net tangible book value of each outstanding share of our common stock. As
a result, investors participating in this offering will incur immediate and
substantial dilution. Based on an initial public offering price of $14.00 per
share and our capitalization as of June 30, 2000, the dilution will be $10.03
per share in the pro forma net tangible book value for investors participating
in this offering, or $9.80 per share if the underwriters' option to purchase
additional shares is exercised in full. This dilution is described in greater
detail under "Dilution" in this prospectus. Including the assumed exercise of
all outstanding options and warrants to purchase shares of common stock, the
dilution would be $9.92 per share in the pro forma net tangible book value for
investors participating in this offering, and $9.71 per share if the
underwriters' option to purchase additional shares were to be exercised in full.
OUR MANAGEMENT HAS BROAD DISCRETION TO DETERMINE THE SPECIFIC USE OF THE NET
OFFERING PROCEEDS, AND THE USE OF SUCH PROCEEDS MAY NOT INCREASE OUR PROFITS OR
MARKET VALUE.
As of the date of this prospectus, we have broadly characterized the amount
of the net proceeds of this offering that will be used for the various purposes
described under "Use of Proceeds." Our management will have considerable
discretion in the specific application of the net proceeds within the functional
area to which it is allocated, may apply the net proceeds in ways other than
those we currently expect and may apply the net proceeds in ways that may not
increase our profitability or our market value. You will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
of this offering are being used appropriately.
21
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," contains forward looking statements.
These statements relate to future events or our future financial performance,
and involve known and unknown risks, uncertainties, and other factors that may
cause our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by these forward looking statements. In some
cases, you can identify forward looking statements by terminology such as "may,"
"will," "should," "expects," "intends," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue" or the negative of these terms
or other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. In evaluating these statements, you
should specifically consider the risks outlined under "Risk Factors."
Although we believe that the expectations reflected in the forward looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward looking statements after the date of this prospectus to conform these
statements to actual results.
22
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 6,000,000 shares of common
stock we are offering, at an initial public offering price of $14.00 per share,
after deducting underwriting discounts and commission and estimated offering
expenses, will be approximately $76.0 million. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $87.7 million.
We expect to use the net proceeds from this offering to fund expansion of
our operations and for other general corporate purposes as follows:
o approximately 50% of the net proceeds for working capital;
o approximately 25% of the net proceeds to fund increased research and
development expenses; and
o approximately 25% to fund our costs of manufacturing, including
capital expenditures and general and administrative expenses.
We may also use a portion of the proceeds to acquire or invest in
complementary businesses or products, or to obtain the right to use
complementary technologies. We consider complementary businesses those that
would bring us geographical diversity, and complementary products those that
would further add to the vertical or horizontal integration of our product
portfolio. Although we currently have no specific plans for any of these
transactions, we are continually evaluating strategic possibilities as part of
our growth strategy. Pending use of the net proceeds for the above purposes, we
intend to invest these funds in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends. We currently intend to
retain any future earnings to fund the development and growth of our business.
Therefore, we currently do not anticipate paying cash dividends in the
foreseeable future.
23
<PAGE>
CAPITALIZATION
The table below presents the following information:
o our actual capitalization as of June 30, 2000;
o our pro forma capitalization as of that date after giving effect to
the conversion of all outstanding shares of preferred stock as of June
30, 2000 into common stock upon completion of this offering; and
o our pro forma capitalization as adjusted to reflect the receipt of the
net proceeds from our sale of 6,000,000 shares of common stock at an
initial public offering price of $14.00 per share in this offering,
less underwriting discounts and commissions and estimated offering
expenses payable by us as discussed in "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents and short term investments................ $ 36,918 $ 36,918 $ 112,938
============= ============= =============
Long term obligations, net of current portion....................... $ 1,596 $ 1,596 $ 1,596
Stockholders' equity:
Convertible preferred stock, $.001 par value; 27,000,000 shares
authorized; 25,881,302 shares issued and outstanding, actual;
no shares issued and outstanding, pro forma; 5,000,000 shares
authorized, no shares issued and outstanding pro forma as
adjusted....................................................... 187,167 -- --
Common stock, $.001 par value, 50,000,000 shares authorized,
661,964 shares issued and outstanding, actual; 26,543,266
shares issued and outstanding pro forma; 100,000,000 shares
authorized, 32,543,266 shares issued and outstanding pro forma
as adjusted.................................................... 1 27 33
Additional paid-in capital....................................... 21,974 209,115 285,129
Deferred stock compensation...................................... (19,308) (19,308) (19,308)
Accumulated deficit.............................................. (33,293) (33,293) (33,293)
------------- ------------- -------------
Total stockholders' equity..................................... 156,541 156,541 232,561
------------- ------------- -------------
Total capitalization......................................... $ 158,137 $ 158,137 $ 234,157
============= ============= =============
</TABLE>
This table does not include:
o 4,486,138 shares of common stock that we may issue upon exercise of
options outstanding as of June 30, 2000;
o 322,641 shares of common stock that we may issue upon the exercise of
warrants outstanding as of June 30, 2000; and
o 428,572 shares of our common stock that we issued to DMC Stratex
Networks on October 2, 2000.
24
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000, after giving
effect to the automatic conversion of our preferred stock upon the closing of
this offering and the assumed exercise of all options and warrants held by
officers, directors, promoters and affiliated persons, was approximately $62.1
million, or $2.16 per share. Pro forma net tangible book value per share
represents the amount of pro forma stockholders' equity, less intangible assets,
divided by the pro forma number of shares of common stock outstanding as of June
30, 2000. Dilution per share represents the difference between the amount per
share paid by purchasers of shares of common stock in this offering and the pro
forma net tangible book value per share of common stock immediately after
completion of this offering.
Pro forma net tangible book value as of June 30, 2000 after giving effect
to the sale of 6,000,000 shares of common stock offered by us at an initial
public offering price of $14.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses payable by us, would
have been $138.2 million, or $3.97 per share. This represents an immediate
increase in pro forma net tangible book value of $1.81 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$10.03 per share to investors purchasing our common stock in this offering, as
illustrated in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share.................................................. $ 14.00
Pro forma net tangible book value per share as of June 30, 2000....................... $ 2.16
Increase per share attributable to new investors...................................... 1.81
---------
Pro forma net tangible book value per share after this offering.......................... 3.97
----------
Pro forma dilution per share to new investors............................................ $ 10.03
==========
</TABLE>
The table below summarizes, on a pro forma basis as of June 30, 2000, the
differences between our existing stockholders and the new investors purchasing
our common stock in this offering with respect to the total number of shares
purchased from us, the total consideration paid and the average price per share
paid, based upon an initial public offering price of $14.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- ---------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------------- -------- ------------------ -------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 26,543,266 81.6% $ 246,496,973 74.6% $ 9.29
New investors....................... 6,000,000 18.4 84,000,000 25.4 $ 14.00
--------------- -------- ------------------ --------
Total............................ 32,543,266 100.0% $ 330,496,973 100.0% $ 10.16
=============== ======== ================== ========
</TABLE>
In connection with our merger with Milliwave, we issued 13,963,063 shares
of capital stock to TRW. We have not performed a valuation of Milliwave; as a
result, we cannot quantify with precision the purchase price paid by TRW for our
stock. The total consideration paid by existing stockholders set forth above
assumes that the purchase price paid by TRW was $154.2 million. This amount was
obtained by assuming that the approximately 47% of Endwave retained by the
Endgate stockholders was worth $139.0 million at the time of the merger, in
accordance with the valuation of Endgate obtained by TRW and, by extension that
the approximately 53% interest obtained by TRW was worth $154.2 million.
25
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
On March 31, 2000, Endgate merged with TRW Milliwave Inc., a wholly-owned
subsidiary of TRW Inc. Endgate was the surviving corporation in the merger and
Milliwave ceased to exist as a separate legal entity. However, because TRW owned
more than half of Endgate's outstanding capital stock immediately after the
merger, Milliwave is treated as the acquiring company for accounting purposes.
As a result, Endgate ceased to be a separate accounting entity as of the date of
the merger, and Endwave's financial statements prior to the merger are those of
Milliwave. In connection with the merger, we renamed the combined company
Endwave Corporation. Milliwave and Endwave have a fiscal year end of December
31. Prior to the merger, Endgate's fiscal year end was June 30.
PRO FORMA
The following table sets forth our pro forma statement of operations data
for 1999 and the six months ended June 30, 1999 and 2000 and our actual balance
sheet data as of June 30, 2000. The pro forma statement of operations data for
the year ended December 31, 1999 and the six months ended June 30, 1999 and 2000
appearing in this table have been prepared as if the merger had been completed
on January 1, 1999. The pro forma statement of operations data were prepared by
combining Endgate's statement of operations data with the statement of
operations data of Milliwave for each of the periods presented. For all periods
presented, the pro forma statement of operations data excludes an $11.7 million
expense for acquired in-process research and development because it is a
non-recurring charge. Pro forma net loss per share data and pro forma share data
used in computing pro forma net loss per share have been calculated by assuming
that all of Endwave's outstanding shares of preferred stock had been converted,
as of their original issuance dates, into shares of Endwave's common stock and
that Endwave's common stock was outstanding for all periods presented. The pro
forma financial data should be read with the financial statements of Endwave,
Endgate and Milliwave and our pro forma condensed combining financial
statements, in each case including the related notes, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------------
1999 1999 2000
--------------- ------------- -------------
<S> <C> <C> <C>
PRO FORMA STATEMENT OF OPERATIONS DATA (UNAUDITED):
Revenues:
Product revenues............................................... $ 13,745 $ 3,829 $ 16,059
Development fees............................................... 1,302 221 2,551
--------------- ------------- -------------
Total revenues............................................... 15,047 4,050 18,610
Costs and expenses:
Cost of product revenues....................................... 18,499 6,927 23,976
Research and development....................................... 10,925 5,431 6,556
Sales and marketing............................................ 1,316 595 1,291
General and administrative..................................... 3,870 2,191 2,917
Amortization of goodwill and other intangible assets........... 19,208 9,604 9,604
Amortization of deferred stock compensation*................... 710 -- 1,391
--------------- ------------- -------------
Total costs and expenses..................................... 54,528 24,748 45,735
Loss from operations.............................................. (39,481) (20,698) (27,125)
Interest expense and other, net................................... (585) (638) (324)
--------------- ------------- -------------
Net loss.......................................................... $ (40,066) $ (21,336)$ (27,449)
=============== ============= =============
Basic and diluted pro forma net loss per share.................... $ (2.18) $ (1.34)$ (1.11)
=============== ============= =============
Shares used to compute pro forma net loss per 18,401 15,864 24,623
share, basic and diluted.......................................
=============== ============= =============
--------------
*Amortization of deferred stock compensation:
Cost of product revenues....................................... $ 84 $ -- $ 325
Research and development....................................... 281 -- 401
Sales and marketing............................................ 125 -- 114
General and administrative..................................... 220 -- 551
--------------- ------------- ------------
$ 710 $ -- $ 1,391
=============== ============= =============
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
AS OF
JUNE 30,
2000
-----------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................................... $ 36,918
Working capital................................................................................ 36,588
Goodwill and other intangible assets........................................................... 104,376
Total assets................................................................................... 181,027
Long term obligations, less current portion.................................................... 1,596
Total stockholders' equity..................................................................... 156,541
</TABLE>
MILLIWAVE
The following table contains Milliwave's statement of operations data for
the fiscal years ended December 31, 1995, 1996, 1997, 1998 and 1999 and the six
months ended June 30, 1999 and Endwave's statement of operations for the six
months ended June 30, 2000, and Milliwave's balance sheet data as of December
31, 1995, 1996, 1997, 1998 and 1999 and Endwave's balance sheet data as of June
30, 2000. Milliwave accounted for the merger with Endgate using the purchase
method of accounting. The Endwave data for the six months ended June 30, 2000
includes the results of operations of Endgate for the three months ended June
30, 2000 because the merger occurred on March 31, 2000 and results of operations
for Milliwave for the six months ended June 30, 2000. The balance sheet data as
of June 30, 2000 is the actual balance sheet data of the combined company.
The statement of operations data for the fiscal years ended December 31,
1997, 1998 and 1999 and the balance sheet data at December 31, 1998 and 1999 are
derived from the financial statements of Milliwave that have been audited by
Ernst & Young LLP, independent accountants, and are included elsewhere in this
prospectus. The statement of operations data for the fiscal years ended December
31, 1995 and 1996 and the balance sheet data at December 31, 1995, 1996 and 1997
are derived from unaudited financial statements that do not appear in this
prospectus that, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information. The statement of operations data for the six
months ended June 30, 1999 and 2000 and the balance sheet data as of June 30,
2000 are derived from Milliwave's and Endwave's unaudited financial statements
and related notes appearing elsewhere in this prospectus. The net loss per share
for the six months ended June 30, 2000 has been calculated using the net loss
applicable to common stockholders and the weighted average actual outstanding
stock of Endwave subsequent to the merger. Net loss per share has not been
presented for periods prior to the merger as there were no common shares
outstanding.
27
<PAGE>
Particularly as a result of the merger, Milliwave's historical results of
operations are not necessarily indicative of our future results. The following
financial data should be read in conjunction with the Milliwave financial
statements and related notes, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," both included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- --------- --------- --------- -------------- ----------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...........................
Product revenues................ $ 5,312 $ 5,435 $ 5,250 $ 7,030 $ 12,419 $ 3,367 $ 14,537
Development fees................ -- -- -- -- -- -- 946
-------- --------- --------- --------- -------------- ----------- ---------
Total revenues................ 5,312 5,435 5,250 7,030 12,419 3,367 15,483
Costs and expenses:
Cost of product revenues........ 3,317 3,838 4,350 5,992 11,221 3,880 19,196
Research and development........ -- -- 254 286 326 142 3,732
Selling, general and
administrative................ 1,188 1,590 1,222 2,964 2,370 1,352 3,140
Amortization of goodwill and
other intangible assets....... -- -- 384 1,536 1,536 768 5,186
In-process research and
development................... -- -- -- -- -- -- 11,700
Amortization of deferred stock
compensation*................. -- -- -- -- -- -- 910
-------- --------- --------- --------- -------------- ----------- ---------
Total costs and expenses...... 4,505 5,428 6,210 10,778 15,453 6,142 43,864
-------- --------- --------- --------- -------------- ----------- ---------
Income (loss) from operations...... 807 7 (960) (3,748) (3,034) (2,775) (28,381)
Interest income (expense) and
other, net...................... (27) 26 -- -- -- -- 353
Income tax benefit (expense)....... (312) (13) 199 850 518 700 627
-------- --------- --------- --------- -------------- ----------- ---------
Net income (loss).................. $ 468 $ 20 $ (761) $ (2,898) $ (2,516) $ (2,075) $(27,401)
======== ========= ========= ========= ============== =========== =========
Net loss applicable to common
stockholders subsequent to the
merger.......................... $(25,396)
=========
Basic and diluted net loss per
share........................... $ (39.26)
=========
Shares used to compute net loss
per share, basic and diluted.... 647
=========
-----------
*Amortization of deferred stock
compensation:
Cost of product revenues........ $ -- $ -- $ -- $ -- $ -- $ -- $ 232
Research and development........ -- -- -- -- -- -- 225
Sales and marketing............. -- -- -- -- -- -- 40
General and administrative...... -- -- -- -- -- -- 413
-------- --------- --------- --------- -------------- ----------- ---------
$ -- $ -- $ -- $ -- $ -- $ -- $ 910
======== ========= ========= ========= ============== =========== =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
--------------------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
------------ ---------- ------------ ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 756 $ 467 $ 529 $ 283 $ 373 $ 36,918
Working capital.................... 1,182 941 1,042 2,039 2,356 36,588
Total assets....................... 3,677 3,995 13,272 16,361 25,758 181,027
Long term obligations, less
current portion................. 1,262 1,671 1,641 -- -- 1,596
Total stockholders' equity......... 1,544 1,546 10,631 13,481 18,013 156,541
</TABLE>
ENDGATE
The following table contains Endgate's historical statement of operations
data for the fiscal years ended June 30, 1995, 1996, 1997, 1998 and 1999 and the
nine months ended March 31, 1999 and 2000, and Endgate's historical balance
sheet data as of June 30, 1995, 1996, 1997, 1998 and 1999 and March 31, 2000.
Information is included through March 31, 2000 because Endgate ceased to be a
separate accounting entity at the time of its merger with Milliwave, even though
Endgate was the surviving corporation in the merger.
The statement of operations data for the years ended June 30, 1997, 1998
and 1999 and the balance sheet data at June 30, 1998 and 1999 are derived from
the financial statements of
28
<PAGE>
Endgate that have been audited by Ernst & Young LLP, independent auditors, and
are included elsewhere in this prospectus. The statement of operations data for
the years ended June 30, 1995 and 1996 and the balance sheet data at June 30,
1995, 1996 and 1997 are derived from the financial statements of Endgate that
have been audited by Ernst & Young LLP, independent auditors, and are not
included in this prospectus. The statement of operations data for the nine
months ended March 31, 1999 and 2000 and the balance sheet data as of March 31,
2000 are derived from the unaudited financial statements of Endgate that are
included elsewhere in the prospectus. Particularly as a result of the merger
with Milliwave, Endgate's historical results of operations are not necessarily
indicative of our future results. The following financial data should be read in
conjunction with the Endgate financial statements and related notes, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," both included elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
--------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenues............ $ -- $ 560 $ 1,133 $ 1,560 $ 1,084 $ 875 $ 2,384
Development fees............ 602 255 239 373 519 458 2,689
--------- --------- ---------- ---------- ---------- ---------- ----------
Total revenues............ 602 815 1,372 1,933 1,603 1,333 5,073
Costs and expenses:
Cost of product revenues.... -- 1,612 3,957 4,230 5,836 4,500 9,011
Research and development.... 3,308 5,576 6,236 6,128 9,824 7,265 8,133
Sales and marketing......... 212 306 474 489 751 531 904
General and administrative.. 984 891 1,303 1,528 1,843 1,218 1,548
Amortization of deferred
stock compensation*....... -- -- -- -- -- -- 1,191
--------- --------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses.. 4,504 8,385 11,970 12,375 18,254 13,514 20,787
--------- --------- ---------- ---------- ---------- ---------- ----------
Loss from operations........... (3,902) (7,570) (10,598) (10,442) (16,651) (12,181) (15,714)
Interest income (expense) and
other, net.................. 136 152 300 (133) (607) (582) (624)
--------- --------- ---------- ---------- ---------- ---------- ----------
Net loss....................... $ (3,766) $ (7,418) $ (10,298) $ (10,575) $ (17,258) $ (12,763) $ (16,338)
========= ========= ========== ========== ========== ========== ==========
--------------
*Amortization of deferred stock
compensation:
Cost of product revenues.... $ -- $ -- $ -- $ -- $ -- $ -- $ 177
Research and development.... -- -- -- -- -- -- 456
Sales and marketing......... -- -- -- -- -- -- 200
General and administrative.. -- -- -- -- -- -- 358
--------- --------- ----------- ----------- ---------- ---------- ----------
$ -- $ -- $ -- $ -- $ -- $ -- $ 1,191
========= ========= =========== =========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
------------------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
---------- ------------ ---------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 3,719 $ 15,272 $ 4,252 $ 9,274 $ 12,562 $ 20,882
Working capital.................... 8,903 14,632 3,970 8,388 11,718 22,524
Total assets....................... 10,920 20,031 8,797 13,362 16,604 31,434
Long term obligations, less
current portion................. 560 1,575 846 440 456 1,239
Total stockholders' equity......... 9,629 16,475 6,177 10,453 13,919 24,377
</TABLE>
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IN CONJUNCTION WITH THE ENDWAVE, ENDGATE, MILLIWAVE AND
PRO FORMA FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION AND ANALYSIS CONTAINS FORWARD
LOOKING STATEMENTS THAT INVOLVE RISK, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD LOOKING
STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING BUT NOT LIMITED TO THOSE SET
FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We provide RF subsystems that enable the transmission and reception of data
signals in broadband wireless systems. We sell our products to wireless systems
integrators that provide the broadband wireless equipment used by communications
service providers to offer data services. Our customers use our products in high
speed cellular backhaul, point-to-point access and point-to-multipoint access
applications. Wireless systems integrators who use our products in their
broadband wireless systems include Allgon, Hughes Network Systems, Nokia, Nortel
Networks, P-Com, Rockwell International, Toshiba and WinNet MCS.
On March 31, 2000, Endgate merged with TRW Milliwave Inc., a wholly-owned
subsidiary of TRW Inc. Endgate was the surviving corporation in the merger and
Milliwave ceased to exist as a separate legal entity. However, because TRW owned
more than half of Endgate's outstanding capital stock immediately after the
merger, Milliwave is treated as the acquiring company for accounting purposes.
As a result, Endgate ceased to be a separate accounting entity as of the date of
the merger. In connection with the merger, we renamed the combined company
Endwave Corporation. When we refer to our business or other corporate activities
prior to March 31, 2000, the date of the merger, we are generally referring to
Endgate's business and corporate activities unless otherwise specified.
Our revenues consist of product revenues and development fees. Product
revenues are generated through sales of our custom and standard RF subsystem
products to wireless systems integrators and equipment manufacturers and are
recognized upon product shipment. We sell our products through our direct sales
force and network of independent international sales representatives.
Development fees are generated by developing product prototypes and custom
products pursuant to development agreements that provide for payment of a
portion of our research and development or other expenses. Any up-front
development fees paid under a development contract are recognized ratably over
the expected term of the contract, except that in no event are revenues
recognized prior to becoming billable under the terms of the contract. These
agreements, which we enter into with key customers from time to time if we
expect them to result in a significant product order, are for one-time projects
and are non-recurring. We expect development fees to represent a decreasing
percentage of our total revenues in future periods.
We depend, and expect to remain dependent, on a small number of wireless
systems integrators for sales of our products. On a pro forma basis giving
effect to our merger with Milliwave, Hughes Network Systems, Nokia and Nortel
Networks accounted for 29%, 21% and 26% of our revenues in the six months ended
June 30, 2000. On the same pro forma basis, they accounted for 7%, 35% and 8% of
our total revenues in the year ended December 31, 1999. We have production and
supply contracts with TRW, under which we deliver products to Nokia and Nortel
Networks in satisfaction of TRW's direct contractual obligations with them. We
also ship some RF subsystems to Nokia under direct purchase orders. Although a
portion of our relationship with Nokia is indirect and our entire relationship
with Nortel Networks is indirect, these companies are effectively two of our
largest customers. TRW's contract with Nortel Networks, and our corresponding
agreement with TRW, expire in October 2000. TRW's contract with Nokia, and our
30
<PAGE>
corresponding agreement with TRW, expire in July 2001. We are negotiating
production contracts with Nokia and Nortel Networks that would take effect upon
the expiration of their agreements with TRW under which we deliver products to
them. We may not be able to successfully negotiate these contracts on favorable
terms, or at all.
Cost of product revenues consists primarily of the costs of direct
materials and labor utilized to assemble and test our products, costs associated
with procurement, production control, quality assurance and manufacturing
engineering, costs associated with maintaining our manufacturing facilities and
costs associated with warranty returns. We subcontract some portions of the
manufacturing of subassemblies for our transceivers, antennas and outdoor units,
and perform final assembly and testing of transceivers and outdoor units
in-house. These subcontracting costs are also included in the cost of product
revenues.
Research and development expenses consist primarily of:
o salaries and related expenses for personnel engaged in research and
development;
o material costs for prototype and test units;
o patent-related legal expenses;
o other expenses related to the design, development and testing of our
products; and
o fees paid to consultants and outside service providers for engineering
and other technical services.
Research and development expenses also include all costs incurred under our
development agreements. We expense all of our research and development costs as
they are incurred.
Sales and marketing expenses consist primarily of:
o salaries, bonuses and related expenses for personnel engaged in
marketing;
o sales and customer support functions; and
o costs associated with trade shows, promotional activities, advertising
and corporate branding.
We expense commissions to our independent sales representatives when
revenues from the associated sale are recognized.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology,
facilities and human resources personnel and professional fees.
Our merger with Milliwave was recorded using the purchase method of
accounting. In connection with the purchase, Milliwave recorded goodwill of
$80.2 million and other intangible assets of $23.6 million. In addition, we
allocated $11.7 million to in-process research and development. In determining
the total consideration, as well as the allocation of the purchase price
including the amount of in-process research and development, Milliwave
considered as part of their analysis an appraisal prepared for TRW's Space and
Electronics Group by American Appraisal Associates, Inc., an independent
appraisal firm that used established valuation techniques appropriate for the
high technology industry. The amount allocated to in-process research and
development was expensed upon acquisition because technological feasibility had
not been established and no future alternative uses existed. We are amortizing
goodwill and other intangible assets on a straight-line basis over periods not
exceeding six years. Of the total intangible assets recorded in connection with
the merger, approximately $4.4 million were amortized in the six months ended
June 30, 2000 and we expect $8.8 million to be amortized during the remainder of
2000.
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<PAGE>
Deferred stock compensation charges consist of charges related to the
difference between deemed fair market values on the date of employee option
grants and the associated employee option exercise prices, amortized over the
vesting periods of the options. Through June 30, 2000, we have recorded a total
of $20.2 million in stock-based compensation in connection with stock option
grants to our employees and consultants, which is being amortized using an
accelerated method of amortization as described in Financial Accounting
Standards Board Interpretation No. 28 over the vesting periods of the options,
generally four years. We amortized approximately $910,000 of this expense in the
six months ended June 30, 2000. On a pro forma basis, we amortized approximately
$710,000 of this expense in 1999 and approximately $1.4 million of this expense
in the six months ended June 30, 2000. We expect amortization of deferred stock
compensation charges to be approximately $5.3 million for the remainder of 2000.
We earn interest income on the investment of our cash balances in money
market accounts. We incur interest expense under financing leases for capital
equipment and short term loans periodically extended by our equity investors.
Interest expense also includes the fair value of warrants Endgate issued in
February 1999 and January 2000 to investors who advanced funds in anticipation
of private placements of preferred stock. The interest and principal associated
with those notes was repaid in the form of preferred stock. The fair value of
the warrants was calculated to be $519,000 for periods ended in 1999 and
$510,000 for periods ended in 2000 using the Black-Scholes valuation method and
was expensed fully during the applicable fiscal periods.
The merger of Milliwave into Endgate was accomplished through a tax free
reorganization under the Internal Revenue Code. As such, Endgate's and
Milliwave's tax bases in their assets and liabilities carried over to Endwave
with no step-up in basis. Therefore, the amortization of intangible assets
resulting from the merger, including goodwill, is not deductible for tax
purposes. Since inception, Endgate incurred net operating losses and therefore
incurred significant net operating loss carryforwards. These carryforwards were
not reflected on Endgate's balance sheet as an asset because they were fully
reserved due to uncertainty about Endgate's ability to utilize these loss
carryforwards. Our merger with Milliwave imposed limitations on the combined
company's ability to utilize these pre-existing net operating loss
carryforwards. Generally accepted accounting principles require that deferred
tax liabilities be recorded for identifiable intangible assets acquired in a
business combination accounted for as a purchase. The deferred tax asset related
to our net operating loss carryforwards is greater than the deferred tax
liabilities related to the identifiable intangible assets acquired. We have
provided a valuation allowance to eliminate the net deferred tax asset because
ultimate realization is uncertain. Because Milliwave was a wholly-owned
subsidiary of TRW, and therefore part of the consolidated TRW tax return prior
to merging with Endgate, TRW was able to utilize Milliwave's net operating
losses in the consolidated income tax return of TRW for periods prior to March
31, 2000, leaving Milliwave with no net operating loss carryforwards. As a
result of each of these factors, to the extent we become profitable, we are
unlikely to have net operating loss carryforwards to offset taxable income.
32
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our statement of
operations data, presented on a pro forma basis as if our merger with Milliwave
occurred on January 1, 1999, as a percentage of total revenues.
SIX MONTHS ENDED
JUNE 30,
------------------
1999 2000
-------- --------
(UNAUDITED)
Revenues:
Product revenues........................................ 94.5% 86.3%
Development fees........................................ 5.5 13.7
-------- --------
Total revenues........................................ 100.0 100.0
Costs and expenses:
Cost of product revenues................................ 171.0 128.8
Research and development................................ 134.1 35.2
Sales and marketing..................................... 14.7 6.9
General and administrative.............................. 54.1 15.7
Amortization of goodwill and other intangible assets.... 237.1 51.6
Amortization of deferred stock compensation............. -- 7.5
-------- --------
Total costs and expenses.............................. 611.0 245.7
-------- --------
Loss from operations....................................... (511.0) (145.7)
Interest expense and other, net............................ (15.8) (1.7)
-------- --------
Net loss................................................... (526.8)% (147.4)%
======== ========
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Pro forma total revenues for the six months ended June 30, 2000 were $18.6
million, a 354% increase from $4.1 million for the same period in 1999. Pro
forma product revenues for the six months ended June 30, 2000 were $16.1
million, a 324% increase from $3.8 million for the same period in 1999. The
increase in pro forma product revenues was primarily attributable to a
significant increase in the number of transceiver and antenna products we sold.
Pro forma development fees for the six months ended June 30, 2000 were $2.6
million as compared to $221,000 for the same period in 1999. The increase in pro
forma development fees was attributable to the completion and billing of custom
products for Hughes Network Systems in the 2000 period.
COSTS AND EXPENSES
COST OF PRODUCT REVENUES. Pro forma cost of product revenues for the six
months ended June 30, 2000 was $24.0 million, a 248% increase from $6.9 million
for the same period in 1999. This increase in absolute dollars was attributable
primarily to a significant increase in the number of transceiver and antenna
products sold and investments made to increase our manufacturing capacity in the
2000 period. The decrease as a percentage of product revenues was primarily
attributable to increased utilization of our manufacturing capacity. Our cost of
product revenues has exceeded our product revenues due in part to the
historically low volumes of products we have sold and our investments in
increasing manufacturing capacity. Though we believe that utilization of lower
cost technologies will decrease our cost per unit in high volume manufacturing,
we cannot assure you that we will increase our sales of high volume products or
attain or maintain positive gross margins on product revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Pro forma research and development
expenses for the six months ended June 30, 2000 were $6.6 million, a 22%
increase from $5.4 million for the same period in 1999. The increase in absolute
dollars was primarily attributable to an increase in research and development
personnel. The decrease as a percentage of total revenues is primarily
attributable
33
<PAGE>
to increased production volume and resulting revenues. We estimate that the pro
forma research and development expenses attributable to development fees were
approximately $693,000 in the six months ended June 30, 2000 and approximately
$2.9 million in the six months ended June 30, 1999. Following this offering, we
intend to significantly increase expenditures in all areas, including research
and development, to execute our business strategy.
SALES AND MARKETING EXPENSES. Pro forma sales and marketing expenses for
the six months ended June 30, 2000 were $1.3 million, a 118% increase from
$595,000 for the same period in 1999. The increase in absolute dollars was
primarily attributable to an increase in sales and marketing personnel and
increased promotional activities. The decrease as a percentage of total revenues
is primarily attributable to increased production volume and resulting revenues.
Following this offering, we intend to significantly increase expenditures in
sales and marketing.
GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma general and administrative
expenses for the six months ended June 30, 2000 were $2.9 million, a 32%
increase from $2.2 million for the same period in 1999. The increase in absolute
dollars was primarily attributable to increased finance, human resources and
information technology personnel and infrastructure expenses. The decrease as a
percentage of total revenues is primarily attributable to increased production
volume and resulting revenues. We expect that while general and administrative
expenses will increase in absolute dollars in future periods, they will decrease
as a percentage of total revenues.
INTEREST EXPENSE AND OTHER, NET
Interest expense and other, net, for the six months ended June 30, 2000 was
$324,000, a 49% decrease from $638,000 for the same period in 1999. The decrease
was primarily attributable to an increase in interest income generated from
larger cash balances in the later period.
HISTORICAL RESULTS OF OPERATIONS
MILLIWAVE
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
Total revenues for the six months ended June 30, 2000 were $15.5 million, a
356% increase from $3.4 million in the comparable period in 1999. Product
revenues for the six months ended June 30, 2000 were $14.5 million, a 326%
increase from $3.4 million in the comparable period in 1999. The increase in
product revenues was primarily attributable to the higher levels of production
on Milliwave's automated assembly and test lines and the merger with Endgate in
March 2000. Milliwave did not derive any revenues from development fees prior to
the merger. Development fees of $946,000 for the six months ended June 30, 2000
are attributable to the merger with Endgate. For the six months ended June 30,
2000, sales to TRW, for satisfaction of TRW's agreements with Nokia and Nortel
Networks, and sales to Hughes Network Systems and Rockwell International each
accounted for over 10% of Milliwave's total revenues. For the six months ended
June 30, 1999, sales to TRW, for satisfaction of TRW's agreements with Nokia,
Nortel Networks, Rockwell International and under agreements with TRW on its own
behalf, accounted for over 10% of Milliwave's total revenues.
COSTS AND EXPENSES
COST OF PRODUCT REVENUES. Cost of product revenues for the six months ended
June 30, 2000 was $19.2 million, a 392% increase from $3.9 million in the
comparable period of 1999. The
34
<PAGE>
increase was primarily attributable to increased levels of production and
investments in increasing manufacturing capacity.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the six months ended June 30, 2000 were $3.7 million, as compared to $142,000
for the comparable period in 1999. The increase was primarily attributable to
the acquisition of Endgate's research and development operations in March 2000
and a one-time allocation from TRW for research and development expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended June 30, 2000 were $3.1
million, a 121% increase from $1.4 million for the comparable period in 1999.
The increase was primarily attributable to additional personnel and
infrastructure expenses, a substantial portion of which were attributable to the
merger with Endgate. Milliwave was provided intercompany services, including
circuit design assistance, finance and legal, by TRW. Corporate allocations were
charged for these services, and accounted for as a component of selling, general
and administrative expenses. Most of these corporate services and related
charges have ceased, and we generally provide those services internally or
contract with outside providers to provide them.
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
REVENUES
Total revenues for 1999 were $12.4 million, a 77% increase from $7.0
million for 1998. Revenues for 1998 increased 32% from $5.3 million in 1997. The
increase from 1998 to 1999 was primarily attributable to the commencement of
manufacturing of products for Nokia and Nortel Networks in 1999 and the increase
from 1997 to 1998 was primarily attributable to increases in shipments to two
large customers, P-Com and SPC Electronic America, as well as an order secured
through TRW after the acquisition of Milliwave by TRW in late 1997. In 1999,
sales to TRW on behalf of Nokia, Nortel Networks and Rockwell International
accounted for over 10% of Milliwave's revenues. In 1998, sales to P-Com and SPC
Electronic America and sales to TRW, for satisfaction of TRW's agreements with
Rockwell International and under agreements with TRW for its own behalf, each
accounted for over 10% of Milliwave's revenues. In 1997, sales to P-Com,
Lockheed Martin and Hughes Aircraft each accounted for over 10% of Milliwave's
revenues.
COSTS AND EXPENSES
COST OF PRODUCT REVENUES. Cost of product revenues for 1999 was $11.2
million, an 87% increase from $6.0 million for 1998. Cost of product revenues
for 1998 increased 40% from $4.3 million in 1997. These increases were
attributable primarily to growth in revenues and costs associated with the
introduction of automated manufacturing.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
1999 were $326,000, as compared to $286,000 for 1998. Research and development
expenses were $254,000 in 1997. Prior to 1999, Milliwave primarily utilized the
resources of TRW for its research and development expertise. In 1999, Milliwave
began hiring design personnel in order to augment the services that it received
from TRW.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1999 were $2.4 million, 20% decrease from $3.0
million for 1998. Selling, general and administrative expenses for 1998
increased 150% from $1.2 million in 1997. The increase from 1997 to 1998 was
primarily attributable to building Milliwave's infrastructure in order to
support higher production volumes, including adding personnel in finance,
accounting, human resources and management. The decrease in selling, general and
administrative expenses from 1998 to 1999 was primarily attributable to one time
personnel relocation expenses incurred in 1999.
35
<PAGE>
ENDGATE
NINE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
Total revenues for the nine months ended March 31, 2000 were $5.1 million,
a 292% increase from $1.3 million for the same period in 1999. For the nine
months ended March 31, 2000, sales to Hughes Network Systems and Allgon each
accounted for over 10% of Endgate's total revenues. For the nine months ended
March 31, 1999, sales to Hughes Network Systems and to Harris Corporation each
accounted for over 10% of Endgate's revenues. Product revenues for the nine
months ended March 31, 2000 were $2.4 million, a 174% increase from $875,000 for
the same period in 1999. The increase in product revenues was primarily
attributable to a significant increase in the volume of transceiver and antenna
products sold. Development fees for the nine months ended March 31, 2000 were
$2.7 million, a 490% increase from $458,000 for the same period in 1999. The
increase in development fees was attributable to the completion and billing of
custom products for Hughes Network Systems in the 2000 period.
COSTS AND EXPENSES
COST OF PRODUCT REVENUES. Cost of product revenues for the nine months
ended March 31, 2000 was $9.0 million, a 100% increase from $4.5 million for the
same period in 1999. This increase in absolute dollar amount was attributable
primarily to a significant increase in the volume of transceiver and antenna
products sold and investments made to increase Endgate's manufacturing capacity.
The decrease as a percentage of product revenues was primarily attributable to
increased absorption of fixed overhead costs due to increased production volume.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the nine months ended March 31, 2000 were $8.1 million, an 11% increase from
$7.3 million for the same period in 1999. The increase was primarily
attributable to an increase in research and development personnel. We estimate
the research and development expenses attributable to development fees were
approximately $1.8 million in the nine months ended March 31, 2000 and
approximately $3.7 million in the nine months ended March 31, 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the nine
months ended March 31, 2000 were $904,000, a 70% increase from $531,000 for the
same period in 1999. The increase was primarily attributable to an increase in
sales and marketing personnel and increased promotional activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended March 31, 2000 were $1.5 million, a 25% increase from
$1.2 million for the same period in 1999. The increase was primarily
attributable to the addition of personnel, an increase in information technology
infrastructure costs and year 2000 upgrades to Endgate's internal systems.
INTEREST EXPENSE AND OTHER, NET
Interest expense and other, net, for the nine months ended March 31, 2000
was $624,000, a 7% increase from $582,000 in the comparable period in fiscal
1999. The increase was primarily attributable to higher interest rates and
higher average debt balances in the later period.
36
<PAGE>
YEARS ENDED JUNE 30, 1999, 1998 AND 1997
REVENUES
Total revenues for the year ended June 30, 1999 were $1.6 million, a 16%
decrease from $1.9 million for the year ended June 30, 1998. Total revenues for
the year ended June 30, 1998 increased 36% from $1.4 million in the year ended
June 30, 1997. In the years ended June 30, 1999 and 1998, sales to Hughes
Network Systems and Harris Corporation each represented over 10% of Endgate's
total revenues. In the year ended June 30, 1997, sales to Harris Corporation
represented over 10% of Endgate's total revenues.
Product revenues for the year ended June 30, 1999 were $1.1 million, a 31%
decrease from $1.6 million for the year ended June 30, 1998. Product revenues
for the year ended June 30, 1998 increased 45% from $1.1 million in the year
ended June 30, 1997. The changes in product revenues were primarily attributable
to fluctuations in the number of products sold during the periods. Prior to
2000, Endgate did not ship any products in significant volume.
Development fees for the year ended June 30, 1999 were $519,000, a 39%
increase from $373,000 for the year ended June 30, 1998. Development fees for
the year ended June 30, 1998 increased 56% from $239,000 for the year ended June
30, 1997. Development fees during each of these periods were generated primarily
as a result of non-recurring engineering revenues for development of an outdoor
unit product to Hughes Network Systems.
COSTS AND EXPENSES
COST OF PRODUCT REVENUE. Cost of product revenues for the year ended June
30, 1999 was $5.8 million, a 38% increase from $4.2 million for the year ended
June 30, 1998. Cost of product revenues for the year ended June 30, 1998
increased 5% from $4.0 million in the year ended June 30, 1997. These increases
were attributable primarily to investments in increasing manufacturing capacity.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the year ended June 30, 1999 were $9.8 million, a 61% increase from $6.1 million
for the year ended June 30, 1998. Research and development expenses for the year
ended June 30, 1998 remained flat as compared to $6.2 million for the year ended
June 30, 1997. The increase from the year ended June 30, 1998 to the year ended
June 30, 1999 was primarily attributable to increased expenses associated with
the Hughes Network Systems development contract, the addition of staff to
support new design projects and the retention of consultants to augment in-house
expertise. We estimate the research and development expenses attributable to
development fees were approximately $5.1 million and $759,000 for the years
ended June 30, 1999 and 1998.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the year
ended June 30, 1999 were $751,000, a 54% increase from $489,000 for the year
ended June 30, 1998. Sales and marketing expenses for the year ended June 30,
1998 increased 3% from $474,000 in fiscal 1997. The increase from the year ended
June 30, 1998 to the year ended June 30, 1999 was primarily attributable to an
increase in sales and marketing personnel.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended June 30, 1999 were $1.8 million, a 20% increase from $1.5
million for the year ended June 30, 1998. General and administrative expenses
for the year ended June 30, 1998 increased 15% from $1.3 million for the year
ended June 30, 1997. The increase from the year ended June 30, 1998 to the year
ended June 30, 1999 was primarily attributable to increased salary and benefits
expenses and investments in upgrading network equipment. The increase from the
year ended June 30, 1997 to the year ended June 30, 1998 was primarily
attributable to increased salary and facilities-related expenses.
37
<PAGE>
INTEREST INCOME (EXPENSE) AND OTHER, NET
Interest expense and other, net, for the year ended June 30, 1999 was
$607,000, a 356% increase from $133,000 for the year ended June 30, 1998.
Interest income and other, net, for the year ended June 30, 1997 was $300,000.
The increase in expense from the year ended June 30, 1998 to the year ended June
30, 1999 was primarily attributable to increased financing leases of
manufacturing and engineering equipment. The change from the year ended June 30,
1997 to the year ended June 30, 1998 was primarily attributable to lower amounts
of interest income earned due to smaller cash balances in the 1998 period.
38
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited statement of operations data for
the six quarters ended June 30, 2000, as well as this information expressed as a
percentage of total pro forma revenues for the periods indicated. These
unaudited quarterly financial data have been derived from our pro forma
financial statements and have been prepared on the same basis as the unaudited
financial statements contained in this prospectus. The data for each of the
quarters presented is presented on a pro forma basis giving effect to our merger
with Milliwave as if it was completed on January 1, 1999. This unaudited pro
forma quarterly financial information has been derived from our unaudited pro
forma financial statements and has been prepared on the same basis as our pro
forma financial statements contained in this prospectus. Operating results for
any quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------------------------------------
THREE MONTHS ENDED
-----------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999 1999 1999 2000 2000
---------- ---------- ----------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (UNAUDITED):
Revenues:
Product revenues..................... $ 1,602 $ 2,227 $ 4,315 $ 5,601 $ 5,713 $ 10,346
Development fees..................... 160 61 356 725 1,605 946
---------- ---------- ----------- ---------- ---------- ---------
Total revenues..................... 1,762 2,288 4,671 6,326 7,318 11,292
Costs and expenses:
Cost of product revenues............. 3,583 3,344 4,850 6,722 9,245 14,731
Research and development............. 2,801 2,630 2,494 3,000 3,808 2,748
Sales and marketing.................. 252 343 330 391 533 758
General and administrative........... 986 1,205 803 876 1,525 1,392
Amortization of goodwill and other
intangible assets.................. 4,802 4,802 4,802 4,802 4,802 4,802
Amortization of deferred stock
compensation....................... -- -- 279 431 481 910
---------- ---------- ----------- ---------- ---------- ---------
Total costs and expenses........... 12,424 12,324 13,558 16,222 20,394 25,341
Loss from operations.................... (10,662) (10,036) (8,887) (9,896) (13,076) (14,049)
Interest income (expense) and other, net (613) (25) 79 (26) (677) 353
---------- ---------- ----------- ---------- ---------- ---------
Net loss................................ $ (11,275) $ (10,061) $ (8,808) $ (9,922) $ (13,753) $ (13,696)
========== ========== =========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------------------------------------------
THREE MONTHS ENDED
-----------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1999 1999 1999 1999 2000 2000
---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF REVENUES (UNAUDITED):
Revenues:
Product revenues..................... 90.9% 97.3% 92.4% 88.5% 78.1% 91.6%
Development fees..................... 9.1 2.7 7.6 11.5 21.9 8.4
---------- ---------- ----------- ---------- ---------- ----------
Total revenues..................... 100.0 100.0 100.0 100.0 100.0 100.0
Operating expenses:
Cost of product revenues............. 203.3 146.2 103.8 106.3 126.3 130.5
Research and development............. 159.0 114.9 53.4 47.4 52.0 24.3
Sales and marketing.................. 14.3 15.0 7.1 6.2 7.3 6.7
General and administrative........... 56.0 52.7 17.2 13.8 20.8 12.3
Amortization of goodwill and other
intangible assets.................. 272.5 209.9 102.8 75.9 65.6 42.5
Amortization of deferred stock
compensation....................... -- -- 6.0 6.8 6.6 8.1
---------- ---------- ----------- ---------- ---------- ----------
Total operating expenses........... 705.1 538.7 290.3 256.4 278.6 224.4
Loss from operations.................... (605.1) (438.7) (190.3) (156.4) (178.6) (124.4)
Interest income (expense) and other, net (34.8) (1.1) 1.7 (0.4) (9.3) 3.1
---------- ---------- ----------- ---------- ---------- ----------
Net loss................................ (639.9)% (439.8)% (188.6)% (156.8)% (187.9)% (121.3)%
========== ========== =========== ========== ========== ==========
</TABLE>
39
<PAGE>
SIX QUARTERS ENDED JUNE 30, 2000
Our operating results have fluctuated significantly from quarter to
quarter. We expect these fluctuations to continue. They may occur for several
reasons, including variations in the timing and size of, or cancellations or
reductions of, customer orders and shipments.
REVENUES
Product revenues increased in each of the four quarters in 1999, primarily
as a result of increased shipments in satisfaction of TRW's agreements with
Nokia and, in addition, for the fourth quarter of 1999, increased shipments in
satisfaction of TRW's agreement with Nortel Networks and our introduction of a
new antenna product. There was no significant change in product revenues from
the fourth quarter of 1999 to the first quarter of 2000 due to a slight increase
in the number of products we sold, offset by lower prices to Nokia. Our product
revenues increased substantially during the second quarter of 2000, primarily
due to further increases in shipments to Nokia, Nortel Networks and Hughes
Network Systems. We expect product revenues in the third quarter of 2000 will be
only slightly higher than those in the second quarter of 2000.
Development fees were insignificant until the fourth quarter of 1999. The
increase during that quarter and in the first quarter of 2000 was due to
shipments of prototype units to Hughes Network Systems. Development fees were
lower in the second quarter of 2000 because we transitioned to sales of
production units, which are reflected in product revenues, to Hughes Network
Systems during that quarter.
COSTS AND EXPENSES
COST OF PRODUCT REVENUES. Our cost of product revenues decreased from the
first quarter of 1999 to the second quarter of 1999. The decrease resulted from
reserves for obsolescence taken in the first quarter. Cost of product revenues
increased from the second quarter of 1999 to the fourth quarter of 1999,
primarily as a result of an increased level of production for Nokia. Cost of
product revenues increased substantially from the fourth quarter of 1999 to the
first quarter of 2000, primarily due to investments in equipment, management and
facilities to support anticipated higher production volumes. Cost of product
revenues continued to increase substantially from the first quarter of 2000 to
the second quarter of 2000. This increase was due to continued investment in
manufacturing capacity as well as an increase in component prices from TRW to
Milliwave in connection with the merger. We have experienced increasingly
negative gross margins as a result of these investments in manufacturing
capacity. We believe the investments will result in lower unit costs if our
production volume increases in future quarters.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased from the first to the third quarter of 1999, primarily as a result of
decreasing purchases of materials for Hughes Network Systems products under
development. Research and development expenses increased from the third quarter
of 1999 to the fourth quarter due to increased costs for material and labor to
produce prototype units for Hughes Network Systems. Research and development
expenses increased from the fourth quarter of 1999 to the first quarter of 2000
due to TRW's one-time allocation of research and development expenses to
Milliwave in the first quarter. This allocation had not been made in prior
years. Because there was no allocation of these expenses from TRW after the
merger, research and development expenses decreased from the first quarter to
the second quarter of 2000.
SALES AND MARKETING EXPENSES. Sales and marketing expenses generally
increased over the six quarters ended June 30, 2000, primarily as a result of
increased personnel and spending on marketing programs, particularly in the
first and second quarters of 2000.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from the first quarter of 1999 to the second quarter of 1999 due
primarily to accrual of Endgate's year end bonuses, which were paid in the third
quarter of 1999. General and administrative expenses decreased in the third
quarter of 1999 compared to the second quarter due to a refinement in our
methodology for assigning costs between operating expenses and production
overhead at Milliwave. From the fourth quarter of 1999 to the first quarter of
2000, general and administrative expenses increased due to consulting expenses
and, in the first quarter, of allocations from TRW for computer services and
management costs. General and administrative expenses decreased from the first
quarter to the second quarter of 2000 because there was no TRW allocation after
the merger.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Endgate financed its operations and funded its capital
expenditures through the private sale of equity securities, supplemented by
equipment leases. Aggregate net proceeds to date from Endgate's private equity
financings were approximately $91 million. For the years ended June 30, 1997,
1998 and 1999 and the nine months ended March 31, 2000, Endgate entered into
capital lease arrangements totaling $660,000, $494,000, $0 and $1.4 million.
Prior to the merger, Milliwave primarily financed its operations and funded its
capital expenditures through operating cash and investments by its parent, TRW.
The cash advances provided by TRW during 1999 and 1998 exceeded net cash flow
from operations. In the aggregate, net advances from TRW totaled $7.0 million
and $6.0 million during 1999 and 1998. This compares to net cash provided by
operations of Milliwave of $472,000 in 1999 and cash used in operations of $2.3
million in 1998.
As of June 30, 2000, we had $36.9 million in cash, cash equivalents and
short term investments and $36.6 million in working capital.
On a pro forma basis, net cash used in operating activities was $19.1
million in 1999 and $12.7 million in the six months ended June 30, 2000. Net
cash used in Endgate's operating activities was $8.8 million, $9.0 million and
$15.1 million in the year ended June 30, 1997, 1998 and 1999 and was primarily
attributable to net losses, offset by non-cash charges for depreciation and
amortization. Net cash used in Milliwave's operating activities was $99,000 in
1997 and $2.3 million in 1998 and net cash provided by Milliwave's operating
activities was $472,000 in 1999. In each of these periods, net cash used in
operating activities was primarily used to fund operating losses.
On a pro forma basis, net cash used in investing activities was $7.9
million in 1999 and $3.5 million in the six months ended June 30, 2000. Net cash
used in Endgate's investing activities was $495,000, $375,000 and $1.5 million
in the year ended June 30, 1997, 1998 and 1999. Net cash used in Milliwave's
investing activities was $10.8 million in 1997, $2.0 million in 1998 and $7.4
million in 1999. In each of these periods, investing activities consisted
primarily of purchases of short term investments and capital expenditures.
On a pro forma basis, net cash provided by financing activities was $26.6
million in 1999 and $51.0 million in the six months ended June 30, 2000. Net
cash used in Endgate's financing activities was $1.5 million in the year ended
June 30, 1997, and net cash provided by Endgate's financing activities was $14.2
million and $19.9 million in the year ended June 30, 1998 and 1999. Net cash
provided by Milliwave's financing activities was $11.0 million in 1997, $4.1
million in 1998 and $7.0 million in 1999 of which $10.9 million in 1997, $6.0
million in 1998 and $7.0 million in 1999 was provided by TRW. In each of these
periods, net cash provided by financing activities consisted primarily of
proceeds from the issuance of preferred stock and proceeds from loans and
capital leases, offset by repayments of loans and capital leases.
As we execute our strategy, we expect significant increases in our
operating expenses, especially in sales, marketing and research and development.
Presently, we anticipate that our existing capital resources and the proceeds
from this offering will meet our operating and investing
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needs for at least the next 12 months. However, following the use of proceeds
from this offering, additional funding may not be available to us on acceptable
terms, or at all. If we require additional capital resources to grow our
business, execute our operating plans or acquire complementary technologies or
businesses at any time in the future, we may seek to sell additional equity or
debt securities or secure bank financing, which may result in additional
dilution to our stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, 133, entitled "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivative instruments and hedging activities. SFAS 133 was to be effective for
fiscal years beginning after June 15, 1999. However, in July 1999, the Financial
Accounting Standards Board issued SFAS 137, entitled "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133." SFAS 137 defers for one year the effective date of SFAS 133
so that it will now apply to all fiscal quarters of all fiscal years beginning
after June 15, 2000. We believe the adoption of SFAS 133 will not have a
material impact on our consolidated financial position, results of operations
and cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, or SAB, No. 101, entitled "Revenue Recognition." SAB 101
provides guidance on the recognition, presentation and disclosure of revenues in
financial statements filed with the Securities and Exchange Commission. SAB 101
outlines the basic criteria that must be met to recognize revenues and provides
guidance for disclosures relating to revenue recognition policies. We believe
that our revenue recognition policy is in compliance with the provisions of SAB
101 and that the adoption of SAB 101 had no material effect on our financial
position or results of operations.
MARKET RISK
We develop products in the United States and market our products in North
America and, to a lesser extent, in Europe and the rest of the world. As a
result, our financial results could be affected by factors such as changes in
foreign currency rates or weak economic conditions in foreign markets. Because
all of our revenues are currently denominated in U.S. dollars, a strengthening
of the dollar could make our products less competitive in foreign markets.
We have an investment portfolio of money market funds. The fixed income
certificates of deposit, like all fixed income securities, are subject to
interest rate risk and will fall in value if market interest rates increase. We
attempt to limit this exposure by investing primarily in short term securities.
In view of the nature and mix of our total portfolio, a 10% movement in market
interest rates would not have a significant impact on the total value of our
portfolio as of December 31, 1999, either on a historical or pro forma basis
giving effect to our merger with Milliwave.
Although a portion of our interest expense is sensitive to changes in the
general level of United States interest rates because some of our debt
arrangements are based on a margin above the prime rate, we believe the
potential change would not have a material impact on our operating results.
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BUSINESS
OVERVIEW
We design and manufacture RF subsystems that enable the transmission,
reception and processing of high-speed data signals in broadband wireless access
systems. Our products are used in point-to-point access, point-to-multipoint
access and high capacity cellular backhaul applications. Our target customers
are wireless systems integrators that provide the broadband wireless equipment
used by communications service providers to offer data and voice services.
Equipment manufacturers that use our products include Allgon, Anritsu, Hughes,
Lockheed Martin, Nokia, Nortel Networks, P-Com, Rockwell International, Toshiba
and WinNet MCS.
We design our products to best meet our customers' performance, flexibility
and economic requirements by using our proprietary technologies and RF design
expertise. We offer a broad range of products at multiple levels of integration
that are optimized for a customer's specific performance needs. Our products
include RF modules, integrated transceivers, broadband antennas and outdoor
units. Our proprietary circuit and manufacturing technologies enable us to
design and manufacture RF subsystems that minimize the use of expensive gallium
arsenide and manual labor. We use third-party semiconductor fabrication
facilities for the manufacturing of the gallium arsenide devices we design. Our
ability to design our own gallium arsenide devices allows us the flexibility to
use technologies best suited for specific applications and eliminates dependence
on standard, commercially available gallium arsenide devices. We believe our
proprietary technologies and processes give us a significant competitive
advantage in manufacturing our products in high volume with a path to low per
unit cost.
INDUSTRY BACKGROUND
DEMAND FOR HIGH SPEED DATA TRANSMISSION SERVICES
The growth of the Internet as a medium to share data, collaborate and
conduct commerce across and within enterprises has led to a dramatic increase in
the volume of data traffic on communications networks. As a result,
organizations are conducting an increasing amount of business electronically and
want the ability to electronically transmit large amounts of data rapidly and
inexpensively. This demand for high speed data transmission services is further
increased by recent growth in the demand for "anytime, anywhere" data access
from mobile devices including cellular phones, which has caused communications
service providers to migrate to new high speed mobile data transfer standards
including "third generation" cellular, or 3G. To meet the demand for high speed
data services, communications service providers must upgrade their network
infrastructure to increase system speed and capacity.
THE ACCESS NETWORK BOTTLENECK AND LIMITATIONS OF ALTERNATIVE APPROACHES
Communications networks broadly consist of three interconnected segments:
o subscribers' internal networks, which can typically transmit data at
speeds of up to 100 million bits of data, or megabits, per second,
using readily available technology.
o the trunking network, which transports large, aggregated amounts of
data to and from multiple points within a communications network,
typically over long distances. Communications service providers have
installed fiber optic cables and associated equipment to cover most of
the trunking network to enable data transmission rates of more than
10,000 megabits per second.
o access networks, which connect subscribers' internal networks to the
trunking network. Access networks today are largely based on copper
wiring and typically provide data transmission rates of only up to 1.5
megabits per second. As a result, access networks are
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a bottleneck between subscriber networks and the trunking network and
limit a communications service provider's ability to offer high speed
data services.
To address the limitations of today's primarily copper-based access
networks, communications service providers are adopting new technologies. The
primary alternatives are digital subscriber line, or DSL, cable, fiber optic
cable and broadband wireless systems. Each of these alternatives differs in
features including bandwidth, ease of deployment and cost. DSL is a technology
that improves the data transmission capacity of copper-based access networks to
enable high speed asymmetric data transmission or lower speed symmetric data
transfer. In asymmetric data transmission, the transfer rate from the subscriber
to the network is significantly less than the transfer rate from the network to
the subscriber. In symmetric data transmission, the transfer rates to and from
the subscriber are equal. Cable networks were designed to transmit video and
generally support data transmission rates of up to 10 megabits per second. Cable
networks are, however, unavailable to most businesses because they generally are
installed only in residential areas. In addition, they generally only support
asymmetric data transmission. Fiber optic cable networks offer the highest
capacity, typically supporting data transmission rates of 155 megabits per
second or higher. However, only a small minority of businesses have direct
access to fiber optic cable networks, and communications service providers would
need to incur significant costs to extend fiber optic cable to include all
access networks. In addition, the cost and time involved in obtaining permission
to lay new cable, or "right of way," may limit the attractiveness of fiber
deployment in many areas.
EMERGENCE OF BROADBAND WIRELESS ACCESS
Broadband wireless access systems use high frequency radios to link
multiple points in a communications network. These systems enable high speed
data transmission from a fixed location, as in a corporate office, to the
trunking network. They can be deployed in "point-to-point" or
"point-to-multipoint" configurations. In addition, point-to-point systems can be
used to connect buildings in a high capacity ring known as "point-to-consecutive
point." They also enable high speed data transmission from a cellular base
station to the trunking network, which is commonly referred to as "cellular
backhaul." Today's broadband wireless access networks can support data
transmission rates of up to 155 megabits per second, although the most common
deployments support data transmission rates of 15 megabits to 50 megabits per
second. Communications service providers can deploy broadband wireless access
systems more rapidly than other alternatives because they do not involve laying
cables or require time consuming right of way acquisition. A communications
service provider can configure a broadband wireless access network to offer
symmetric or asymmetric data transmission. This flexibility enables the service
provider to match its services to customers' requirements.
Broadband wireless access has been facilitated by deregulation in the
telecommunications industry. Regulatory authorities around the world have
licensed specific frequency bands to a number of incumbent and new
communications service providers in the 18 gigahertz (GHz) to 65 GHz frequency
range for high speed data transmission services. Communications service
providers are using broadband wireless access systems operating at these
frequencies to upgrade their networks or build new networks to offer broadband
services. The Strategis Group, an independent research firm, estimates that the
customer premises equipment market alone will grow from approximately $443
million in 2000 to $5.4 billion in 2004. This market encompasses sales of the
equipment installed at subscribers' premises to complete the link of a broadband
wireless access system to the subscribers' internal networks.
CHALLENGES FACING WIRELESS SYSTEMS INTEGRATORS AND THE NEED FOR RF
SUBSYSTEM SUPPLIERS
Wireless systems integrators provide the equipment that communications
service providers use to build broadband wireless access networks. Wireless
systems integrators generally do not design or manufacture the RF subsystems
that are used in broadband wireless equipment to transmit and
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receive data. To meet the needs of communications service providers,
differentiate their products and compete most effectively, wireless systems
integrators require RF subsystem suppliers that offer the following advantages:
HIGH PERFORMANCE. Wireless systems integrators want RF subsystems that
offer the highest practicable data transmission rates within a given segment of
the radio frequency spectrum. Higher data transmission rates generally enable
communications service providers to support a larger number of subscribers or a
higher level of service.
ABILITY TO MIGRATE TO LOW COST, HIGH VOLUME SOLUTIONS. Wireless systems
integrators face increasing pressure to offer lower cost solutions as compared
to providers of alternatives to broadband wireless access. They seek suppliers
that not only offer them cost effective RF subsystems but also have the ability
to migrate from high cost, low volume to low cost, high volume solutions.
SHORT TIME-TO-MARKET. The speed with which a wireless systems integrator
can address new frequencies and emerging applications is critical to maintaining
its market leadership. Because each new frequency and application requires a new
RF subsystem, wireless systems integrators are dependent upon the design and
manufacturing expertise of their RF subsystem suppliers to rapidly introduce new
products to market.
MULTIPLE LEVELS OF INTEGRATION. To meet varying product requirements,
wireless systems integrators require the flexibility to purchase subsystems at
different levels of integration. This flexibility enables wireless systems
integrators to lower design and manufacturing costs.
ACCESS TO HIGH VOLUME MANUFACTURING CAPABILITY. Access to an adequate
supply of RF subsystems is critical for a wireless systems integrator to
manufacture and deliver its products in sufficient volumes to meet demand and
maintain and extend its market position.
We believe that, although there is significant demand for wireless
subsystems today, few suppliers comprehensively address the challenges facing
wireless systems integrators. Many RF subsystem suppliers use labor-intensive
circuit manufacturing methods that limit their ability to produce subsystems in
high volume and demonstrate a path to low cost manufacturing. Some RF subsystem
suppliers have limited in-house RF design expertise and rely on third parties
for their circuit designs. In addition, we believe some RF subsystem suppliers
lack the ability to rapidly and cost effectively customize their products as may
be required by many wireless systems integrators.
OUR SOLUTION
We are a provider of RF subsystems to wireless systems integrators. We
design and manufacture a broad portfolio of products, from RF modules to fully
integrated transceivers and outdoor units. The primary benefits of our RF
subsystems include:
SUPERIOR PERFORMANCE THROUGH TECHNOLOGICAL LEADERSHIP. We have extensive
experience in the design and manufacture of high performance RF subsystems. We
have a technical team with broad expertise in device physics, circuit design,
antenna modeling and design, transceiver design, test engineering and other
disciplines. Our technical leadership enables us to optimize our products for
key performance factors, including spectral efficiency, which is the data
transmission rate in a given segment of the radio frequency spectrum. We have
extensive experience in the design of RF devices based on gallium arsenide, the
semiconductor material most widely used in broadband wireless access
applications. This design expertise gives us the flexibility to optimize our
product designs because we are not limited to standard commercially available
gallium arsenide devices. We use third-party semiconductor fabrication
facilities to manufacture the gallium arsenide devices we design. Our use of
third-party semiconductor facilities gives us the flexibility to use the process
technology that is best suited for each application and eliminates the need for
us to invest in and maintain our own semiconductor fabrication facilities.
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PATH TO LOW COST, HIGH VOLUME MANUFACTURING THROUGH PATENTED CIRCUIT
TECHNOLOGY. By using a combination of our proprietary circuit and process
technologies, we are able to meet our customers' volume and time-to-market
requirements. Traditional hybrid microwave integrated circuits, or HMICs, for
broadband wireless applications have many bond wires that must be individually
tested and adjusted, or tuned, during the manufacturing process. Our monolithic
microwave integrated circuits, or MMICs, require a small fraction of the bond
wires used in HMICs, allowing us to produce them using automated assembly
techniques. However, MMICs incorporate large amounts of costly gallium arsenide.
Our patented multi-chip integrated circuit, or MCIC, which we refer to as
"flip-chip," technology enables us to design and manufacture RF circuits with
smaller amounts of gallium arsenide material than MMICs and significantly fewer
wire bonds than HMICs that require individual tuning. As a result, MCIC circuits
lend themselves to automated manufacturing processes that enable high product
quality and reliability and lower unit costs at high volume.
RAPID DESIGN AND PROTOTYPE CAPABILITY. We have developed an extensive
library of RF circuit designs that allow us to rapidly and economically combine
standard circuits into custom assemblies with various performance capabilities
and support for multiple frequencies. We also have extensive in-house RF design
expertise that allows us to work jointly with our customers in designing
broadband wireless subsystems. We have the expertise to use traditional circuit
manufacturing technologies to rapidly prototype and demonstrate the feasibility
of a design. After prototyping, we can rapidly modify the circuit design to
utilize our proprietary circuit technology for high volume manufacturing. We
believe that this ability to migrate from prototype to volume production in a
short period of time is an important competitive advantage.
BROAD PRODUCT PORTFOLIO. We offer a range of products, from RF modules to
integrated transceivers and outdoor units. This allows wireless systems
integrators to select the products that best complement their internal
capabilities. Our product portfolio supports a broad range of frequencies, from
18 GHz to 65 GHz, and addresses multiple market applications. This enables
wireless systems integrators to rapidly design products for new frequencies or
applications.
HIGH VOLUME PRODUCTION CAPABILITY. We believe we are one of the largest
suppliers of RF subsystems focused on broadband wireless solutions. Our
automated assembly and testing capabilities and multiple manufacturing
facilities and production lines allow us to rapidly achieve high volume
production of our products. Our long term gallium arsenide device supply
agreement with TRW further enhances our manufacturing capabilities. For more
information on our strategic relationship with TRW, see the section of this
prospectus entitled "TRW Relationship."
STRATEGY
Our objective is to be the leading global supplier of RF subsystems for
broadband wireless applications. We intend to become the RF subsystem supplier
of choice for broadband wireless systems designed by leading wireless systems
integrators. The major elements of our strategy include:
EXTEND TECHNOLOGICAL LEADERSHIP. We will continue to invest in research and
development, seek to attract the most talented engineers and scientists, and
build on our manufacturing technologies to remain a technological leader. We
intend to continue offering products that are optimized for the performance
factors that are most important to our customers. We also intend to continue
protecting our technological innovations through patents and other means.
TARGET NEW FREQUENCIES AND EMERGING APPLICATIONS. We currently offer a wide
range of products that support the principal frequency bands used for broadband
wireless access. We plan to offer these products globally as regulatory
authorities license new bands of the frequency spectrum for broadband wireless
access applications. We intend to aggressively offer products for new frequency
bands and emerging market applications.
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PROVIDE BEST-IN-CLASS MANUFACTURING CAPABILITY. Our circuit design,
manufacturing and testing technologies and continuous improvement programs have
helped to bring manufacturing innovations to an industry that has historically
utilized labor intensive manufacturing techniques. We also intend to continue
our philosophy of building capacity in advance of demand so that we can offer
short product lead times to our customers.
MAINTAIN RAPID PROTOTYPING CAPABILITY. We intend to maintain our position
as a supplier of choice through our ability to rapidly prototype a design to
meet our customers' needs and also meet their high volume manufacturing demands.
We believe we can achieve this with our multiple design and manufacturing
techniques.
LEVERAGE STRATEGIC RELATIONSHIP WITH TRW. We believe our relationship with
TRW gives us a competitive advantage in designing and manufacturing our
products. Our supply agreement with TRW provides us with a long term supply of
gallium arsenide devices. We believe that our supply of these devices from TRW
is a competitive advantage because the supply of gallium arsenide devices may
become constrained in the future as the broadband wireless access market grows.
In addition, we have access to TRW's research and design expertise in the areas
of RF and digital circuit design technologies. In light of the competitive
market for professionals with circuit design expertise, we believe this access
to TRW's design expertise represents a significant competitive advantage.
PRODUCTS
Our products include amplifiers, frequency converters, frequency sources,
broadband antennas, integrated transceivers and outdoor units that enable the
transmission and reception of data signals in broadband wireless access
networks.
As illustrated in the following diagram, our products are primarily used in
the outdoor portion of a broadband wireless system.
[GRAPHIC]
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We supply our products at multiple levels of integration, depending upon
the needs of our customers, as indicated in the shaded areas in the diagrams
below.
Our products are described in the following table:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
PRODUCTS DESCRIPTION APPLICATION
--------------------------------------------------------------------------------------------------------------------
<S><C>
RF MODULES These modules are the building blocks for These modules are used to provide
RF subsystems. They include low noise basic RF functions in broadband
amplifiers, power amplifiers, frequency wireless systems and are often
converters and frequency multipliers. used to rapidly develop product
prototypes.
--------------------------------------------------------------------------------------------------------------------
INTEGRATED TRANSCEIVERS These units combine the high frequency Our transceivers transmit and
transmit and receive functions of a radio receive data signals in a variety of
system in one package. broadband wireless applications.
--------------------------------------------------------------------------------------------------------------------
BROADBAND ANTENNAS These elements in a wireless system radiate Our compact directional antennas
and receive high frequency signals. Our are used in point-to-point,
sector antennas are designed to minimize cellular backhaul and
interference in adjacent sectors. point-to-multipoint systems.
Sector antennas are used for the
hub terminals of
point-to-multipoint systems.
--------------------------------------------------------------------------------------------------------------------
OUTDOOR UNITS These subsystems provide complete radio Outdoor units are used in all
functionality in a single, environmentally ypes of broadband wireless
sealed package. They include a transceiver tystems as a complete RF
module, an electronics and control section subsystem. For point-to-multipoint
and an antenna. Outdoor units transmit and spplications, we supply both hub
receive radio signals to and from one or and subscriber versions.
more other outdoor units.
--------------------------------------------------------------------------------------------------------------------
</TABLE>
TECHNOLOGY AND PRODUCT DEVELOPMENT
CIRCUIT TECHNOLOGIES
We use three circuit technologies to offer our customers the most cost
effective solutions. Each of these technologies has unique attributes. We choose
the technology most appropriate to each customer's performance and volume
requirements. Our circuit technologies enable us to migrate products from
rapidly produced prototypes to scalable high volume designs.
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HMIC AND MMIC TECHNOLOGIES. These circuit technologies are more traditional
approaches commonly used in the high frequency circuit and module industry.
[CIRCUIT GRAPHIC] [CIRCUIT GRAPHIC]
<TABLE>
<CAPTION>
<S> <C>
HYBRID MICROWAVE INTEGRATED CIRCUITS. HMICs consist of MONOLITHIC MICROWAVE INTEGRATED CIRCUITS. MMICs consist
multiple gallium arsenide devices bonded to ceramic of large gallium arsenide devices that contain both
substrates and interconnected with hundreds of bond active circuit regions and interconnection elements that
wires. Many bond wires must be individually tuned, are then bonded to ceramic substrates. MMICs require a
which makes the production of HMICs labor-intensive. small fraction of the number of bond wires used in
We use HMIC technology for rapid prototyping and low HMICs, which makes MMICs suitable for automated assembly.
volume production. They utilize substantially more gallium arsenide and require
more design time and expertise than HMICs.
</TABLE>
MCIC ("FLIP-CHIP") TECHNOLOGY. Our patented multi-chip integrated circuit,
or "flip-chip," technology enables us to design and manufacture RF circuits that
use smaller amounts of gallium arsenide material than MMIC circuits and have far
fewer wire bonds than HMICs that require individual tuning. As a result, MCIC
circuits lend themselves to automated manufacturing processes, which enable high
product quality and reliability and lower unit cost at high volume.
Precision RF interconnections placed on Individual gallium arsenide
ceramic substrate. This eliminates the die "flip-chip" attached.
need for individual circuit tuning.
[CIRCUIT GRAPHIC] [CIRCUIT GRAPHIC]
Ceramic substrate Individual "flip-chip"
connections
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RESEARCH AND DEVELOPMENT ACTIVITIES
Our research and development activities are focused on developing new
products, improving key performance characteristics and developing new circuit
designs and materials technologies to reduce costs. Our product development
approach emphasizes meeting the demands in these areas by leveraging the
following:
EXTENSIVE LIBRARY OF CIRCUIT DESIGNS. Our extensive library of circuit
designs enables us to quickly produce prototypes in response to our customers'
time-to-market demands.
BREADTH OF EXPERTISE. We are experienced in a broad range of technical
disciplines and possess the know-how to design products at multiple levels of
integration.
COMPUTER MODELING CAPABILITIES. Our proprietary computer modeling
capabilities are designed to minimize the number of iterations required to
develop cost effective designs.
On a pro forma basis giving effect to the Milliwave merger, our research
and development expenses were $10.9 million in 1999 and $6.6 million in the six
months ended June 30, 2000. Endgate's historical research and development
expenses were $8.1 million in the nine months ended March 31, 2000, $9.8 million
in the year ended June 30, 1999, $6.1 million in the year ended June 30, 1998
and $6.2 million in the year ended June 30, 1997. Because Milliwave was a
wholly-owned subsidiary of TRW and utilized the research and development
capabilities of its parent, it did not need to incur significant research and
development expenses on its own behalf prior to the merger, but rather was able
to benefit from research and development activities undertaken by TRW for the
benefit of itself and all of its subsidiaries.
Our current product development efforts are described below. In each case,
Endwave will retain all proprietary rights in any resulting designs and other
proprietary technology.
HIGH FREQUENCY SEMICONDUCTOR DEVICES. We concentrate on developing devices
that minimize the use of gallium arsenide material. Our use of third-party
gallium arsenide fabrication facilities enables us to use the best process
technology for each of these devices. Key projects in process, which are in
various stages of development, include:
o new MMIC technology devices that would require less usage of gallium
arsenide; and
o new "flip-chip" gallium arsenide devices.
HIGH FREQUENCY CIRCUITS, MODULES AND INTEGRATED TRANSCEIVER UNITS. We use
both custom and commercially available devices, combined with high frequency
interconnects and advanced packaging techniques, to develop complete functional
modules such as power amplifiers, frequency converters and integrated
transceiver units. We are currently developing various modules for emerging
applications and a next generation, lower cost family of circuits and modules.
Key projects in process, which are in various stages of development, include:
o a general market transmit and receive module;
o custom design transmit and receive modules; and
o designs for reducing the production cost of existing transmit and
receive modules.
BROADBAND ANTENNAS AND OUTDOOR UNITS. Using proprietary modeling tools, we
are designing high performance broadband antennas in customer-specific and
standard configurations. We combine our modules, transceivers and antennas to
create custom outdoor unit designs to meet our customers' needs. Key projects in
process, which are in various stages of development, include:
o a general market, low cost outdoor unit;
o general market antenna projects; and
o a customer specific antenna.
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CUSTOMERS
We sell our products to global wireless systems integrators and equipment
manufacturers. The ten customers that generated the greatest proportion of our
revenues in the six months ended June 30, 2000, on a pro forma basis giving
effect to our merger with Milliwave, were:
Allgon Nortel Networks
Anritsu P-Com
Hughes Network Systems Rockwell International
Lockheed Martin Toshiba
Nokia WinNet MCS
With the exception of Nortel Networks and a portion of our product revenues
derived from sales to Nokia, all revenues attributable to each of these
customers are generated through direct sales by us to them. We do not have a
direct customer relationship with Nortel Networks; instead we deliver our
products directly to them under an exclusive supply contract we have with TRW,
which has a corresponding agreement with Nortel Networks. We deliver products to
Nokia in part directly under purchase orders and in part under an exclusive
production agreement we have with TRW, which has a corresponding agreement with
Nokia. We entered into these agreements with TRW in connection with our merger
with Milliwave in March 2000. Under a long term production agreement, we sell
two different outdoor units to Hughes Network Systems.
In September 2000, we entered into a non-binding memorandum of
understanding with DMC Stratex Networks, a wireless systems integrator. Pursuant
to the memorandum, we have agreed to negotiate in good faith towards definitive
product development and supply agreements. In addition, on October 2, 2000, we
issued 428,572 shares of our common stock to DMC Stratex Networks at a purchase
price of $14.00 per share.
We expect Nokia, Nortel Networks and Hughes Network Systems to account for
a majority of our revenues for the foreseeable future. On a pro forma basis
giving effect to our merger with Milliwave, Hughes Network Systems, Nokia and
Nortel Networks and its affiliates accounted for 29%, 21% and 26% of our
revenues in the six months ended June 30, 2000. On the same pro forma basis,
they accounted for 7%, 35% and 8% of our total revenues in the year ended
December 31, 1999.
SALES AND MARKETING
Our sales and marketing efforts are focused on establishing a global and
diversified customer base. We are currently focused on the cellular backhaul,
point-to-point and point-to-multipoint markets. We sell our products through our
direct sales efforts and a network of international independent representatives.
We have technical account managers to develop and expand the relationship with
each of our major customers.
Our marketing efforts are focused on identifying industry leaders in our
target markets. As our products are highly technical, sales efforts involve a
collaborative and iterative process with our customers to determine their
specific requirements and design an appropriate solution. Our engineers
participate in the product development and sales process from concept
identification and product selection to post-sale support. The typical sales
cycle, which includes prototyping, is between three months and twelve months.
As of June 30, 2000, we employed 10 sales and marketing personnel. We are
actively seeking to add to our domestic direct sales force and to build an
international direct sales force. As part of our growth strategy, we are in the
process of identifying qualified personnel to represent us in the European and
Canadian markets, as well as additional personnel to provide us with a larger
presence in the United States. Further, we are investigating additional
relationships with both international and domestic industry representative firms
to act on our behalf.
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OPERATIONS
We use traditional and proprietary circuit technologies to manufacture our
RF modules, transceivers and outdoor units. We currently maintain circuit
assembly and test facilities in Diamond Springs and Sunnyvale, California. We
assemble our outdoor units at our Santa Clara, California facility. We use our
Diamond Springs facility for high volume manufacturing and our Sunnyvale and
Santa Clara facilities primarily for prototyping and low volume manufacturing.
We design many of the gallium arsenide devices that we use in our products
but we do not operate a facility to manufacture these devices. Instead, we use
third-party semiconductor fabrication facilities to manufacture the gallium
arsenide devices we design. Our use of third-party semiconductor facilities
gives us the flexibility to use the process technology that is best suited for
each application and eliminates the need for us to invest in and maintain our
own semiconductor fabrication facilities.
For our MCIC and MMIC products, we exclusively use planar assembly
techniques. This approach consists of beginning with a flat base plate onto
which we sequentially mount all of the various components and circuit elements
in an automated manner. Concurrent with our product development efforts, we
develop assembly processes to ensure that our designs can be produced in high
volume and at low cost. Our assembly processes are highly automated and are
designed to minimize individual tuning of bond wires.
Broadband wireless access products require extensive testing after assembly
to comply with stringent customer requirements. We utilize high speed, custom
designed, automated test sets that are capable of rapidly testing a complete
transceiver unit, and we have developed similar high speed methods for outdoor
units. Concurrent with the development of these test methods, we develop
Web-based data analysis and reporting tools to facilitate communication of test
data to our customers.
Our high volume manufacturing facility is registered under ISO 9001, an
international certification standard of quality for design, development and
business practices. We maintain comprehensive quality systems at all of our
facilities to ensure compliance with customer specifications, configuration
control, documentation control and supplier quality conformance.
TRW RELATIONSHIP
In March 2000, we completed our merger with TRW Milliwave, which was then a
wholly-owned subsidiary of TRW. Through the merger, we acquired Milliwave's
manufacturing and product development facility in Diamond Springs, California.
We also entered into various agreements with TRW described below.
SUPPLY AGREEMENT. The supply agreement allows us to purchase specified
quantities of particular gallium arsenide devices from TRW through March 2003.
Under the agreement, we are required to purchase a minimum quantity of gallium
arsenide devices each year, and TRW is required to supply us with these devices
up to an annual maximum amount. This agreement does not limit our ability to
obtain gallium arsenide wafer processing services or devices from other
suppliers.
LICENSE AGREEMENT. TRW granted us royalty-free, fully-paid, worldwide
licenses to TRW intellectual property existing as of February 2000 that is
incorporated into specified products we supply to Nokia and Nortel Networks
under contracts we have with TRW. The intellectual property licensed to us by
TRW includes United States and foreign patent rights, copyrights, trademarks,
trade secrets, industrial rights and contract rights. In addition, we have been
granted a license to changes or improvements in this intellectual property that
is developed by TRW on or before February 28, 2001. Our license is for use in
products provided to commercial customers in non-satellite applications. This
license is exclusive as to all parties, including TRW, although TRW reserved the
right to use the licensed technology to perform under their agreements with
Nokia and
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Nortel Networks if TRW determines we are unable to do so. Additionally, we have
reciprocally agreed, for the initial year of our agreement, to provide to TRW a
royalty-free, non-exclusive right to our improvements to the licensed
intellectual property for use in fields of application unrelated to our
products.
SERVICES AGREEMENT. The services agreement provides access to technical
support related to the production of our products incorporating TRW-produced
devices, as well as access to TRW's RF design and process expertise for products
within the 15 to 65 GHz frequency range. TRW has also agreed to provide general
design assistance to us. The agreement expires in March 2002.
In addition, TRW granted us a non-exclusive, royalty-free, perpetual,
irrevocable and worldwide license, commencing September 30, 2000 to TRW-owned
intellectual property related to products incorporating TRW-produced devices.
This license only applies to products provided to commercial customers in
non-satellite applications.
RELATIONSHIPS WITH NORTEL NETWORKS AND NOKIA. At the closing of the merger,
we entered into contracts with TRW pursuant to which we agreed to fulfill TRW's
contractual obligations with Nokia and Nortel Networks for the supply of
specified RF subsystems. Our agreements with TRW provide substantially the same
terms to us as embodied in the agreements between TRW and Nokia and TRW and
Nortel Networks. TRW's agreement with Nokia terminates in July 2001 and the
agreement between TRW and Nortel Networks expires in October 2000. These
arrangements do not obligate either Nokia or Nortel Networks to purchase any
products from us. We also ship some RF subsystems to Nokia under direct purchase
orders. While the terms of our contracts with TRW are substantially similar to
the terms in TRW's corresponding contracts with Nokia and Nortel Networks, these
terms are not commercially satisfactory to us due to the indirect nature of the
agreements, and the pricing and quantity terms. The lack of a direct definitive
agreement with Nokia and with Nortel Networks is more administratively
burdensome than a direct agreement with each of these customers would be. We are
currently negotiating agreements with each of Nokia and Nortel Networks for the
direct supply of RF subsystems after the expiration of these contracts with TRW.
In order to make future agreements with these customers profitable for us, we
must negotiate more favorable terms. Although we have initiated cost reduction
programs and implemented further production efficiencies in an attempt to
minimize cost increases to these customers, we may be unable to successfully
negotiate these agreements on favorable terms, or at all. We have only recently
achieved a direct customer relationship with Nokia, and we cannot assure you
that Nokia will remain a significant customer of ours or that Nortel Networks
will become a significant customer of ours in the future.
COMPETITION
Competition in the market for RF subsystems for broadband wireless access
systems is intense. In the markets for RF modules, transceivers and outdoor
units, we primarily compete with the following companies:
o Celeritek;
o Filtronics;
o Infineon Technologies;
o MTI Technology;
o Raytheon;
o REMEC;
o Signal Technologies;
o Telaxis Communications;
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o Thomson-CSF; and
o WJ Communications.
In the market for antennas, we primarily compete with:
o Andrew Corporation;
o Electromagnetic Sciences;
o Nurad Technologies;
o Radio Waves; and
o REMEC.
In addition to those companies listed above with whom we may compete with
directly, there are wireless systems integrators, for example, Ericsson, who
design and manufacture their own RF subsystems for internal use. To the extent
wireless systems integrators presently, or may in the future, produce their own
RF subsystems we lose the opportunity to gain a customer and the related sales
opportunities.
We believe that the principal competitive factors in our industry are:
o technical leadership;
o the ability to migrate to low cost solutions;
o manufacturing capability and capacity;
o time-to-market in the design and manufacturing of products;
o price;
o product breadth;
o access to semiconductor materials and components; and
o customer support services.
We believe that the cost structure of our products is competitive in each
of target markets. Many factors contribute to the final pricing of our products,
including the scale of production and additional costs for customer specific
designs. Accordingly, we do not always offer the lowest prices. We commit to
providing superior product performance, customer support and manufacturing
excellence, as we believe these factors are critical to our customers' decision
to purchase our products.
We believe we are well positioned to compete effectively in our chosen
markets. However, many of our current and potential competitors are
substantially larger than us and have greater financial, technical,
manufacturing and marketing resources. If we are unable to compete successfully,
our future operations and financial results would be harmed.
PATENTS AND INTELLECTUAL PROPERTY RIGHTS
Our success will depend, in part, on our ability to protect our
intellectual property. We rely primarily on a combination of patent, copyright,
trademark and trade secret laws to protect our proprietary technologies and
processes. Nevertheless, these measures may not be adequate to safeguard the
proprietary technology underlying our products. As of June 30, 2000, we had 27
United States patents issued, 12 foreign patents issued, and more than 90 United
States and foreign patent applications pending. The pending applications include
two international applications filed under the Patent Cooperation Treaty that
provide the opportunity to file 18 additional foreign applications. Of the
pending patent applications, 13 have been allowed and are expected to result in
the issuance of patents to us. Our issued patents include those relating to
basic circuit and device designs, semiconductors, our proprietary "flip-chip"
design for MCIC circuit technology and antenna
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design and technology. In addition, we jointly hold two patents with AT&T and
pertaining to sectorized communications systems and jointly hold one patent with
Conductus relating to satellite communications. Our issued patents expire
between 2013 and 2018. Of all our patents, we consider the patents relating to
our flip-chip circuit technology to be the most valuable. With regard to our
pending patent applications, no patents may be issued as a result of these or
any future applications. If they are issued, any patent claims allowed may not
be sufficiently broad to protect our technology. In addition, any existing or
future patents may be challenged, invalidated or circumvented, and any right
granted thereunder may not provide meaningful protection to us. The failure of
any patents to provide protection to our technology might make it easier for our
competitors to offer similar products and use similar manufacturing techniques.
We generally enter into confidentiality and assignment of rights to
inventions agreements with our employees, and confidentiality and non-disclosure
agreements with our strategic partners, and generally control access to and
distribution of our documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our products or technology without authorization, develop similar
technology independently or design around our patents. In addition, effective
patent, copyright, trademark and trade secret protection may be unavailable or
limited outside of the United States, Europe and Japan. We may not be able to
obtain any meaningful intellectual property protection in other countries and
territories. Additionally, we may, for a variety of reasons, decide not to file
for patent, copyright, or trademark protection outside of the United States. We
occasionally agree to incorporate a customer's or supplier's intellectual
property into our designs, in which cases we have obligations with respect to
the non-use and non-disclosure of that intellectual property. In particular,
under our agreement with Hughes Network Systems, they retain all rights related
to the specific products produced for them for a period following the completion
of the development phase of the agreement. We also license TRW technology. There
are no limitations on our rights to make, use or sell products we may develop in
the future utilizing the technology licensed to us by TRW, provided that the
products are for commercial customers and non-satellite applications.
Steps taken by us to prevent misappropriation or infringement of the
intellectual property of our company or our customers may not be successful.
Moreover, litigation may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of proprietary rights of others, including our customers. Litigation of
this type could result in substantial costs and diversion of our resources.
The wireless access industry is characterized by vigorous protection and
pursuit of intellectual property rights. We have received and may receive in the
future notices of claims of infringement of other parties' proprietary rights.
For example, we are in the process of responding to inquiries that claim that
some of our antenna technologies infringe upon a European patent. In addition,
the invalidity of our patents may be asserted or prosecuted against us.
Furthermore, in a patent or trade secret action, we could be required to
withdraw the product or products as to which infringement was claimed from the
market or redesign products offered for sale or under development. We have also
at times agreed to indemnification obligations in favor of our customers and
strategic partners that could be triggered upon an allegation or finding of our
infringement of other parties' proprietary rights. These indemnification
obligations would be triggered for reasons including our sale or supply to a
customer or strategic partner of a product which was later discovered to
infringe upon another party's proprietary rights. Irrespective of the validity
or successful assertion of such claims we would likely incur significant costs
and diversion of our resources with respect to the defense of such claims. To
address any potential claims or actions asserted against us, we may seek to
obtain a license under a third party's intellectual property rights. However, in
such an instance, a license may not be available on commercially reasonable
terms, if at all.
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FACILITIES
Our principal executive offices are located in Sunnyvale, California, where
we lease approximately 30,000 square feet, which encompasses our headquarters
and also provides space for research and design and manufacturing functions.
This lease expires January 2002. We also lease approximately 12,000 square feet
in Santa Clara, California for manufacturing purposes. This lease expires
November 2000. We own two buildings consisting of approximately 46,000 square
feet in Diamond Springs, California, which we use primarily for manufacturing
purposes. We believe that our existing facilities are adequate to meet our
current and near term future needs.
EMPLOYEES
As of June 30, 2000, we had 448 full-time employees, including 313 in
manufacturing, 97 in product and process engineering, 10 in sales and marketing
and in 28 in general and administrative. Our employees are not subject to any
collective bargaining agreement with us and we believe that our relations with
our employees are good.
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MANAGEMENT
DIRECTORS, OFFICERS AND KEY EMPLOYEES
The following table contains information regarding our executive officers,
directors and other key employees, including their ages as of June 30, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------- ------- ------------
<S> <C> <C>
Edward A. Keible, Jr. (3)............. 56 Chief Executive Officer, President and Director
Donald J. Dodson, Jr.................. 53 Chief Operating Officer and Senior Vice President
Bruce M. Margetson.................... 55 Chief Financial Officer and Senior Vice President
Julianne M. Biagini .................. 38 Vice President, Finance and Administration, and
Corporate Secretary
James G. Bybokas...................... 57 Vice President, Sales and Marketing
John J. Mikulsky...................... 55 Vice President, Product Development
Lionel Kirton......................... 63 Vice President, Manufacturing and Operations, Silicon
Valley
Douglas G. Lockie..................... 54 Executive Vice President and Founder of Endgate
Clifford A. Mohwinkel................. 59 Vice President and Chief Technology Officer
John C. Rosenberg..................... 47 Executive Vice President and Founder of Milliwave Inc.
Michael Roush......................... 48 Vice President, Manufacturing and Operations, Diamond
Springs
Wes Bush (2)(3)....................... 39 Director
Timothy W. Hannemann ................. 57 Director
Esfandiar Lohrasbpour (1)............. 48 Director
Robert D. Pavey (1)(2)(3)............. 58 Director
Edward C.V. Winn (1).................. 61 Director
</TABLE>
--------------
(1) Member of the audit committee
(2) Member of the compensation committee
(3) Member of the executive committee
EDWARD A. KEIBLE, JR. has served as our President and Chief Executive
Officer and as a director since January 1994. From 1973 until 1993, Mr. Keible
held various positions at Raychem Corporation, culminating in the position of
Senior Vice President with specific oversight of Raychem's International and
Electronics Groups. Mr. Keible has been awarded three patents in the fields of
electronics and communications. Mr. Keible holds a B.A. in engineering sciences
and a B.E. and an M.E. in materials science from Dartmouth College and an M.B.A.
from Harvard Business School. Mr. Keible currently serves on the board of
directors of the American Electronics Association.
DONALD J. DODSON, JR. has served as our Chief Operating Officer and Senior
Vice President since March 2000. Mr. Dodson joined us in connection with our
merger with Milliwave. From September 1998 until April 2000, Mr. Dodson served
as a Vice President and the General Manager of Milliwave and as a Manager of
TRW's Telecommunications Programs. Prior to September 1998, Mr. Dodson held
various management positions with TRW, including as a Deputy Manager of the TRW
RF Products Center and Vice President of Engineering, Research and Development
in TRW's Automotive Electronics Group. Mr. Dodson holds a B.S. and an M.S. in
electrical engineering from Drexel University.
BRUCE M. MARGETSON has served as our Chief Financial Officer and Senior
Vice President since March 2000. Prior to joining us, Mr. Margetson was
Controller of the Wide Area Network Business
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Unit and Senior Manager, Corporate Planning at Cisco Systems Inc., where he
served from August 1996 until March 2000. From 1991 until 1996, Mr. Margetson
held various positions at Silicon Graphics, including as its European Finance
Director. Prior to 1991, Mr. Margetson held positions at Network Equipment
Technologies, Tekna, Raychem Corporation, Singer Company and Price Waterhouse.
Mr. Margetson holds a B.A. in economics and political science from the
University of British Columbia and an M.B.A. from Stanford University.
JULIANNE M. BIAGINI has served as our Vice President of Finance and
Administration and Corporate Secretary since April 1995. Ms. Biagini joined us
as our Director of Finance and Administration and Secretary in March 1994.
Previously, Ms. Biagini was the Manager of Accounting and Tax at Exponent, Inc.
(formerly Failure Analysis Associates), an engineering and scientific consulting
firm, from 1992 until 1994. Prior to 1992, Ms. Biagini worked at KPMG Peat
Marwick as a tax specialist. Ms. Biagini is a C.P.A. in California with a B.S.
in business administration from San Jose State University and an M.B.A. from
Santa Clara University.
JAMES G. BYBOKAS has served as our Vice President of Sales and Marketing
since March 1996. From 1991 until 1996 Mr. Bybokas served as the Director of
Marketing for the Communications Products Division of Litton Solid State. Mr.
Bybokas has also held positions as Vice President of Marketing and Product
Development at Superconductor Technologies, Marketing Manager at Avantek, and
Sales Manager at Varian. Mr. Bybokas holds a B.S. in electrical engineering from
the University of Illinois and an M.S. in electrical engineering from New York
University.
JOHN J. MIKULSKY has served as our Vice President of Product Development
since May 1996. From 1993 until 1996, Mr. Mikulsky worked as a Technology
Manager for Balazs Analytical Laboratory, a provider of analytical services to
the semiconductor and disk drive industries. Prior to 1993, Mr. Mikulsky worked
at Raychem Corporation most recently as a Division Manager for the Electronic
Systems Division. Mr. Mikulsky holds a B.S. in electrical engineering from
Marquette University, an M.S. in electrical engineering from Stanford University
and an M.S. in Management from the Sloan School at the Massachusetts Institute
of Technology.
LIONEL KIRTON has served as our Vice President of Manufacturing and
Operations at our Sunnyvale location since January 2000. Prior to joining
Endwave, from 1991 until 1998, Mr. Kirton worked at Hewlett-Packard as the
Worldwide Manufacturing Manager for the Communications Components Division.
Prior to 1991, Mr. Kirton had served as a Senior Vice President of Avantek, a
Division Manager at Advanced Microdevices and Vice President of Signetics
Corporation. Mr. Kirton holds a B.S. in physics from University of Nottingham,
England.
DOUGLAS G. LOCKIE has served as an Executive Vice President since 1994 and
founded Endgate in 1991. From inception until March 2000 he also served as a
director. From 1984 until 1991, Mr. Lockie worked for Pacific Monolithics, a
company that he co-founded, as the Vice President of Marketing and Sales. Mr.
Lockie was previously employed by the Watkins Johnson Company as a microwave
applications engineer. Mr. Lockie is the co-author of seven patents in the
fields of electronics and communications. Mr. Lockie holds a B.S. in electrical
engineering from Montana State University.
CLIFFORD A. MOHWINKEL has served as our Chief Technology Officer since
inception and is a Vice President and a co-founder of Endgate. From 1965 until
1991, Dr. Mohwinkel most recently served as a Senior Technical Manager at
Pacific Monolithics, Litton, Varian, Fairchild, and Blonder Tongue Labs. Dr.
Mohwinkel has been awarded 24 patents in the field of microelectronics. Dr.
Mohwinkel holds a B.S. and an M.S. in electrical engineering from Newark College
of Engineering and a Ph.D. in electrical engineering from the Polytechnic
Institute of New York.
JOHN C. ROSENBERG has served as an Executive Vice President since March
2000. Mr. Rosenberg joined us in connection with our merger with Milliwave. Mr.
Rosenberg founded Milliwave in 1992 and served as its President until Fall 1998,
and as a Vice President of Milliwave from Fall 1998 until its merger with
Endgate. From 1990 to 1992, Mr. Rosenberg was Division
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Manager of the Active Products Division at Sierra Microwave. Previously, Mr.
Rosenberg was employed as the Manager for Engineering and Manufacturing
Millimeter Wave Products Division of Avantek. Mr. Rosenberg has been awarded a
patent in the field of microelectronics. Mr. Rosenberg holds a B.S. in
electrical engineering from San Jose State University.
MICHAEL ROUSH has served as our Vice President of Manufacturing and
Operations at our Diamond Springs location since March 2000. Mr. Roush joined us
in connection with our merger with Milliwave. Mr. Roush worked for Milliwave
from January 1998 to March 2000, first as Director of Operations and then as
Vice President of Operations. Prior to joining Milliwave, Mr. Roush worked for
TRW's Automotive Electronics Group as a Director of Engineering Operations and
as a manager in TRW's RF Products Group. Mr. Roush holds two patents in the
field of electronics manufacturing. Mr. Roush has a B.S. in electrical
engineering from the University of Illinois.
WES BUSH has served as a director of Endwave since the consummation of our
merger with Milliwave in March 2000. Mr. Bush has served as Vice President and
Group Deputy General Manager for TRW Ventures, a division of TRW's Space and
Electronics Group since March 2000. Mr. Bush has served in various management
capacities for TRW since 1987, including within TRW's Space and Electronics
Group. Mr. Bush holds a B.S. and an M.S. in electrical engineering from the
Massachusetts Institute of Technology and is a graduate of UCLA's Executive
Management Program. Mr. Bush serves as a member of the board of directors of
Astrolink.
TIMOTHY W. HANNEMANN has served as a director of Endwave since the
consummation of our merger with Milliwave in March 2000. Mr. Hannemann has
served as an Executive Vice President and General Manager for TRW's Space and
Electronics Group since January 1993. Mr. Hannemann has served in various
management capacities within TRW since 1969, including positions within TRW's
Space and Defense Systems Sector and Electronic Systems Group. Mr. Hannemann
holds a B.S. and an M.S. in electrical engineering from the Illinois Institute
of Technology. Mr. Hannemann serves as a member of the board of directors of
Astrolink.
ESFANDIAR LOHRASBPOUR has served as a director of Endwave since April 1999.
Dr. Lohrasbpour is a Managing Director with INVESCO Private Capital, a money
management firm he joined in 1998. Dr. Lohrasbpour focuses on technology
investments primarily with a communication orientation. Prior to joining
INVESCO, Dr. Lohrasbpour worked for AT&T from 1982 until 1998. Dr. Lohrasbpour
holds a B.A. in mathematics from Berea College in Berea, Kentucky, an M.S. in
operations research from the University of North Carolina at Chapel Hill and a
Ph.D. in operations research from the UCLA School of Engineering.
ROBERT D. PAVEY has served as a director of Endwave since May 1994. Mr.
Pavey has served as a General Partner of Morgenthaler Ventures since January
1970. Mr. Pavey holds a B.A. in physics from The College of William and Mary, an
M.S. in metallurgical engineering from Columbia University, and an M.B.A. from
Harvard Business School. Mr. Pavey serves as a member of the board of directors
of Commonfund, FiberStreet, LightChip, Lightwave Microsystems, New Focus and
Think & Do Software.
EDWARD C.V. WINN has served as a director of Endwave since July 2000. From
March 1992 to January 2000, Mr. Winn served in various capacities with TriQuint
Semiconductor, a semiconductor manufacturer, most recently as Executive Vice
President, Finance and Administration and Chief Financial Officer. Previously,
Mr. Winn served in various capacities with Avantek, most recently as Product
Group Vice President. Mr. Winn received a B.S. in Physics from Rensselaer
Polytechnic Institute and an M.B.A. from Harvard Business School. Mr. Winn
serves as a member of the board of directors of OmniVision Technologies, Inc.
There are no family relationships between any of the directors and officers
of Endwave.
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BOARD OF DIRECTORS
Endwave has five authorized directors. In accordance with the terms of our
amended and restated certificate of incorporation and amended and restated
bylaws, each of which will become effective upon the completion of this
offering, the board of directors will be divided into three classes, Class I,
Class II and Class III, with each class serving staggered three-year terms. Upon
the completion of this offering, the members of classes will be divided as
follows:
o Class I: Messrs. Bush and Lohrasbpour
o Class II: Messrs. Hannemann and Pavey
o Class III: Messrs. Keible and Winn
The Class I directors will stand for re-election or election at the 2001
annual meeting of stockholders. The Class II directors will stand for
re-election or election at the 2002 annual meeting of stockholders. The Class
III directors will stand for re-election or election at the 2003 annual meeting
of stockholders. At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following the election or special meeting held in lieu thereof.
The amended and restated certificate of incorporation provides that the
authorized number of directors may be changed only by resolution of the board of
directors. Any additional directorships resulting from an increase in the number
of directors will be distributed between the three classes so that, as nearly as
possible, each class will consist of one third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in the control or management of Endwave.
Our directors may be removed only for cause by the affirmative vote of the
holders of a majority of our voting stock.
BOARD COMMITTEES
Our board of directors has a compensation committee, an audit committee and
an executive committee. The compensation committee, which consists of Messrs.
Bush and Pavey, acts on behalf of the board to grant options, makes
recommendations to the board concerning salaries and incentive compensation for
our officers and employees and provides guidance on overall compensation levels
for Endwave. The audit committee, which consists of Messrs. Lohrasbpour, Pavey
and Winn, makes recommendations to the board of directors regarding the
selection of independent auditors, reviews the results and scope of the audit
and other services provided by our independent auditors, and reviews and
evaluates our audit and control functions. The executive committee, which
consists of Messrs. Bush, Pavey and Keible, acts with the full authority of the
board within the limits of applicable law and as set forth in our certificate of
incorporation and bylaws. Members of these committees will serve until their
successors are appointed.
Neither of Messrs. Bush and Pavey, as members of our compensation
committee, is or has been an officer or employee of Endwave. No member of the
compensation committee of Endwave serves as a member of the board of directors
or compensation committee of any entity that has one or more executive officers
serving as a member of the Endwave board of directors.
DIRECTOR COMPENSATION
The members of the board of directors do not currently receive cash
compensation for their services as directors, although they are reimbursed for
travel expenses in connection with attendance at board and committee meetings.
Non-employee directors are eligible to participate in our 2000 Non-Employee
Director Plan, which will be effective upon the consummation of this
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offering. Pursuant to the plan, all non-employee directors will automatically be
granted an option to purchase 40,000 shares of common stock upon their election
to the board of directors. Our incumbent directors will be granted their initial
option grants upon consummation of this offering. Our non-employee directors
will also be granted an option to purchase an additional 10,000 shares of common
stock each year following the date of our annual stockholder's meeting, provided
that if any non-employee director has not served in that capacity for the entire
period since the preceding annual stockholder's meeting, then the number of
shares subject to the annual grant will be reduced, pro rata, for each full
quarter the person did not serve during the previous period. All options under
this plan expire after ten years and have an exercise price equal to the fair
market value on the date of grant. These options vest over four years at the
rate of 1/48 of the total grant per month. Our directors are also eligible to
participate in our 2000 Equity Incentive Plan and our employee directors are
eligible to participate in our 2000 Employee Stock Purchase Plan.
EMPLOYMENT ARRANGEMENTS
In March 2000 in connection with our merger with Milliwave, our board of
directors approved a plan providing for the acceleration of vesting, under
certain circumstances, of a percentage of the stock options granted to our
officers under our equity incentive plans prorated based on years of employment
with us. Under the plan, an unvested portion of each officer's stock options
under our equity incentive plans becomes vested and exercisable if Endwave is
acquired pursuant to a change in control, or the officer is terminated without
cause. In addition, severance benefits will be paid to each officer if
terminated without cause. For more information on our Officer Retention Plan,
see also the section titled "Employee Benefit Plans--Officer Retention Plan."
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid to our Chief Executive Officer and the other most highly compensated
executive officers whose annual salaries and bonuses together exceeded $100,000
for the year ended December 31, 1999. These individuals are referred to as the
named executive officers in this prospectus.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION AWARDS
----------------------------------------------- ----------------------
OTHER ANNUAL NUMBER OF SHARES
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(2) UNDERLYING OPTIONS
------------------------------------------ ------------ ------------ ------------------- ----------------------
<S> <C> <C> <C> <C>
Edward A. Keible, Jr..................... $ 261,250 $ 60,000 $ 671 150,000
President, Chief Executive Officer
and Chief Financial Officer (3)
John J. Mikulsky......................... 171,250 35,000 235 62,500
Vice President, Product Development
and Operations (3)
James G. Bybokas......................... 147,833 24,000 439 50,000
Vice President, Sales and Marketing
Julianne M. Biagini...................... 113,500 22,000 69 50,000
Vice President, Finance and
Administration, and Corporate
Secretary
</TABLE>
--------------
(1) In accordance with rules promulgated by the Securities and Exchange
Commission, other annual compensation in the form of perquisites and other
personal benefits has been omitted where the aggregate amount of such
perquisites and other personal benefits constitutes less than the lesser of
$50,000 or 10% of the total annual salary and bonus for the named executive
officer for the fiscal year.
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(2) Represents insurance premiums paid by Endwave with respect to group life
insurance for the benefit of the named executive officers.
(3) In March 2000, we hired Bruce M. Margetson as our Chief Financial Officer
and Donald J. Dodson, Jr. as our Chief Operating Officer.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding options granted to
each of the named executive officers during the year ended December 31, 1999.
The information regarding stock options granted to named executive officers as a
percentage of total options granted to employees in 1999 is based on options to
purchase a total of 751,625 shares that were granted to employees, consultants
and directors in 1999, all pursuant to our 1992 Stock Option Plan. No stock
appreciation or stock purchase rights were granted during 1999.
Options were granted by the board of directors at an exercise price
determined by them in good faith to be the fair market value of our common stock
as of the date of grant. In determining the fair market value of Endwave's
common stock the board of directors considered various factors, including
Endwave's financial condition and business prospects, its operating results, the
absence of a public market for its common stock and the risks normally
associated with technology companies. Options typically vest ratably on a
quarterly basis over a four-year period.
The potential realizable values set forth in the table below are computed
by multiplying the number of shares of common stock subject to a given option by
the initial public offering price of $14.00 per share. The assumed 0%, 5% and
10% rates of stock price appreciation are provided in accordance with rules of
the SEC and do not reflect our estimate or projection of future stock price
growth. The assumed rate of 0% indicates the value at the effective date for the
offering based on the deemed value arrived at following the grant date in
connection with this offering less the exercise price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------
NUMBER OF PERCENTAGE DEEMED POTENTIAL REALIZABLE VALUE AT
SECURITIES OF TOTAL VALUE PER ASSUMED ANNUAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE SHARE AS OF PRICE APPRECIATION FOR OPTION TERM
OPTIONS GRANTED IN PRICE PER EXPIRATION DATE OF ---------------------------------------
Name GRANTED FISCAL 1999 SHARE DATE GRANT (1) 0% 5% 10%
------- ---------- ----------- --------- ---------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edward A. Keible, Jr... 150,000 20.0% $ 1.20 7/28/09 $ 6.00 $ 1,920,000 $ 3,243,000 $ 5,259,000
John J. Mikulsky....... 62,500 8.3 1.20 7/28/09 6.00 800,000 1,351,250 2,191,250
James G. Bybokas....... 50,000 6.7 1.20 7/28/09 6.00 640,000 1,081,000 1,753,000
Julianne M. Biagini.... 50,000 6.7 1.20 7/28/09 6.00 640,000 1,081,000 1,753,000
</TABLE>
--------------
(1) The deemed value per share was determined after the date of grant in
connection with this offering.
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AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth for each of the named executive officers the
shares acquired and the value realized on each exercise of stock options during
the year ended December 31, 1999 and number and value of securities underlying
unexercised options held by the named executive officers at December 31, 1999.
Also reported are values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding stock options and
the initial public offering price of $14.00 per share.
<TABLE>
<CAPTION>
NUMBER NUMBER OF SHARES
OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1999(1) DECEMBER 31, 1999(1)
ON VALUE -------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------- ---------- ----------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Edward A. Keible, Jr........... -- -- 371,750 -- $ 4,758,400 --
John J. Mikulsky............... -- -- 152,500 -- 1,926,500 --
James G. Bybokas............... -- -- 111,250 -- 1,424,000 --
Julianne M. Biagini............ -- -- 92,937 -- 1,192,687 --
</TABLE>
--------------
(1) Some of the shares are immediately exercisable; however, to the extent
shares are purchased prior to their vesting, these shares are subject to
repurchase by Endwave at the original exercise price paid per share upon
the optionee's cessation of service prior to vesting. The shares listed
as exercisable are those shares which are unexercised for which Endwave
no longer has a right of repurchase if the option is exercised by the
holder; similarly, the shares listed as unexercisable are those shares
over which Endwave has a right of repurchase if the option is exercised
by the holder.
EMPLOYEE BENEFIT PLANS
1992 STOCK OPTION PLAN
In September 1992 our board of directors adopted, and in February 1993 our
stockholders approved, our 1992 Stock Option Plan. The 1992 option plan was
terminated in March 2000. No new options can be granted under the plan; however,
all stock options granted prior to the termination of the 1992 option plan
remain valid and exercisable options and governed by the terms of the plan,
subject to vesting. The 1992 option plan provided for the grant of stock awards
to eligible persons, consisting of:
o incentive stock options, as defined under the Internal Revenue Code of
1986, as amended, granted solely to employees; and
o nonstatutory stock options, granted to employees, non-employee
directors and consultants.
PLAN ADMINISTRATION
The 1992 option plan was administered by our board of directors. Subject to
the terms of the plan, the board of directors determined recipients, the numbers
and types of stock options to be granted and the terms and conditions of the
stock awards, including the period of their exercisability and vesting and the
form of consideration payable upon the exercise of each option. Subject to the
plan's limitations, the board of directors also determined the exercise price of
options granted.
OPTIONS
Stock options were granted pursuant to incentive stock options or
nonstatutory stock options. Incentive stock options were granted at an exercise
price not less than 100% of the fair market value of the common stock on the
date of grant. Nonstatutory stock options were granted at an exercise price of
not less than 85% of the fair market value of the common stock on the date of
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grant. Options granted under the 1992 option plan typically vest ratably on a
quarterly basis over a four-year period.
The term of incentive stock options granted under the 1992 option plan may
not exceed 10 years. Unless the terms of an optionee's stock option agreement
provide for earlier termination, in the event an optionee's service relationship
with us, or any affiliate or ours, ceases due to disability, the optionee, or a
beneficiary of the optionee, may exercise any vested options up to 12 months
after the date such service relationship ends. If an optionee's relationship
with us, or any affiliate of ours, ceases for any reason other than disability
or death, absent a provision for earlier termination in the stock option
agreement, the optionee may exercise any vested options up to three months from
cessation of service. However, in no circumstances may an option be exercised
after the expiration of its term.
Acceptable consideration for the purchase of shares of common stock upon
exercise of an option granted under the 1992 option plan is determined by our
board of directors and may include cash, common stock previously owned by the
optionee, a deferred payment arrangement and other legal consideration as
approved by the board of directors.
TRANSFERABILITY OF OPTIONS
An optionee who holds an incentive stock option may not transfer a stock
option other than by will or intestate laws of descent and distribution upon
death. An optionee who holds a nonstatutory stock option may not transfer a
stock option other than by will or intestate laws of descent and distribution
upon death or pursuant to a qualified domestic relations order.
TAX LIMITATIONS ON STOCK OPTION GRANTS
Under tax laws in effect during the active life of our 1992 option plan,
only employees were eligible for the grant of incentive stock options. Only the
first $100,000 worth of stock options exercisable for the first time in one
calendar year can be treated as an incentive stock option. For this purpose, the
value of a stock option grant is the fair market value of the underlying stock
at the date of grant. No employee was eligible for the grant of an incentive
stock option if, at the time of the grant, such employee was the owner of or was
deemed to own stock possessing more than 10% of the total combined voting power
of Endwave or any affiliate unless the following conditions were satisfied:
o the option exercise price was at least 110% of the fair market value
of the stock subject to the option on the date of grant; and
o the term of any incentive stock option award did not exceed five years
from the date of grant.
CHANGES IN CONTROL
In the event of certain changes in control of Endwave, the surviving entity
may elect to assume, continue or substitute all options granted under the 1992
option plan. If the surviving entity elects not to assume, continue or
substitute for such options, such options will terminate if not exercised before
the change in control. In the event of dissolution or liquidation of Endwave,
options granted under the 1992 option plan will terminate if not exercised prior
to the dissolution or liquidation.
OPTIONS OUTSTANDING
As of June 30, 2000, there were 1,467,138 shares of our common stock
subject to options outstanding under the 1992 option plan.
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2000 EQUITY INCENTIVE PLAN
In March 2000, our board of directors adopted and the stockholders approved
the 2000 Equity Incentive Plan. The 2000 incentive plan will expire in March
2010 unless it is terminated earlier by the board of directors. The 2000
incentive plan provides for the grant of stock awards to eligible persons,
consisting of:
o incentive stock options, as defined under the Internal Revenue Code of
1986, as amended, which may be granted solely to employees; and
o nonstatutory stock options, restricted stock purchase awards, and
stock bonuses which may be granted to employees, non-employee
directors and consultants.
PLAN ADMINISTRATION
The 2000 incentive plan is administered by our board of directors; however
administration of the plan may be delegated to a committee designated by the
board. Subject to the terms of the plan, the board of directors determines
recipients, the numbers and types of stock awards to be granted and the terms
and conditions of the stock awards including the period of their exercisability
and vesting. Subject to limitations set forth in the plan and described below,
the board of directors also determines the exercise price of options granted and
the terms of any other stock awards granted under the plan.
OPTIONS
Stock options are granted pursuant to stock option agreements. The exercise
price for an incentive stock option cannot be less than 100% of the fair market
value of the common stock on the date of grant. The exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the common stock on the date of grant. Options granted under the 2000 incentive
plan vest at the rate specified in a grantee's option grant notice and option
agreement.
The term of incentive stock options granted under the 2000 incentive plan
may not exceed 10 years. Unless the terms of an optionee's stock option
agreement provide for earlier termination, in the event an optionee's service
relationship with us, or any affiliate of ours, ceases due to disability, the
optionee may exercise any vested options up to 12 months after the date such
service relationship ends. In the case of the optionee's death, absent a
provision stating otherwise in the stock option agreement, a beneficiary of the
optionee may exercise any vested options up to 18 months after the date the
service relationship ends. If an optionee's relationship with us, or any
affiliate of ours, ceases for any reason other than disability or death, absent
a provision for earlier termination in the stock option agreement, the optionee
may exercise any vested options up to three months from cessation of service.
However, in no circumstances may an option be exercised after the expiration of
its term.
Acceptable consideration for the purchase of common stock issued under the
2000 incentive plan is determined by the board of directors and may include
cash, common stock previously owned by the optionee, a deferred payment
arrangement and other legal consideration approved by the board of directors.
TRANSFERABILITY OF OPTIONS
An optionee may not transfer a stock option other than by will or intestate
laws of descent and distribution upon death unless the optionee holds a
nonstatutory stock option that provides otherwise. However, an optionee may
designate a beneficiary who may exercise the option following the optionee's
death.
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TAX LIMITATIONS ON STOCK OPTION GRANTS
Under current tax laws, incentive stock options may be granted only to our
employees. Only the first $100,000 worth of stock options exercisable for the
first time in one calendar year can be treated as an incentive stock option. For
this purpose, the value of the stock option grant is the fair market value of
the underlying stock at the date of grant. No incentive stock option may be
granted to any person who, at the time of the grant, owns or is deemed to own
stock possessing more than 10% of the total combined voting power of Endwave or
any affiliate unless the following conditions are satisfied:
o the option exercise price must be at least 110% of the fair market
value of the stock subject to the option on the date of grant; and
o the term of any incentive stock option award must not exceed five
years from the date of grant.
SECTION 162(M)
Section 162(m) of the Internal Revenue Code of 1986 denies an income tax
deduction to publicly held corporations for certain compensation paid to
specified employees in a taxable year to the extent that the compensation
exceeds $1 million, unless the compensation constitutes "performance-based
compensation." In order to ensure that option grants under the 2000 incentive
plan constitute "performance-based compensation," no person may be granted
options under the 2000 incentive plan covering more than 750,000 shares of
common stock in any calendar year. Under its general authority to grant options,
the board of directors has the implicit authority to reprice outstanding options
or to offer optionees the opportunity to replace outstanding options with new
options for the same or a different number of shares. In such case, both the
original and new options will count toward the Section 162(m) limitation.
STOCK BONUS AND RESTRICTED STOCK AWARDS
Stock bonus awards may be granted to eligible persons in consideration for
past services rendered. Shares of common stock granted under a stock bonus
agreement may be subject to a vesting schedule, with a right of repurchase
reserved to Endwave in the event a grantee's employment terminates prior to
vesting. The purchase price for each restricted stock award granted must be at
least 85% of the fair market value of the stock on the date of the award or at
the time the purchase is consummated. Rights to acquire shares under a stock
bonus or restricted stock bonus agreement are transferable only upon the terms
and conditions set forth in the stock bonus or restricted stock agreement, so
long as the shares awarded to a grantee are subject to the terms of the
applicable agreement.
CHANGES IN CONTROL
In the event of certain changes in control, the surviving entity may elect
to assume, continue or substitute all outstanding stock awards under the 2000
incentive plan. If the surviving entity elects not to assume, continue or
substitute for such awards, the vesting provisions of outstanding stock awards
held by persons whose service relationship with us has not terminated at the
time of the change in control will be accelerated in full. These stock awards
will be terminated upon the change in control if not previously exercised.
AUTHORIZED SHARES
There are 6,500,000 shares reserved under the 2000 incentive plan. As of
each anniversary of the listing date for trading of our common stock beginning
in 2001 and continuing until the fifth anniversary of the listing date in 2005,
the number of shares of common stock authorized for
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issuance under the 2000 incentive plan will be increased by the lesser of: (1)
6% of the number of shares of common stock outstanding on that date, (2)
3,000,000 shares or (3) a lesser number of shares as determined by the board of
directors.
Shares subject to stock options granted under the 2000 incentive plan that
have expired or otherwise terminated without having been exercised in full will
again become available for the grant of awards under the 2000 incentive plan.
Likewise, shares of restricted stock awarded under this plan that have not
become fully vested will again become available for the grant of awards under
the 2000 incentive plan. Shares issued under the 2000 incentive plan may be
previously unissued shares or reacquired shares bought on the market or
otherwise.
OPTIONS OUTSTANDING
As of June 30, 2000, there were 3,019,000 shares of our common stock
subject to outstanding options under the 2000 incentive plan.
2000 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In July 2000, our board of directors adopted, subject to stockholder
approval, the 2000 Non-Employee Directors' Stock Option Plan which provides for
the automatic grant of nonstatutory stock options to purchase shares of common
stock to our non-employee directors. The aggregate number of shares of common
stock that may be issued pursuant to these options under the plan is 600,000
shares. No options have been granted under the plan. The plan will be effective
upon the effectiveness of this offering.
ADMINISTRATION AND TERMS
Our board of directors administers the plan. Options granted to
non-employee directors are generally subject to the following terms:
o the exercise price of options granted will be equal to the fair market
value of the common stock on the date of grant;
o no option granted may be exercised after the expiration of 10 years
from the date it was granted;
o options granted are not transferable other than by will or by the
intestate laws of descent and distribution upon death and are
exercisable during the life of the optionee only by the optionee;
o an optionee may designate a beneficiary who may exercise the option
following the optionee's death; and
o an optionee whose service relationship with Endwave or any affiliate,
whether as a non-employee director of Endwave or subsequently as an
employee, director or consultant of either Endwave or an affiliate,
ceases for any reason may exercise vested options for the term
provided in the option agreement, which is generally 12 months, or 18
months in the event of the optionee's death. However, in no
circumstances may an option be exercised after the expiration of its
term.
AUTOMATIC GRANTS
Upon the completion of this offering, each non-employee director that has
not previously received Endwave stock options will automatically be granted an
option to purchase 40,000 shares of common stock. Any individual who becomes a
non-employee director after this offering will automatically receive this
initial grant upon being elected to the board of directors. Each year, on the
day after our annual stockholders' meeting, commencing in 2001, any person who
is then a
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non-employee director will automatically be granted an option to purchase 10,000
shares of common stock, provided that if any non-employee director has not
served in that capacity for the entire period since the preceding annual
stockholders' meeting, then the number of shares subject to the annual grant
shall be reduced, pro rata, for each full quarter the person did not serve
during the previous period. Initial grants and annual grants under the plan
provide for monthly vesting of one forty-eighth of the shares subject to the
option each month following the date of grant over a four year period.
2000 EMPLOYEE STOCK PURCHASE PLAN
In July 2000, the board of directors adopted and the stockholders approved
the 2000 Employee Stock Purchase Plan, authorizing the issuance of common stock
pursuant to purchase rights granted to our employees or to employees of any of
our affiliates. The purchase plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Code. The purchase plan
provides a means by which employees may purchase our common stock through
payroll deductions. As of the date hereof, no shares of common stock have been
purchased under the purchase plan. The plan will be effective upon the
consummation of this offering.
ADMINISTRATION
The purchase plan is administered by our board of directors which may
delegate authority to administer the purchase plan to a committee. Subject to
the terms of the plan, the board of directors or its authorized committee
determines when and how rights to purchase shares will be granted and the
provisions of each offering of rights. Under the plan, we may specify offerings
with a duration of not more than 27 months, and may specify shorter purchase
periods within each offering. The board of directors has determined that the
first offering will begin on the effective date of this offering and be 24
months in duration, with purchases occurring every six months. Unless otherwise
determined by the board of directors, common stock is purchased for accounts of
employees participating in the purchase plan at a price per share equal to the
lower of:
o 85% of the fair market value of a share of our common stock on the
date of commencement of participation in the offering; or
o 85% of the fair market value of a share of our common stock on the
date of purchase.
ELIGIBILITY
The purchase plan is implemented by offerings of rights to eligible
employees. Generally, all regular employees, including executive officers, who
work at least 20 hours per week and are customarily employed by Endwave or by an
affiliate of Endwave for at least five months per calendar year may participate
in the purchase plan and may authorize payroll deductions of up to 15% of their
earnings for the purchase of stock under the purchase plan. Eligible employees
may be granted rights only if the rights, together with any other rights granted
under employee stock purchase plans, do not permit such employee's rights to
purchase our stock to accrue at a rate which exceeds $25,000 of the fair market
value of such stock for each calendar year in which such rights are outstanding.
No employee shall be eligible for the grant of any rights under the purchase
plan if immediately after such rights are granted, such employee has voting
power over 5% or more of our outstanding capital stock measured by vote or
value.
CHANGES IN CONTROL
In the event of a change in control as described in the plan, the surviving
entity may assume or substitute for rights outstanding under the purchase plan.
If the surviving entity does not assume or substitute for outstanding rights,
then a participant's accumulated payroll deductions shall be used to purchase
shares immediately prior to the change in control, and their outstanding rights
thereafter shall be terminated.
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AUTHORIZED SHARES
The purchase plan authorizes the issuance of 400,000 shares of common stock
under the purchase plan which amount is increased each anniversary of the
listing date for trading of our common stock beginning 2001 and continuing
through and including the tenth anniversary of the listing date in 2010, by the
lesser of (1) 350,000 shares (2)1.5% of the number of shares of common stock
outstanding on that date or (3) a lesser number of shares as determined by the
board of directors.
401(K) PLAN
In 1995, we adopted an employee savings plan covering our employees.
Pursuant to the 401(k) plan, eligible employees may elect to reduce their
current compensation by up to the lesser of 20% of their annual compensation or
the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) plan. In addition, eligible employees may make
rollover contributions to the 401(k) plan from a tax-qualified retirement plan.
The 401(k) plan is intended to qualify under Section 401 of the Code, so that
contributions by employees or Endwave to the 401(k) plan, and income earned on
the 401(k) plan contributions, are not taxable to employees until withdrawn from
the 401(k) plan, and so that contributions by Endwave, if any, will be
deductible by Endwave when made. Effective April 1, 2000, Endwave provides a
matching contribution of $0.50 per $1.00 up to the first 6% per year.
OFFICER RETENTION PLAN
In March 2000, our board of directors adopted our Officer Retention Plan.
The retention plan provides for the payment of severance benefits and the
acceleration of options granted to our officers upon specified events, as
described below.
INVOLUNTARY TERMINATION WITHOUT MISCONDUCT AND PRIOR TO A CHANGE IN CONTROL
The retention plan provides that in the event an officer is terminated for
reasons other than misconduct, as defined in the plan, and prior to a change in
control, the officer will be entitled to salary and continuation of benefits
based on his length of service and position with Endwave as follows:
o our chief executive officer will receive 12 months' salary or 2
months' salary for each completed year of service, whichever is
greater;
o our chief operating officer and chief financial officer each will
receive 9 months' salary or 1.5 months' salary for each completed year
of service, whichever is greater; and
o each executive vice president and vice president will receive 6
months' salary or 1 month's salary for each completed year of service,
whichever is greater.
Additionally, each officer will receive a prorated bonus for the year in
which terminated. All options awarded prior to our merger with Milliwave, if
any, will immediately vest in full, and all options awarded following our merger
with Milliwave will vest as though the officer had remained employed for twice
the severance period described above.
CHANGE IN CONTROL
Upon a change in control, as defined in the plan, any options awarded to
officers prior to our merger with Milliwave will immediately vest in full.
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INVOLUNTARY TERMINATION WITHOUT MISCONDUCT WITHIN SIX MONTHS FOLLOWING A
CHANGE IN CONTROL
The retention plan provides that in the event an officer is terminated for
reasons other than misconduct and within six months of a change in control of
Endwave, the officer will receive salary, continuation of benefits and option
vesting for double the length of time the officer would have received had the
officer been involuntarily terminated with no change in control, as described
above.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Delaware corporate law authorizes a court to award, or a corporation's
board of directors to grant indemnity to directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances
for liabilities, including reimbursement for expenses incurred, arising under
the Securities Act.
As permitted by Delaware law, our certificate of incorporation, as in
effect upon the closing of this offering, includes a provision that eliminates
the personal liability of its directors for monetary damages for breach of
fiduciary duty as a director, except for liability:
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
o under Section 174 of the Delaware law regarding unlawful payments of
dividends and unlawful stock repurchases or redemptions; or
o for any transaction from which the director derived an improper
personal benefit.
Our certificate of incorporation and/or our bylaws as such will be in
effect upon the closing of this offering, provide that:
o we are required to indemnify our directors and officers to the fullest
extent permitted by Delaware law, so long as such person acted in good
faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of Endwave, and with respect to any
criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful;
o we are permitted to indemnify our other employees to the extent that
we indemnify our officers and directors, unless otherwise required by
law, our certificate of incorporation, our bylaws or agreements;
o we are required to advance expenses, as incurred, to our directors and
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to certain very limited exceptions;
and
o the rights conferred in our bylaws are not exclusive.
Prior to the effective time of this offering, we intend to enter into
indemnity agreements with each of our current directors and officers to give our
directors and officers additional contractual assurances regarding the scope of
the indemnification set forth in our certificate of incorporation and our bylaws
and to provide additional procedural protections. Upon completion of this
offering, we will also maintain directors and officers liability insurance. At
present, we are not aware of any pending litigation or proceeding involving any
of our directors, officers or employees regarding which indemnification is
sought, nor are we aware of any threatened litigation that may result in claims
for indemnification.
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CERTAIN TRANSACTIONS
The following is a description of transactions in the last three years to
which we have been a party in which the amount involved in the transaction
exceeds $60,000 and in which any director, executive officer or holder of more
than 5% of our capital stock had or will have direct or indirect material
interest other than compensation arrangements that are otherwise described under
"Management."
RECAPITALIZATION
In March 2000, we underwent a recapitalization at the time of our merger
with Milliwave in which we exchanged all outstanding shares of our Series A
through Series G preferred stock for shares of our Series E-1 through Series E-7
preferred stock resulting in the issuance of the following: 426,250 shares of
Series E-1 preferred stock; 866,398 shares of Series E-2 preferred stock;
991,423 shares of Series E-3 preferred stock; 1,246,464 shares of Series E-4
preferred stock; 2,481,677 shares of Series E-5 preferred stock; 3,456,391
shares of Series E-6 preferred stock; 2,449,636 shares of Series E-7 preferred
stock; and 13,963,063 shares of Series T-1 preferred stock, all of which shares
of Series T-1 preferred stock were issued to TRW in connection with our merger
with Milliwave.
CONSTITUTION OF BOARD OF DIRECTORS AND REGISTRATION RIGHTS
In connection with our merger with Milliwave, effective as of March 31,
2000, we amended our certificate of incorporation and entered into an Investors'
Rights Agreement to provide holders of our Series E-1 through E-7 preferred
stock with the right to designate two members of our board of directors and our
Series T-1 preferred stock (held solely by TRW) with the right to designate two
members of our board of directors. This right terminates upon the closing of
this offering. Esfandiar Lohrasbpour and Robert Pavey are the current board
members designated by the Series E-1 through E-7 preferred stock, and Wes Bush
and Timothy Hannemann are the current board members designated by TRW, as the
sole holder of our Series T-1 preferred stock.
Under our Investors' Rights Agreement, we have granted to preferred stock
purchasers registration rights as to the shares of common stock acquired by them
upon conversion of their preferred stock shares or upon exercise of warrants
held by them, as the case may be. For more information regarding this agreement,
see "Description of Capital Stock--Registration Rights."
ISSUANCES OF NOTES AND WARRANTS AND SALES OF STOCK
Between October 1997 and March 2000, we sold an aggregate of 8,387,704
shares of our Series E-5, E-6 and E-7 preferred stock in three private
placements of preferred stock. In connection with these private placements, we
issued and sold subordinated notes to purchase preferred stock prior to the
private placements. These notes were automatically converted into preferred
stock at the closing of the private placement.
In October 1997, we issued and sold subordinated notes in the aggregate
principal amount of $2.5 million. In connection with the sale of these
subordinated notes, we entered into an agreement to issue warrants to purchase
shares of our preferred stock. Upon the closing of our Series E-5 preferred
stock financing, we issued warrants to purchase approximately 86,000 shares of
our Series E-5 preferred stock with an exercise price of $6.00 per share. The
warrants for Series E-5 preferred stock were exercised in full upon the closing
of the Series E-5 financing. In March 1998 and May 1998, we issued and sold an
aggregate of 2,481,677 shares of our Series E-5 preferred stock at $6.00 per
share in exchange for $12.3 million in cash, forgiveness of the subordinated
notes and the exercise of the Series E-5 warrants.
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In January, February and March of 1999, we issued and sold subordinated
notes in the aggregate principal amount of $5.1 million. In connection with the
issuance and sale of these subordinated notes, we entered into an agreement to
issue warrants to purchase shares of our preferred stock. Upon the closing of
our Series E-6 preferred stock financing, we issued warrants to purchase
approximately 171,000 shares of our Series E-6 preferred stock with an exercise
price of $6.004 per share. In April 1999, we issued and sold an aggregate of
3,456,391 shares of our Series E-6 preferred stock at $6.004 per share in
exchange for $15.6 million in cash and forgiveness of the subordinated notes.
In January 2000, we issued and sold subordinated notes in the aggregate
principal amount of $5.0 million. In connection with the issuance and sale of
these subordinated notes, we entered into an agreement to issue warrants to
purchase shares of our preferred stock. Upon the closing of our Series E-7
preferred stock financing we issued warrants to purchase approximately 100,000
shares of our Series E-7 preferred stock with an exercise price of $10.12 per
share. In March 2000, we issued and sold an aggregate of 2,449,636 shares of our
Series E-7 preferred stock at $10.12 per share in exchange for $19.8 million in
cash and forgiveness of the subordinated notes.
The following table summarizes our issuances of preferred stock,
subordinated notes and warrants to directors, executive officers, and holders of
more than 5% of our capital stock (prior to or upon the purchase of the
preferred stock or securities convertible into or exercisable for shares of our
preferred stock) within the three preceding fiscal years.
<TABLE>
<CAPTION>
SHARES OF
PREFERRED AGGREGATE AMOUNT
AGGREGATE AMOUNT STOCK OF CONSIDERATION
SHARES OF OF SUBORDINATED ISSUABLE PAID FOR
PREFERRED NOTES CONVERTED UPON PREFERRED STOCK,
STOCK (PRINCIPAL AND EXERCISE OF SUBORDINATED
INVESTOR PURCHASED INTEREST) WARRANTS NOTES AND WARRANTS
-------- ------------- ------------------ -------------- -------------------
<S> <C> <C> <C> <C>
Entities affiliated with
Crescendo Ventures...................... 899,324 $ 1,274,868 33,063 $ 6,416,386
Entities affiliated with Goldman Sachs and
Company................................. 543,036 1,926,603 42,327 3,757,020
Greylock Equity............................ 46,010 230,055 -- 276,063
Entities affiliated with Hallador Venture
Partners................................ 239,393 603,708 8,060 1,775,595
Harris Corporation......................... 362,483 1,078,897 23,282 2,446,404
Entities affiliated with INVESCO Private
Capital, Inc............................ 1,462,045 977,125 19,309 9,997,127
Entities affiliated with Kinship Partners
II, L.P................................. 124,907 628,233 9,867 790,528
Entities affiliated with Morgenthaler
Ventures................................ 1,062,807 1,757,908 37,300 8,840,790
Entities affiliated with Oak Investment
Partners................................ 547,432 1,678,586 35,786 3,710,727
Entities affiliated with Sigma Partners.... 25,913 129,575 -- 155,486
Entities affiliated with Temasek Holdings
(Private) Limited....................... 875,762 -- -- 5,435,001
Entities affiliated with Vertex Venture
Holdings Pte Ltd........................ 503,449 651,506 18,116 3,236,799
Entities affiliated with Walden
International Investment Group.......... 899,007 1,079,426 23,546 7,837,986
</TABLE>
TRANSACTIONS WITH TRW
In connection with our merger with Milliwave in March 2000, we issued to
TRW 13,963,063 shares of our Series T-1 preferred stock, which will convert into
common stock on a one-for-one basis upon the closing of this offering. We also
entered into the following agreements with TRW:
o A supply agreement, which provides for our purchase from TRW of
specified gallium arsenide devices. Our supply agreement with TRW
provides for discounted per wafer
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pricing when we order specified levels of these gallium arsenide
devices and provides for increased pricing when we order less than
that volume of devices. The quantities and prices specified are
quarterly amounts and the prices, both discounted and standard
pricing, decrease throughout the life of the contract. For the three
months ended June 30, 2000, we purchased devices from TRW under this
agreement for an aggregate amount of approximately $5.2 million.
Additonally, as of June 30, 2000, we owed TRW approximately $2.8
million for inventory purchased prior to our merger. We produce
specific products that utilize these gallium arsenide devices, and
because we are dependent upon the timing of orders from our customers,
we cannot predict the number of these devices that we will require in
future periods. To the extent that we require fewer gallium arsenside
devices from TRW in the future, we would expect our expenses to
correspondingly decrease.
o A services agreement for the provision of technical support
related to the production of Endwave products incorporating
TRW-produced devices, which also includes licensed rights to related
later developed intellectual property. As of June 30, 2000, we had
incurred total expenses of approximately $71,000 under our services
agreement with TRW. We expect our expenses under the services
agreement to remain relatively constant for the foreseeable future.
o Two agreements for RF subsystems in fulfillment of TRW's
contractual arrangements with Nokia and Nortel Networks. Our
agreements with TRW which correspond to TRW's agreements with Nokia
and Nortel Networks contain warranty and product liability provisions
relating to products delivered by us to Nokia and Nortel Networks
under our agreements with TRW. For the three months ended June 30,
2000, we had recognized revenues of approximately $2.5 million
attributable to the TRW agreements relating to Nokia and revenues of
approximately $3.4 million attributable to the TRW agreement relating
to Nortel Networks. Because revenues under these agreements are
dependent on the timing of orders received from Nokia and Nortel
Networks and our shipments of products to these customers, we cannot
predict the revenues that may be derived from these agreements in
future periods.
o A license agreement providing for the use of TRW intellectual
property in products we produce for Nokia and Nortel Networks.
The financial terms of each of our supply and services agreements with TRW
are at least as favorable as would have been gained in arms length negotiations
with an unrelated third party.
For additional details about our existing agreements with TRW, see
"Business--TRW Relationship."
For a transition period following our merger, as an accommodation, TRW
provided our Diamond Springs facility with cash management services. These
services included providing funds to our Diamond Springs facility to cover
operating expenses. Through June 30, 2000 we had an aggregate amount payable to
TRW under this arrangement of approximately $5.6 million for reimbursement of
these funds. This practice was discontinued in the third quarter of fiscal 2000.
TRANSACTIONS WITH MANAGEMENT
Mr. Keible, our Chief Executive Officer and President, is a substantial
shareholder in and a director of Promex Industries, which leases approximately
12,000 square feet to us at our Santa Clara facility for an aggregate annual
rent of approximately $144,000 under a lease expiring November 2000.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our outstanding common stock as of June 30, 2000:
o each person or group who beneficially owns more than 5% of our common
stock;
o each of our directors;
o each of the executive officers; and
o all of our executive officers and directors as a group.
Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission and generally includes shares over which a
person exercises sole or shared voting or investment power. Except as indicated
by footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all shares of common stock held by them. Shares of common stock subject to
options currently exercisable or exercisable within 60 days of June 30, 2000 are
deemed outstanding for calculating the percentage of outstanding shares of the
person holding these options, but are not deemed outstanding for calculating the
percentage of any other person. Applicable percentage ownership in the following
table is based on 26,543,266 shares of common stock outstanding as of June 30,
2000, after giving effect to the conversion of all outstanding preferred stock
into common stock upon the closing of the offering, and 32,543,266 shares of
common stock outstanding immediately following the completion of this offering.
Unless otherwise indicated in the table, the address of each stockholder
identified in the table is 321 Soquel Way, Sunnyvale, California 94085.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
-------------------------------
NAME AND ADDRESS SHARES BEFORE OFFERING AFTER OFFERING
---------------- -------------- --------------- ---------------
<S> <C> <C> <C>
TRW Inc.......................................................... 13,963,063 52.6% 42.9%
1900 Richmond Road
Cleveland, OH 44124
Entities Affiliated with Morgenthaler
Ventures (1)..................................................... 1,578,579 5.9 4.8
Terminal Tower
50 Public Square, Suite 2700
Cleveland, OH 44113
Entities Affiliated with Invesco
Private Capital, Inc. (2)........................................ 1,481,355 5.6 4.5
1166 Avenue of the Americas
New York, NY 10036
Edward A. Keible, Jr. (3)........................................ 864,249 3.2 2.6
Donald J. Dodson, Jr. (4)........................................ 252,300 * *
Bruce M. Margetson (5)........................................... 220,800 * *
Julianne M. Biagini (6).......................................... 174,248 * *
James G. Bybokas (7)............................................. 210,000 * *
John J. Mikulsky (8)............................................. 252,499 * *
Wes Bush......................................................... -- -- --
Timothy Hannemann................................................ -- -- --
Esfandiar Lohrasbpour (1)........................................ 1,481,355 5.6 4.5
Robert D. Pavey (2).............................................. 1,448,357 5.5 4.4
Edward C.V. Winn (9)............................................. -- -- --
All directors and executive officers as a group
(11 persons)(10).............................................. 4,789,560 17.0% 14.0%
</TABLE>
--------------
* Represents beneficial ownership of less than 1%.
(1) Includes 1,047,208 shares held by Morgenthaler Venture Partners III
and 494,071 shares held by Morgenthaler Venture Partners IV. Also
includes 37,300 shares issuable upon exercise of warrants exercisable
within 60 days of June 30, 2000. Mr. Pavey, a director of Endwave, is
a general partner of Morgenthaler Management Partners which is
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the manager of the Morgenthaler funds. In such capacity, Mr. Pavey may
be deemed to have an indirect pecuniary interest in an indeterminate
portion of the shares beneficially owned by the Morgenthaler funds.
Mr. Pavey disclaims beneficial ownership of the shares held by the
Morgenthaler funds within the meaning of Rule 13d-3 under the
Securities Act of 1934.
(2) Includes 31,799 shares held by Chancellor Private Capital Offshore
Partners I, C.V., 339,194 shares held by Chancellor Private Capital
Offshore Partners II L.P., 206,148 shares held by Chancellor Private
Capital Partners III L.P. and 884,904 shares held by Citiventure 96
Partnership Ltd. Also includes 19,310 shares issuable upon exercise of
warrants exercisable within 60 days of June 30, 2000. INVESCO Private
Capital, Inc. is the investment advisor and manager to the Chancellor
funds and Citiventure 96 Partnership Ltd. Mr. Lohrasbpour, a director
of Endwave, is a Managing Director of INVESCO Private Capital, Inc. In
such capacity, Mr. Lohrasbpour may be deemed to have an indirect
pecuniary interest in an indeterminate portion of the shares
beneficially owned by the Chancellor funds and Citiventure 96
Partnership Ltd. Mr. Lohrasbpour disclaims beneficial ownership of the
shares held by the Chancellor funds and Citiventure 96 Partnership
Ltd. within the meaning of Rule 13d-3 under the Securities Act of
1934.
(3) Includes 645,437 shares issuable upon exercise of options exercisable
within 60 days of June 30, 2000, 607,376 of which will be unvested and
therefore subject to repurchase by Endwave upon termination of
employment with Endwave.
(4) Represents shares issuable upon exercise of options exercisable within
60 days of June 30, 2000, 236,531 of which will be unvested and
therefore subject to repurchase by Endwave upon termination of
employment with Endwave.
(5) Represents shares issuable upon exercise of options exercisable within
60 days of June 30, 2000, 207,000 of which will be unvested and
therefore subject to repurchase by Endwave upon termination of
employment with Endwave.
(6) Includes 4,937 shares held in a trust for the benefit of Ms. Biagini's
daughter. Also includes 135,142 shares issuable upon exercise of
options exercisable within 60 days of June 30, 2000, 125,750 of which
will be unvested and therefore subject to repurchase by Endwave upon
termination of employment with Endwave.
(7) Includes 188,500 shares issuable upon exercise of options exercisable
within 60 days of June 30, 2000, 134,688 of which will be unvested and
therefore subject to repurchase by Endwave upon termination of
employment with Endwave.
(8) Includes 231,718 shares issuable upon exercise of options exercisable
within 60 days of June 30, 2000, 165,000 of which will be unvested and
therefore subject to repurchase by Endwave upon termination of
employment with Endwave.
(9) Since June 30, 2000, Mr. Winn has been granted an option to purchase
40,000 shares.
(10) See footnotes 1 through 9 above, as applicable.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the closing of this offering, we will be authorized to issue
100,000,000 shares of common stock, $.001 par value per share, and 5,000,000
shares of undesignated preferred stock, $.001 par value per share. Immediately
following the closing of this offering, based on the number of shares
outstanding as of June 30, 2000 held of record by approximately 167 stockholders
and assuming the conversion of all outstanding shares of preferred stock, there
will be 32,543,266 shares of common stock outstanding.
COMMON STOCK
As of June 30, 2000 the issued and outstanding shares of common stock are,
and the shares of common stock being offered by us hereby will be upon payment
therefore, validly issued, fully paid and nonassessable. Subject to the prior
rights of the holders of any preferred stock, the holders of outstanding shares
of common stock are entitled to receive dividends out of assets legally
available therefore at such times and in such amounts as the board of directors
may from time to time determine. The shares of common stock are neither
redeemable nor convertible and the holders thereof have no preemptive or
subscription rights to purchase any securities of Endwave. Upon liquidation,
dissolution or winding up of Endwave, the holders of common stock are entitled
to receive pro rata the assets of Endwave which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of any preferred stock then outstanding. Each
outstanding share of common stock is entitled to one vote on all matters
submitted to a vote of stockholders.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of preferred
stock will automatically convert into shares of common stock. Effective upon the
closing of this offering, we will be authorized to issue 5,000,000 shares of
undesignated preferred stock. The board of directors will have the authority to
issue the preferred stock in one or more series and to fix the price, rights,
preferences, privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
a series or the designation of such series, without any further vote or action
by our stockholders. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change in
control of Endwave without further action by the stockholders and may adversely
affect the market price of the common stock and the voting and other rights of
the holders of common stock. We have no current plans to issue any shares of
preferred stock.
WARRANTS
Upon the closing of this offering, a warrant to purchase 6,250 shares of
our common stock at an exercise price of $12.00 per share will be outstanding
and exercisable until March 15, 2003.
REGISTRATION RIGHTS
The holders of 25,782,488 shares of preferred stock are entitled to
registration of these shares under the Securities Act of 1933. Under the terms
of an agreement between Endwave and the holders, after the date of this
offering, the holders of at least 20% of these shares may request, on no more
than three occasions, that we use our best efforts to register their shares,
provided the offering includes at least 30% of the registrable securities then
outstanding. In addition, if we
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<PAGE>
propose to register any of our securities under the Securities Act, either for
our own account or for the account of other security holders exercising
registration rights, the holders are entitled to notice of such registration and
are entitled to include shares of such common stock therein. The holders of
these shares may also require us to register all or a portion of these shares on
Form S-3 under the Securities Act when use of such form becomes available to
Endwave. All registration rights described above are subject to conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares to be included in such registration. If the holders, by
exercising their demand registration rights, cause a large number of securities
to be registered and sold in the public market, such sales could have an adverse
effect on the market price for our common stock. If we were to initiate a
registration and include shares held by such holders pursuant to the exercise of
their piggyback registration rights, such sales may have an adverse effect on
our ability to raise capital.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS
AND OF DELAWARE LAW
Upon the closing of this offering, we will be subject to the provisions of
Section 203 of the Delaware General Corporation Law regulating corporate
takeovers. Section 203 prevents Delaware corporations, including those that are
listed on the Nasdaq National Market, from engaging, under certain
circumstances, in a "business combination," which includes a merger or sale of
more than 10% of the corporation's assets, with any "interested stockholder,"
that is, a stockholder who owns 15% or more of the corporation's outstanding
voting stock, as well as affiliates and associates of any such person, for three
years following the date that such stockholder became an "interested
stockholder" unless:
o the transaction that resulted in the stockholder becoming an
"interested stockholder" was approved by the board of directors prior
to the date the "interested stockholder" attained such status;
o upon consummation of the transaction that resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced, excluding those shares owned by
(i) persons who are directors as well as officers and (ii) employee
stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer; or
o on or subsequent to such date, the "business combination" is approved
by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least two-thirds
of the outstanding voting stock that is not owned by the "interested
stockholder."
A Delaware corporation may "opt out" of Section 203 with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares. We
have not "opted out" of the provisions of Section 203. This statute could
prohibit or delay mergers or other takeover or change-of-control attempts with
respect to Endwave and, accordingly, may discourage attempts to acquire us.
CHARTER DOCUMENTS
Our certificate of incorporation and bylaws include a number of provisions
that may have the effect of deterring or impeding hostile takeovers or changes
of control or management. These provisions include:
o our board of directors is classified into three classes of directors
with staggered three-year terms;
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o the authority of our board of directors to issue up to 5,000,000
shares of preferred stock and to determine the price and the rights
preferences and privileges of these shares, without stockholder
approval;
o elimination of the ability of our stockholders to act by written
consent instead of at a duly called meeting of stockholders;
o no provision for cumulative voting;
o procedures for the advance notification of stockholder nominations and
proposals;
o the ability of our board of directors to alter our bylaws in certain
respects without stockholder approval; and
o the indemnification of officers and directors against losses incurred
during investigations and legal proceedings resulting from their
service to Endwave.
Such provisions may have the effect of delaying or preventing a change of
control.
Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that they may incur in investigations and
legal proceedings resulting from their services to Endwave, which may include
services in connection with takeover defense measures. Such provisions may have
the effect of preventing changes in our management.
OPTION ACCELERATION AND SEVERANCE BENEFITS
In March 2000 in connection with our merger with Milliwave, our board of
directors approved a plan providing for the acceleration of vesting, under
certain circumstances, of a percentage of the stock options granted to our
officers under our equity incentive plans prorated based on years of employment
with us. Under the plan, an unvested portion of each officer's stock options
under our equity incentive plans becomes vested and exercisable upon a change in
control. In addition, severance benefits will be paid to such officer if
terminated without cause or if Endwave is acquired pursuant to a change in
control and the officer is terminated without cause within six months of the
change in control.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Computershare
Trust Company, Inc.
NATIONAL MARKET LISTING
Our common stock has been approved for listing on the Nasdaq Stock
Market's National Market under the symbol "ENWV."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices from time to time. For a
period of 180 days or more following this offering a large number of shares of
our common stock will not be freely tradable due to contractual and legal
restrictions as described below. Sales of substantial amounts of our common
stock in the public market after these restrictions lapse could depress the
prevailing market price and limit our ability to raise equity capital in the
future.
Upon the closing of this offering, and based on shares outstanding as of
June 30, 2000, we will have an aggregate of 32,543,266 shares of common stock
outstanding, assuming no exercise of the underwriters' over-allotment option and
no exercise of outstanding options or warrants. Of the outstanding shares, the
shares sold in this offering will be freely tradable, except that any shares
held by our "affiliates," as that term is defined in Rule 144 promulgated under
the Securities Act, may only be sold in compliance with the limitations
described below. The remaining shares of common stock held by existing
stockholders will be deemed restricted securities as defined under Rule 144.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which are summarized below. Shares will be
available for sale in the public market at the following times:
NUMBER OF SHARES DATE
---------------- -----
6,440,084 After the date of this prospectus, including
shares sold in this offering
25,906,808 At various times after 180 days from the date of
this prospectus
In general, under Rule 144, as currently in effect, a person, or persons
whose shares are aggregated, including an affiliate, who has beneficially owned
shares for at least one year is entitled to sell, within any three-month period
commencing 90 days after the date of this prospectus, a number of shares that
does not exceed the greater of 1% of the then outstanding shares of common
stock, which will equal approximately 325,433 shares immediately after this
offering or the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such sale is filed,
subject to certain restrictions. In addition, a person who is not deemed to have
been an affiliate of ours at any time during the 90 days preceding a sale and
who has beneficially owned the shares proposed to be sold for at least two years
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from an
affiliate of ours, the person's holding period for the purpose of effecting a
sale under Rule 144 commences on the date of transfer from the affiliate.
Any of our employee, officer, director, advisor or consultant who purchased
his or her shares pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding period restrictions, in each case commencing 90
days after we become subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934.
LOCK-UP AGREEMENTS
Our directors, officers and stockholders who hold approximately 25,906,000
shares in the aggregate, have agreed that they will not offer, sell or agree to
sell, directly or indirectly, or otherwise dispose of any shares of common stock
without the prior written consent of Deutsche Bank Securities Inc. for a period
of 180 days from the date of this prospectus. Deutsche Bank Securities Inc. has
advised us that they have no current intentions to release any shares subject to
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lock-up agreements prior to the expiration of the full 180-day term of the
lock-up agreement. They will only release shares subject to a lock-up agreement
in circumstances to be determined on a case by case basis. In considering prior
requests to release shares from lock-up agreements, Deutsche Bank Securities
Inc. has considered such factors as the likelihood of a material market effect
from the sale of released shares, the present market price for the shares
relative to the original offering price, the hardship of any person requesting a
waiver and the desirability of fostering an orderly market for the shares.
Shares purchased by our directors, officers and stockholders in the public
market following the offering, or through our directed shares program, are not
subject to lock-up agreements. Please see "Underwriting."
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of the prospectus, except we
may issue, and grant options to purchase, shares of common stock under our 2000
Equity Incentive Plan, our 2000 Employee Stock Purchase Plan and our 2000
Non-Employee Director Plan. In addition, we may issue shares of common stock in
connection with any acquisition of another company if the terms of such issuance
provide that such common stock shall not be resold prior to the expiration of
the 180-day period referenced in the preceding sentence.
REGISTRATION RIGHTS
Following this offering, some of our stockholders will have registration
rights. Please see, "Description of Capital Stock--Registration Rights."
STOCK OPTIONS
In addition, options to purchase 4,486,138 shares of our common stock are
outstanding as of June 30, 2000 under our 1992 Stock Option Plan and our 2000
Equity Incentive Plan. Following this offering, we expect to register the shares
underlying these options. This registration statement will automatically become
effective upon filing. Accordingly, subject to the exercise of such options,
shares included in such registration statement will be available for sale in the
open market immediately after the 180-day lock-up period expires.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., J.P. Morgan Securities Inc., U.S. Bancorp Piper Jaffray Inc. and Epoch
Securities, Inc. have severally and not jointly agreed to purchase from us, the
following respective number of shares of our common stock at a public offering
less the underwriting discounts and commissions set forth on the cover page of
this prospectus:
NUMBER OF
UNDERWRITERS: SHARES
--------------- ---------------
Deutsche Bank Securities Inc. ............................ 2,187,000
J.P. Morgan Securities Inc. .............................. 1,044,900
U.S. Bancorp Piper Jaffray Inc. .......................... 1,044,900
Epoch Securities, Inc. ................................... 583,200
Banc of America Securities LLC. .......................... 90,000
Chase Securities Inc. .................................... 90,000
CIBC World Markets Corp. ................................. 90,000
Dain Rauscher Incorporated................................ 90,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated........ 90,000
Morgan Stanley & Co. Incorporated......................... 90,000
Robertson Stephens, Inc. ................................. 90,000
Wasserstein Perella Securities, Inc. ..................... 90,000
First Security Van Kasper................................. 60,000
Hoak Breedlove Wesneski & Co. ............................ 60,000
Hoefer & Arnett, Inc. .................................... 60,000
Midwest Research.......................................... 60,000
Needham & Company, Inc. .................................. 60,000
Edgar M. Norris & Co. Inc. ............................... 60,000
Sands Brothers & Co., Ltd. ............................... 60,000
---------------
Total..................................................... 6,000,000
===============
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus and
to dealers at a price that represents a concession not in excess of $0.59
per share under the public offering price. The underwriters may allow, and these
dealers may re-allow, a concession of not more than $0.10 per share to
certain other dealers. After the initial public offering, representatives of the
underwriters may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to additional shares
at the public offering price, less the underwriting fees. The underwriters may
exercise this option solely to cover over-allotments, if any, made in connection
with this offering. To the extent that the underwriters exercise this option,
each underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of additional shares of common stock
as the number of shares of common stock to be purchased by it in the above table
bears to the total number of shares of common stock offered hereby. We will be
obligated, pursuant to the option, to sell these additional shares of common
stock to the underwriters to the extent the option is exercised. If any
additional shares of common stock are purchased, the underwriters will offer the
additional shares on the same terms as those on which common stock offered
hereby are being offered.
81
<PAGE>
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is 7% of the initial public offering price. We have
agreed to pay the underwriters the following fees, assuming either no exercise
or full exercise by the underwriters of the underwriters' over-allotment option:
<TABLE>
<CAPTION>
TOTAL FEES
---------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
FEE PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
-------------- --------------------- ----------------------
<S> <C> <C> <C>
Fees paid by Endwave............................ $ 0.98 $ 5,880,000 $ 6,762,000
</TABLE>
We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.
Each of our officers and directors, and substantially all of our
stockholders and holders of options and warrants to purchase our stock, have
agreed not to offer, sell, contract to sell or otherwise dispose of, or enter
into any transaction that is designed to, or could be expected to, result in the
disposition of any shares of our common stock or other securities convertible
into or exchangeable or exercisable for shares of our common stock or
derivatives of our common stock owned by these persons prior to this offering or
common stock issuable upon exercise of options or warrants held by these persons
for a period of 180 days after the effective date of the registration statement
of which this prospectus is a part without the prior written consent of Deutsche
Bank Securities Inc. This consent may be given at any time without public
notice. We have entered into a similar agreement with the representatives of the
underwriters. There are no agreements between the representatives and any of our
stockholders or affiliates releasing them from these lock-up agreements prior to
the expiration of the 180-day period.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain, or otherwise affect the
market price of our common stock. The underwriters may over-allot shares of our
common stock in connection with this offering, thus creating a short position
for their own account. Short sales involve the sale by the underwriters of a
greater number of shares than they are committed to purchase in the offering. A
short position may involve either "covered" short sales or "naked" short sales.
Covered short sales are sales made in an amount not greater than the
underwriters' overallotment option to purchase additional shares in the offering
described above. The underwriters may close out any covered short position by
either exercising their overallotment option or purchasing shares in the open
market. In determining the source of shares to close the covered short position,
the underwriters will consider, among other things, the price of shares
available for purchase in the open market as compared to the price at which they
may purchase shares through the overallotment option. Naked short sales are
sales in excess of the overallotment option. The underwriters must close out any
naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering.
Accordingly, to cover these short sales positions or to stabilize the
market price of our common stock, the underwriters may bid for, and purchase,
shares of our common stock in the open market. These transactions may be
effected on the Nasdaq National Market or otherwise. Additionally, the
representatives, on behalf of the underwriters, may also reclaim selling
concessions allowed to an underwriter or dealer. Similar to other purchase
transactions, the underwriters' purchases to cover the syndicate short sales or
to stabilize the market price of our common stock may have the effect of raising
or maintaining the market price of our common stock or preventing or mitigating
a decline in the market price of our common stock. As a result, the price of the
shares of
82
<PAGE>
our common stock may be higher than the price that might otherwise exist in the
open market. The underwriters are not required to engage in these activities
and, if commenced, may end any of these activities at any time.
A prospectus in electronic format will be made available on Internet
websites maintained by one or more of the lead or co-managers of this offering
and may also be made available on websites maintained by other underwriters.
Other than the prospectus in electronic format, the information on any
underwriter's web site and any information contained in any other web site
maintained by an underwriter is not part of the prospectus or the registration
statement of which the prospectus forms a part, has not been approved and/or
endorsed by us or any underwriter in its capacity as underwriter and should not
be relied upon by investors. The underwriters may agree to allocate a number of
shares to underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by the lead managers to underwriters
that may make Internet distributions on the same basis as other allocations.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 9% of our common stock being sold in this offering
for our vendors, employees, family members of employees, customers and other
third parties. The number of shares of our common stock available for sale to
the general public will be reduced to the extent these reserved shares are
purchased. Any reserved shares that are not purchased by these persons will be
offered by the underwriters to the general public on the same basis as the other
shares in this offering.
Epoch Securities, Inc. is an investment banking firm formed in November
1999. In addition to this offering, Epoch Securities, Inc. has engaged in the
business of public and private equity investing and financing and financial
advisory services since its inception. The senior investment banking team of
Epoch Securities, Inc. has in excess of 40 years of experience in the securities
industry. Epoch Securities, Inc. does not have any material relationship with
Endwave or any of its officers, directors or other controlling persons, except
that Epoch Securities has a contractual relationship with Endwave under the
terms of the underwriting agreement entered into in connection with this
offering.
The corporate parents of Charles Schwab & Co., Inc., Ameritrade (Inc.) and
TD Waterhouse Investor Services, Inc. are equity investors in Epoch's corporate
parent. Under the terms of Epoch's distribution agreement, Charles Schwab,
Ameritrade and TD Waterhouse are entitled to receive an allocation of any shares
allocated in the offering to Epoch on a free retention basis. Until they accept
this allocation, however, they are not obligated to take any shares. If they do
take shares, they are obligated to try to sell those shares to brokerage
customers who buy shares through the Internet, a computerized system or other
automated system, but they otherwise are entitled to allocate shares following
their customary practices. Charles Schwab, Ameritrade and TD Waterhouse are not
underwriters under the underwriting agreement. Because of their current
relationship to Epoch and their role in the distribution of securities, however,
they may be deemed to be underwriters as that term is defined in the Securities
Act in connection with this offering. They believe their activities fall within
the selling dealer exception to the definition and, therefore, believe that they
are not "underwriters" under the Securities Act.
U.S. Bancorp Piper Jaffray acted as our broker in connection with our
merger with Milliwave. As compensation for those services, we paid U.S. Bancorp
Piper Jaffray a cash fee of $732,381. In addition, an investment fund composed
of officers of U.S. Bancorp Piper Jaffray participated in our Series E-7
preferred stock financing in March 2000. The investment fund purchased 49,407
shares of preferred stock for $499,999. The investment fund subsequently sold
7,410 shares of the preferred stock to a partnership also composed of officers
of U.S. Bancorp Piper Jaffray.
PRICING OF THIS OFFERING
Prior to this offering, there has been no established trading market for
our common stock. Consequently, the initial public offering price for our common
stock has been determined by
83
<PAGE>
negotiations among us and the representatives of the underwriters. Among the
primary factors considered in determining the initial public offering price
were:
o prevailing market conditions;
o our results of operations in recent periods;
o the present stage of our development;
o the market capitalization and stage of development of the other
companies that we and the representatives of the underwriters believe
to be comparable to our business; and
o estimates of our business potential.
84
<PAGE>
LEGAL MATTERS
Cooley Godward LLP, San Francisco, California, will pass upon the validity
of the shares of common stock offered hereby for us. Gibson, Dunn & Crutcher
LLP, San Francisco, California, will pass upon certain legal matters in
connection with this offering for the underwriters. An investment partnership
associated with Cooley Godward LLP owns 32,337 shares of our common stock.
EXPERTS
The financial statements of TRW Milliwave Inc. at December 31, 1999 and
1998, and for the two years then ended and for the periods from October 1, 1997
through December 31, 1997 and from January 1, 1997 through September 30, 1997,
appearing in this prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere in this
prospectus, and are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
The financial statements of Endgate Corporation at June 30, 1999 and 1998,
and for each of the years in the period ended June 30, 1999, appearing in this
prospectus have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere in this prospectus, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The valuation report referred to in this prospectus was prepared in
connection with the merger between Endgate and TRW Milliwave by American
Appraisal Associates, Inc., an independent appraisal firm. The appraisal was
prepared for TRW's Space and Electronics Group for financial reporting purposes.
It was used in determining the total consideration, and the allocation of the
purchase price to, among other things, the amount of in-process research and
development.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock.
For further information regarding us and our common stock, please refer to the
registration statement and exhibits and schedules filed as part of the
registration statement. Where we refer in the prospectus to a contract,
agreement or other document filed as an exhibit to the registration statement,
you should refer to the document filed as an exhibit for all the terms which may
be relevant or material for you.
Our prospectus, filed with the Securities and Exchange Commission and
available on their website set forth below, includes as Appendix A the text to a
Meet the Management presentation that is not included in the printed form of
this prospectus.
You may read and copy all or any portion of the registration statement or
any other information that we file at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC. Please call the Securities and Exchange Commission at 1-800-SEC-0330
for further information on the operation of the public reference rooms. Our
Securities and Exchange Commission filings, including the registration
statement, are also available to you on the Securities and Exchange Commission's
website (http://www.sec.gov).
Upon completion of this offering, we will become subject to the information
and reporting requirements of the Securities Exchange Act of 1934, and in
accordance therewith, will file periodic reports, proxy statements and other
information with the SEC.
We intend to provide our stockholders with annual reports containing
financial statements audited by an independent public accounting firm and to
make available to our stockholders quarterly reports containing unaudited
financial data for the first three quarters of each year.
85
<PAGE>
ENDWAVE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEX TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS FOR ENDWAVE CORPORATION
Unaudited Pro Forma Condensed Combining Statements of Operations.......................................... F-3
Notes to Unaudited Pro Forma Condensed Combining Financial Statements..................................... F-6
INDEX TO FINANCIAL STATEMENTS FOR TRW MILLIWAVE INC.
Report of Ernst & Young LLP, Independent Auditors......................................................... F-7
Balance Sheets............................................................................................ F-8
Statements of Operations.................................................................................. F-9
Statements of Changes in Stockholder's Equity............................................................. F-10
Statements of Cash Flows.................................................................................. F-11
Notes to Financial Statements............................................................................. F-12
INDEX TO CONDENSED UNAUDITED FINANCIAL STATEMENTS FOR ENDWAVE CORPORATION
Unaudited Balance Sheets.................................................................................. F-19
Unaudited Statements of Operations........................................................................ F-20
Unaudited Statement of Changes in Stockholders' Equity.................................................... F-21
Unaudited Statements of Cash Flows........................................................................ F-22
Notes to Condensed Unaudited Financial Statements......................................................... F-23
INDEX TO FINANCIAL STATEMENTS FOR ENDGATE CORPORATION
Report of Ernst & Young LLP, Independent Auditors......................................................... F-28
Balance Sheets............................................................................................ F-29
Statements of Operations.................................................................................. F-30
Statements of Changes in Stockholders' Equity............................................................. F-31
Statements of Cash Flows.................................................................................. F-32
Notes to Financial Statements............................................................................. F-33
</TABLE>
F-1
<PAGE>
ENDWAVE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
On March 31, 2000, Endgate merged with TRW Milliwave Inc., a wholly-owned
subsidiary of TRW Inc. In the merger, TRW Milliwave merged into Endgate and
Endgate issued shares of its capital stock to TRW in exchange for TRW's shares
in TRW Milliwave. Endgate was the surviving corporation in the merger and TRW
Milliwave ceased to exist as a separate legal entity. However, because TRW owned
more than half of Endgate's outstanding capital stock immediately after the
merger, TRW Milliwave is treated as the acquiring company for accounting
purposes. As a result, Endgate ceased to be a separate accounting entity as of
the date of the merger, and Endwave's financial statements prior to the merger
are those of TRW Milliwave. TRW Milliwave and Endwave have a fiscal year end of
December 31. Prior to the merger, Endgate's fiscal year end was June 30.
The total purchase costs of the transactions have been calculated with TRW
Milliwave treated as the accounting acquiror. As consideration for the merger,
we issued shares of Series T-1 preferred stock. The merger was accounted for
using the purchase method of accounting. The aggregate purchase price of $139.9
million was allocated to the assets and liabilities acquired based on their fair
values as follows (in thousands):
AMOUNT
---------------
Tangible net assets............................. $ 24,377
In-process research and development............. 11,700
Purchased technology............................ 16,100
Customer list................................... 2,600
Acquired workforce.............................. 4,900
Goodwill........................................ 80,218
---------------
$ 139,895
===============
In determining the total consideration as well as the allocation of the
purchase price including the amount of in-process research and development,
Milliwave considered as part of their analysis an appraisal prepared for TRW's
Space and Electronics Group by American Appraisal Associates, Inc., an
independent appraisal firm that used established valuation techniques
appropriate for the high technology industry. The amount allocated to in-process
research and development was expensed upon acquisition because technological
feasibility has not been established and no future alternative uses existed. The
in-process research and development was identified and valued through extensive
interviews and discussions with management and the analysis of data provided by
Endgate concerning developmental products, their respective stage of
development, the time and resources needed to complete them, their expected
income generating ability, target markets and associated risks. The income
approach, which includes an analysis of the markets, cash flows, and risks
associated with achieving such cash flows, was the primary technique utilized in
valuing the in-process research and development project. A portion of the
purchase price was allocated to the developmental project based on the appraised
fair value of such project.
The accompanying pro forma financial statements are presented in accordance
with Article 11 of Regulation S-X. The unaudited pro forma condensed combining
statements of operations were prepared as if the acquisition was completed on
January 1, 1999. To prepare the pro forma unaudited condensed combining
statements of operations, the Endgate statement of operations for the year ended
December 31, 1999 has been combined with the statement of operations of TRW
Milliwave for the period from January 1, 1999 to December 31, 1999. This method
of combining the companies is only for presentation of pro forma unaudited
condensed combining financial statements. The unaudited pro forma condensed
combining financial statements are subject to a number of estimates, assumptions
and uncertainties and do not purport to reflect the results of operations that
would have occurred had this acquisition taken place on the date indicated nor
do they purport to reflect results of operations that will occur in the future.
The unaudited pro forma condensed combining financial statements should be read
in conjunction with the historical financial statements of Endgate and TRW
Milliwave. The unaudited pro forma condensed combining statements of operations
do not include the $11.7 million charge for purchased in-process research and
development arising from this acquisition, as it is a non-recurring charge. This
charge is included in the actual consolidated statement of operations of TRW
Milliwave in the quarter ended March 31, 2000, the date of the acquisition.
F-2
<PAGE>
ENDWAVE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------
PRO FORMA PRO FORMA
ENDGATE MILLIWAVE ADJUSTMENTS NOTES COMBINED
------------ ----------- ------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues............................ $ 1,326 $ 12,419 $ -- $ 13,745
Development fees............................ 1,302 -- -- 1,302
----------- ---------- ------------ --------------
Total revenues............................ 2,628 12,419 -- 15,047
Costs and expenses:
Cost of product revenues.................... 7,278 11,221 -- 18,499
Research and development.................... 10,599 326 -- 10,925
Sales and marketing......................... 860 456 -- 1,316
General and administrative.................. 1,956 1,914 -- 3,870
Amortization of goodwill and other
intangible assets......................... -- 1,536 17,672 A 19,208
Amortization of deferred stock compensation* 710 -- -- 710
----------- ---------- ------------ --------------
Total costs and expenses.................. 21,403 15,453 17,672 54,528
Loss from operations........................... (18,775) (3,034) (17,672) (39,481)
Interest income (expense) and other,
net......................................... (585) -- -- (585)
----------- ---------- ------------ --------------
Net loss before income tax benefit (expense)... (19,360) (3,034) (17,672) (40,066)
Income tax benefit (expense)................... -- 518 (518) C --
----------- ---------- ------------ --------------
Net loss....................................... $ (19,360) $ (2,516) $ (18,190) $ (40,066)
=========== ========== ============ ==============
Basic and diluted net loss per share........... D $ (2.18)
==============
Shares used in computation of basic and
diluted net loss per share.................. 18,400,968
==============
--------------
*Amortization of deferred stock compensation:
Cost of product revenues.................... $ 84 $ -- $ -- $ 84
Research and development.................... 281 -- -- 281
Sales and marketing......................... 125 -- -- 125
General and administrative.................. 220 -- -- 220
----------- ---------- ------------ --------------
$ 710 $ -- $ -- $ 710
=========== ========== ============ ==============
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS.
F-3
<PAGE>
ENDWAVE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
-------------------------------------------------------------------
PRO FORMA PRO FORMA
ENDGATE MILLIWAVE ADJUSTMENTS NOTES COMBINED
--------- ------------ ------------ ------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues ....................... $ 1,522 $ 14,537 $ -- $ 16,059
Development fees........................ 1,605 946 -- 2,551
--------- ------------ ------------ ----------------
Total revenues........................ 3,127 15,483 -- 18,610
Costs and expenses:
Cost of product revenues................ 4,780 19,196 -- 23,976
Research and development................ 2,824 3,732 -- 6,556
Sales and marketing..................... 437 854 -- 1,291
General and administrative.............. 631 2,286 -- 2,917
Amortization of goodwill and other
intangible assets..................... -- 5,186 4,418 A 9,604
In-process research and
development........................... -- 11,700 (11,700) B --
Amortization of deferred stock
compensation*......................... 481 910 -- 1,391
--------- ------------ ------------ ----------------
Total costs and expenses.............. 9,153 43,864 (7,282) 45,735
Loss from operations....................... (6,026) (28,381) 7,282 (27,125)
Net interest income (expense) and other.... (677) 353 -- (324)
--------- ------------ ------------ ----------------
Net loss before income tax benefit (expense) (6,703) (28,028) 7,282 (27,449)
Income tax benefit (expense)............... -- 627 (627) C --
--------- ------------ ------------ ----------------
Net loss................................... $ (6,703) $ (27,401) $ 6,655 $ (27,449)
========= ============ ============ ================
Basic and diluted net loss per share....... D $ (1.11)
================
Shares used in computation of basic and 24,622,700
diluted net loss per share..............
================
--------------
*Amortization of deferred stock
compensation:
Cost of product revenues................ $ 93 $ 232 $ -- $ 325
Research and development................ 176 225 -- 401
Sales and marketing..................... 74 40 -- 114
General and administrative.............. 138 413 -- 551
--------- ------------ ------------ ----------------
$ 481 $ 910 $ -- $ 1,391
========= ============ ============ ================
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS.
F-4
<PAGE>
ENDWAVE CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
-------------------------------------------------------------
PRO FORMA PRO FORMA
ENDGATE MILLIWAVE ADJUSTMENTS NOTES COMBINED
--------- --------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues...................... $ 462 $ 3,367 -- $ 3,829
Development fees...................... 221 -- -- 221
--------- --------- ------------ -------------
Total revenues...................... 683 3,367 -- 4,050
Costs and expenses:
Cost of product revenues.............. 3,047 3,880 -- 6,927
Research and development.............. 5,289 142 -- 5,431
Sales and marketing................... 392 203 -- 595
General and administrative............ 1,042 1,149 -- 2,191
Amortization of goodwill and other
intangible assets................... -- 768 8,836 A 9,604
--------- --------- ------------ -------------
Total costs and expenses................. 9,770 6,142 8,836 24,748
Loss from operations..................... (9,087) (2,775) (8,836) (20,698)
Interest income (expense) and other, net. (638) -- -- (638)
--------- --------- ------------ -------------
Net loss before income tax benefit
(expense)............................. (9,725) (2,775) (8,836) $ (21,336)
Income tax benefit (expense)............. -- 700 (700) C --
--------- --------- ------------ -------------
Net loss................................. $ (9,725) $ (2,075) $ (9,536) $ (21,336)
========= ========= ============ =============
Basic and diluted net loss per share..... D $ (1.34)
=============
Shares used in computation of basic and
diluted net loss per share............ 15,864,426
=============
</TABLE>
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS.
F-5
<PAGE>
ENDWAVE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the pro forma
condensed combining financial statements:
A. To reflect pro forma amortization of the purchased intangibles over the
estimated useful lives as follows (in years):
<TABLE>
<CAPTION>
ESTIMATED
LIFE
---------------
<S> <C>
Purchased technology................................................. 6
Customer list........................................................ 5
Acquired workforce................................................... 5
Goodwill............................................................. 6
</TABLE>
B. Adjustment to eliminate the $11.7 million charge for in-process research
and development as it is a non-recurring charge.
C. Adjustment to eliminate the income tax benefit recognized in the
historical TRW Milliwave financial statements due to realization through its
parent company, TRW Inc., as the combined company is not able to utilize these
losses at the present time.
D. Basic and diluted net loss per share has been adjusted to reflect
the actual common shares issued and the equivalent number of shares issued to
complete the merger on an as if converted basis.
F-6
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Management of TRW Inc.
and TRW Space & Electronics Group
We have audited the accompanying balance sheets of TRW Milliwave Inc. (a
wholly owned subsidiary of TRW Inc.) as of December 31, 1999 and 1998, and the
related statements of operations, changes in stockholder's equity, and cash
flows for the years then ended and the periods from October 1, 1997 through
December 31, 1997 and from January 1, 1997 through September 30, 1997 (the
Predecessor Period). 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. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of TRW Milliwave Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended and the periods from October 1, 1997 through December
31, 1997 and January 1, 1997 through September 30, 1997 (the Predecessor Period)
in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Los Angeles, California
June 1, 2000
F-7
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash....................................................................... $ 373 $ 283
Accounts receivable, net of allowance for doubtful
accounts of $81 in 1999 and $816 in 1998................................. 1,343 1,476
Accounts receivable from affiliates........................................ 1,981 --
Inventories, net of allowances............................................. 4,666 2,381
Deferred income taxes...................................................... 637 719
Other current assets....................................................... 137 45
------------ -----------
Total current assets.......................................................... 9,137 4,904
Property, plant, and equipment, net of accumulated
depreciation............................................................... 10,877 4,177
Costs in excess of net assets acquired, net of accumulated amortization
of $3,456 in 1999 and $1,920 in 1998....................................... 5,744 7,280
------------ -----------
Total assets.................................................................. $ 25,758 $ 16,361
============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank overdraft............................................................. $ 2,278 $ --
Accounts payable........................................................... 1,429 1,377
Accounts payable to affiliates............................................. 2,169 368
Accrued payroll liabilities................................................ 391 298
Other accrued liabilities.................................................. 514 822
------------ -----------
Total current liabilities..................................................... 6,781 2,865
Deferred income taxes......................................................... 964 15
Commitments...................................................................
Stockholder's equity:
Common stock, $0.001 par value, authorized shares--50,000,000, no
issued and outstanding shares............................................ -- --
Additional paid-in capital................................................. 10,858 10,858
Advances from TRW Inc...................................................... 13,047 5,999
Accumulated deficit........................................................ (5,892) (3,376)
------------ -----------
Total stockholder's equity.................................................... 18,013 13,481
------------ -----------
Total liabilities and stockholder's equity.................................... $ 25,758 $ 16,361
============ ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR PERIOD
-------------------
PERIOD FROM PERIOD FROM
OCTOBER 1, JANUARY 1, 1997
YEAR ENDED DECEMBER 31, 1997 THROUGH THROUGH
-------------------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
--------------- --------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Sales.................................. $ 5,402 $ 6,057 $ 1,557 $ 3,693
Sales to affiliates.................... 7,017 973 -- --
--------------- --------------- ---------------- -------------------
Total sales............................ 12,419 7,030 1,557 3,693
Cost of sales.......................... 11,221 5,992 1,276 3,074
--------------- --------------- ---------------- -------------------
Gross profit........................... 1,198 1,038 281 619
Selling, general and administrative
expenses............................ 1,915 2,764 329 867
General and administrative expenses
allocated from TRW Inc.............. 455 200 26 --
Goodwill amortization expense.......... 1,536 1,536 384 --
Research and development expense....... 326 286 66 188
--------------- --------------- ---------------- -------------------
Loss before income taxes............... (3,034) (3,748) (524) (436)
Income tax benefit..................... 518 850 46 153
--------------- --------------- ---------------- -------------------
Net loss............................... $ (2,516) $ (2,898) $ (478) $ (283)
=============== =============== ================ ===================
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
ADVANCES ADDITIONAL EARNINGS TOTAL
COMMON FROM PAID-IN (ACCUMULATED STOCKHOLDER'S
STOCK TRW INC. CAPITAL DEFICIT) EQUITY
--------- ------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
Predecessor Period:
Balance at January 1, 1997............... $ -- $ -- $ 1,181 $ 365 $ 1,546
Stock redemption....................... -- -- (50) -- (50)
Net loss............................... -- -- -- (283) (283)
---------- -------------- ------------- ---------------- ----------------
Balance at September 30,
1997................................... $ -- $ -- $ 1,131 $ 82 $ 1,213
========== ============== ============= ================ ================
Balance at October 1, 1997.................. $ -- $ -- $ -- $ -- $ --
Contributed capital at
acquisition............................ -- -- 10,858 -- 10,858
Net transfers from TRW Inc............... -- 251 -- -- 251
Net loss................................. -- -- -- (478) (478)
---------- -------------- ------------- ---------------- ----------------
Balance at December 31, 1997................ -- 251 10,858 (478) 10,631
Net transfers from TRW Inc............... -- 5,748 -- -- 5,748
Net loss................................. -- -- -- (2,898) (2,898)
---------- -------------- ------------- ---------------- ----------------
Balance at December 31, 1998................ -- 5,999 10,858 (3,376) 13,481
Net transfers from TRW Inc............... -- 7,048 -- -- 7,048
Net loss................................. -- -- -- (2,516) (2,516)
---------- -------------- ------------- ---------------- ----------------
Balance at December 31, 1999................ $ -- $ 13,047 $ 10,858 $ (5,892) $ 18,013
========== ============== ============= ================ ================
</TABLE>
SEE ACCOMPANYING NOTES.
F-10
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
PERIOD
-------------
PERIOD FROM PERIOD FROM
OCTOBER 1 JANUARY 1
YEAR ENDED DECEMBER 31, THROUGH THROUGH
------------------------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------------ ----------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................... $ (2,516) $ (2,898) $ (478) $ (283)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation................................. 730 233 60 93
Goodwill amortization........................ 1,536 1,536 384 --
Deferred taxes............................... 1,031 (660) -- (44)
Changes in operating assets and liabilities:
Accounts receivable from outside
customers............................ 133 (795) (123) 208
Accounts receivable from /
payable to affiliates, net........... (180) -- -- --
Inventories............................. (2,285) (1,669) (78) (425)
Other assets............................ (92) 66 317 21
Bank overdraft.......................... 2,278 -- -- --
Accounts payable........................ 52 1,136 44 158
Accrued liabilities..................... (215) 703 (315) 362
------------------ ----------------- --------------- -------------
Net cash provided by (used in) operating
activities..................................... 472 (2,348) (189) 90
INVESTING ACTIVITIES
Purchase of Milliwave Technologies, net of cash
acquired ...................................... -- -- (10,558) --
Purchases of property, plant and equipment........ (7,430) (2,031) (84) (200)
------------------ ----------------- ------------------ -------------
Cash used in investing activities................. (7,430) (2,031) (10,642) (200)
FINANCING ACTIVITIES
Cash contributed from TRW Inc..................... -- -- 10,858 --
Redemption of common stock........................ -- -- -- (50)
Increases to debt................................. -- -- 202 --
Repayment of debt................................. -- (1,866) -- (7)
Net advances from TRW Inc......................... 7,048 5,999 -- --
------------------ ----------------- ------------------ -------------
Net cash provided by (used in) financing
activities..................................... 7,048 4,133 11,060 (57)
------------------ ----------------- ------------------ -------------
Net increase (decrease) in cash................... 90 (246) 229 (167)
Cash at beginning of period....................... 283 529 300 467
------------------ ----------------- ------------------ -------------
Cash at end of period............................. $ 373 $ 283 $ 529 $ 300
================== ================= ================== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
TRW Milliwave Inc. (TRW Milliwave or the Company)--formerly Milliwave
Technologies, Inc.--was acquired by TRW Inc. on September 30, 1997. The purchase
price was approximately $11 million. This transaction was accounted for under
the purchase method of accounting for business combinations.
The accompanying financial statements include the statements of operations,
shareholder's equity, and cash flows for the periods of the Company since TRW
Inc.'s acquisition. The statements of operations, shareholder's equity, and cash
flows from January 1,1997 through September 30, 1997 (the Predecessor Period)
are also presented in the accompanying financial statements. During the
Predecessor Period, the Company operated under different ownership.
The Company is a wholly owned subsidiary of TRW Inc. (TRW or the Parent
Company) within TRW's Space and Electronics Group. TRW Milliwave manufactures
transceiver modules employing gallium arsenide millimeter-wave monolithic
integrated circuits for broadband systems.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a historical
basis and, as such, reflect the historical financial position and results of
operations and cash flows of the Company. The historical common stock presented
in these financial statements reflects the merger of the Company and Endgate
Corporation in March 2000. See Note 7.
Certain general and administrative costs have been allocated from TRW or
TRW's Space and Electronics Group. Allocations from TRW for such expenses have
been made primarily on a proportional cost allocation method based on revenues,
payroll expenses, or net book value of assets.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes product revenue at the time of product shipment
directly to a customer and provides for estimated warranty expense at the time
title passes, which is upon shipment. The Company's customers are primarily
wireless systems integrators and equipment manufacturers. TRW Milliwave's
products are integrated into the products of its customers. There are no
significant customer acceptance requirements or post-shipment obligations on the
part of TRW Milliwave.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair values of cash, accounts receivable, accounts payable,
and accrued expenses approximate their carrying value because of the short term
maturity of these instruments or the stated interest rates are indicative of
market interest rates.
F-12
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company conducts a major portion of its business with a limited number of
customers. Credit is extended based upon an evaluation of each customer's
financial condition, with terms consistent with those present throughout the
industry. Typically, the Company does not require collateral from customers.
ACCOUNTS RECEIVABLE FROM/ACCOUNTS PAYABLE TO AFFILIATES
Affiliates represent TRW Inc. and its groups, divisions or subsidiaries.
Accounts receivable from and payable to affiliates relate to transactions in the
normal course of operations. These transactions result from sales to or
purchases from affiliates, as well as allocated expenses from affiliates for
general and administrative costs.
INVENTORIES
Inventories consist of raw materials, work-in-process, and finished goods.
These materials are stated at the lower of cost (first-in-first-out) or market.
The Company's business is subject to the risk of technological and design
changes. The Company provides for obsolete or slow-moving inventory based on
management's analysis of inventory levels and future sales forecasts at the end
of each accounting period.
The following is a summary of inventories at December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Raw materials.......................................................... $ 2,930 $ 1,013
Work in process and finished goods..................................... 3,630 1,877
Inventory allowances................................................... (1,894) (509)
---------- ----------
$ 4,666 $ 2,381
========== ==========
</TABLE>
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Financial Accounting Standards Board ("FASB") Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of," the Company records write-downs on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the net undiscounted cash flows estimated to be generated by
those assets are less than their carrying amounts. In those circumstances, the
amount of the write down is determined based on the difference between the fair
value and the carrying value of the underlying assets.
COSTS IN EXCESS OF NET ASSETS ACQUIRED
Excess of cost over the fair value of net assets acquired (or goodwill) is
amortized on a straight-line basis over 6 years. The carrying amount of goodwill
is reviewed if facts and circumstances suggest that it may be impaired and
adjusted if the net undiscounted cash flows estimated to be generated by those
assets are less than their carrying amount. In addition, under FASB Statement
No. 121, goodwill associated with assets acquired in a purchase business
combination is included in impairment evaluations when events or circumstances
exist that indicate
F-13
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
the carrying amount of those assets may not be recoverable. The impairment loss
would be determined by comparing the carrying value to the discounted cash
flows.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
on a straight-line basis over the useful lives of the assets, ranging from three
to thirty years. Property, plant and equipment consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
Land................................................................ $ 200 $ 200
Buildings........................................................... 2,294 2,703
Machinery and equipment............................................. 8,797 1,567
Computer software................................................... 597 --
------------ ----------
11,888 4,470
Less accumulated depreciation....................................... 1,011 293
------------ ----------
$ 10,877 $ 4,177
============ ==========
</TABLE>
INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Federal and state income tax returns are filed on a consolidated or
combined basis with TRW Inc. and/or its affiliates. TRW Milliwave's portion of
income tax accounts is included in the Company's financial statements. When
current tax losses are realized by Milliwave, TRW and/or its affiliates are able
to utilize the resulting tax benefits to offset their taxable income.
Accordingly, when such benefit is utilized by TRW or its affiliates, TRW
Milliwave records the income tax benefit, with a related entry to accounts
receivable from affiliates.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with FASB Statement
No. 128, "Earnings per Share" (FAS 128) and SEC Staff Accounting Bulletin No. 98
(SAB 98). Under the provisions of FAS 128 and SAB 98, basic net loss per share
is computed by dividing the net loss applicable to common stockholders for the
period by the weighted average number of shares of common stock outstanding
during the period. In connection with the merger, TRW received convertible
preferred stock in exchange for all of the common stock of TRW Milliwave. Giving
effect to the merger retroactively, the Company has no
F-14
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
outstanding common stock. Accordingly, a basic net loss per share has not been
presented. Since the Company incurred losses for all periods presented, the
convertible preferred stock would be anti-dilutive and accordingly, a diluted
net loss per share has not been presented.
COMPREHENSIVE INCOME (LOSS)
During 1999, the Company adopted the disclosure requirements of FASB
Statement No. 130, "Reporting Comprehensive Income." The Statement requires the
Company to display an amount representing comprehensive income for the year in a
financial statement that is displayed with the same prominence as other
financial statements. The Company had no items of other comprehensive income
(loss) during the year ended December 31, 1999.
SEGMENTS
The Company has one segment--the sale of transceiver modules employing
gallium arsenide millimeter-wave monolithic integrated circuits for broadband
systems. Virtually all of the Company's operations are conducted domestically.
ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition", which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. The Company believes that its revenue
recognition policy is in compliance with the provisions of SAB 101 and that the
adoption of SAB 101 had no material effect on its financial position or results
of operations.
3. RELATED PARTY TRANSACTIONS
ACCOUNTS RECEIVABLE FROM/PAYABLE TO AFFILIATES
In the course of operations, the Company has various transactions with TRW
Inc. and other companies owned by TRW Inc. (affiliates). The terms of those
transactions were determined between related parties and may differ from terms
which would have occurred between unrelated parties and may also differ from the
costs which would have been incurred had the Company operated as an independent
company. Accounts receivable from or payable to affiliates relate mainly to
operating transactions between the Company and other TRW affiliates.
F-15
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
ADVANCES FROM TRW INC.
TRW Milliwave participates in TRW's cash management system, under which TRW
withdraws the Company's cash receipts and provides for any cash disbursements
that have cleared the bank on a daily basis. The net funds advanced by TRW under
this arrangement are used by Milliwave to fund operations of the Company. The
cumulative net funds advanced to Milliwave are recorded as Advances From TRW
Inc. This balance has been included as a component of shareholder's equity as it
was not the original intention of TRW Milliwave or TRW to settle such balances
in cash. At December 31, 1999 and 1998, there were outstanding cash balances due
to TRW of approximately $13.0 million and $6.0 million, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES ALLOCATED FROM TRW INC.
As discussed in Note 1, TRW Inc. and TRW Space and Electronics Group incur
general and administrative expenses that relate to various TRW operating units
that are allocated to the operating units. Such expenses recorded by TRW
Milliwave totaled $0.5 million, $0.2 million and $26,000 during the years ended
December 31, 1999 and 1998 and the period from October 1, 1997 through December
31, 1997, respectively. The costs related primarily to compensation and fringes,
legal and accounting expenses, and other general and administrative costs. As
TRW Inc. did not own Milliwave prior to September 30, 1997, no such expenses
were incurred during the period from January 1, 1997 through September 30, 1997.
Management believes that all costs incurred by TRW Inc. and its affiliates
relating to the operations of the Company have been appropriately allocated and
reflected in the accompanying financial statements.
4. COMMITMENTS
The Company has significant supply agreements with TRW's Space and
Electronics Group to supply or test various products. These supply agreements
relate to TRW's Space and Electronics Group's contracts with two outside
customers. These supply agreements have sales values of $10.4 million and $6.7
million, with expiration dates of March 25, 2001 and May 30, 2000, respectively.
F-16
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. INCOME TAXES
Significant components of the income tax benefit attributable to continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
PERIOD
-------------
PERIOD FROM
PERIOD FROM JANUARY 1,
OCTOBER 1, 1997
YEAR ENDED DECEMBER 31, 1997 THROUGH THROUGH
------------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------ ----------- --------------- -------------
<S> <C> <C> <C> <C>
Current:
Federal......................... $ (1,350) $ (172) $ (40) $ (84)
State........................... (199) (18) (6) (25)
------------ ----------- --------------- -------------
(1,549) (190) (46) (109)
Deferred:
Federal......................... 902 (589) -- (38)
State........................... 129 (71) -- (6)
------------ ----------- --------------- -------------
1,031 (660) -- (44)
------------ ----------- --------------- -------------
Income tax benefit................. $ (518) $ (850) $ (46) $ (153)
============ =========== =============== =============
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory reserves.......................................................... $ 312 $ 183
Accounts receivable reserves................................................ -- 285
Payroll accruals............................................................ 170 55
Maintenance accruals........................................................ 123 --
Other....................................................................... 32 196
-------- --------
Total deferred tax assets...................................................... 637 719
Deferred tax liabilities:
Depreciation................................................................ (758) (15)
Capitalized software costs.................................................. (206) --
-------- --------
Total deferred tax liabilities................................................. (964) (15)
-------- --------
Net deferred tax (liabilities) assets.......................................... $ (327) $ 704
======== ========
</TABLE>
F-17
<PAGE>
TRW MILLIWAVE INC.
(A WHOLLY OWNED SUBSIDIARY OF TRW INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
The reconciliation of income tax at the U.S. federal statutory rate to
income tax benefit is as follows:
<TABLE>
<CAPTION>
PREDECESSOR
PERIOD
---------------
PERIOD FROM PERIOD FROM
YEAR ENDED OCTOBER 1, JANUARY 1,
DECEMBER 31, 1997 THROUGH 1997 THROUGH
----------------------- DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Income tax benefit at U.S. statutory rates............. (35)% (35)% (35)% (35)%
Nondeductible goodwill................................. 19 16 28 --
Other.................................................. (1) (4) (2) --
---------- ---------- --------------- ---------------
(17)% (23)% (9)% (35)%
========== ========== =============== ===============
</TABLE>
No cash payments were made by TRW Milliwave during 1999, 1998 or 1997 for
income taxes.
6. EMPLOYEE BENEFIT PLAN
The Company participates in TRW's contributory stock ownership and savings
plan (the Plan) for which a majority of its employees are eligible as defined in
the Plan. TRW Milliwave matches employee contributions subject to plan
limitations. The Company recognized contributions expense of approximately
$59,000 and $36,000 during the years ended December 31, 1999 and 1998. For the
period from October 1, 1997 through December 31, 1997, no contributions were
made.
Prior to the acquisition of Milliwave Technologies by TRW Inc., the Company
had a defined contribution benefit plan, to which eligible employees of the
Company were permitted to contribute. The Company did not contribute to this
benefit plan.
7. SUBSEQUENT EVENTS
On March 31, 2000, TRW Milliwave merged with Endgate Corporation. In the
merger, Milliwave merged into Endgate and received approximately 53% of the
merged company's capital stock in exchange for TRW's shares in Milliwave. As a
result, Endgate was the surviving corporation in the merger and TRW Milliwave
ceased to exist as a separate legal entity. However, because TRW owned more than
half of Endgate's outstanding capital stock after the merger, TRW Milliwave is
treated as the acquiring company for accounting purposes. As a result, Endgate
ceased to be a separate accounting entity as of the date of the merger, and the
combined company's historical financial statements are those of Milliwave. In
connection with the merger, the combined company was renamed as Endwave
Corporation.
F-18
<PAGE>
ENDWAVE CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF JUNE 30,
2000
---------------------
(UNAUDITED)
<S> <C>
Assets
Current assets:
Cash and cash equivalents............................................................................ $ 36,918
Accounts receivable, net............................................................................. 2,870
Accounts receivable from affiliates.................................................................. 4,153
Inventories.......................................................................................... 14,545
Other current assets................................................................................. 398
---------------------
Total current assets.............................................................................. 58,884
Property and equipment, net............................................................................ 17,480
Goodwill, net.......................................................................................... 81,852
Intangible assets, net................................................................................. 22,524
Other assets, net...................................................................................... 287
---------------------
$ 181,027
=====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and bank overdrafts................................................................. $ 2,517
Accounts payable to affiliates....................................................................... 15,616
Accrued compensation................................................................................. 2,357
Other accrued liabilities............................................................................ 912
Deferred Income...................................................................................... 89
Current portion of capital lease obligations......................................................... 805
---------------------
Total current liabilities......................................................................... 22,296
Deferred income........................................................................................ 594
Long-term portion of capital lease obligations......................................................... 1,596
Commitments............................................................................................
Stockholders' equity:
Preferred stock, $0.001 par value, 27,000,000 shares authorized, issuable in
series:
Series E-1 convertible preferred stock; 426,250 shares designated,
issued and outstanding............................................................................ 1,705
Series E-2 convertible preferred stock; 866,401 shares designated,
866,398 shares issued and outstanding............................................................. 6,006
Series E-3 convertible preferred stock; 1,008,353 shares designated,
991,423 shares issued and outstanding............................................................. 8,182
Series E-4 convertible preferred stock; 1,250,405 shares designated,
1,246,464 shares issued and outstanding........................................................... 14,196
Series E-5 convertible preferred stock; 2,487,934 shares designated,
2,481,677 shares issued and outstanding........................................................... 14,843
Series E-6 convertible preferred stock; 3,652,344 shares designated,
3,456,391 shares issued and outstanding........................................................... 20,714
Series E-7 convertible preferred stock; 2,549,246 shares designated,
2,449,636 shares issued and outstanding........................................................... 25,241
Series T-1 convertible preferred stock; 13,963,063 shares designated, 13,963,063 shares issued and
outstanding....................................................................................... 96,280
Common stock, $0.001 par value, 50,000,000 shares authorized,
661,964 shares issued and outstanding................................................................ 1
Additional paid-in capital............................................................................. 21,974
Deferred stock compensation............................................................................ (19,308)
Accumulated deficit.................................................................................... (33,293)
---------------------
Total stockholders' equity................................................................................ 156,541
---------------------
$ 181,027
=====================
</TABLE>
SEE ACCOMPANYING NOTES.
F-19
<PAGE>
ENDWAVE CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 2000
---------------- --------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Product revenues ($1,809 and $8,676 from affiliates)............................................ $ 3,367 $ 14,537
Development fees................................................................................ -- 946
---------------- --------------
Total revenues.................................................................................. 3,367 15,483
Costs and expenses:
Cost of product revenues........................................................................ 3,880 19,196
Research and development ($0 and $781 from affiliates).......................................... 142 3,732
Sales and marketing............................................................................. 203 854
General and administrative ($225 and $310 from affiliates)...................................... 1,149 2,286
Amortization of goodwill and other intangible assets............................................ 768 5,186
In-process research and development............................................................. -- 11,700
Amortization of deferred stock compensation*.................................................... -- 910
---------------- --------------
Total costs and expenses........................................................................ 6,142 43,864
Loss from operations............................................................................ (2,775) (28,381)
Interest income (expense) and other, net........................................................ -- 353
---------------- --------------
Net loss before income tax benefit (expense).................................................... (2,775) (28,028)
Income tax benefit (expense).................................................................... 700 627
---------------- --------------
Net loss........................................................................................ $ (2,075) $ (27,401)
================ ==============
Net loss applicable to common stockholders subsequent
to the merger................................................................................ $ -- $ (25,396)
================ ==============
Basic and diluted net loss per share............................................................ $ (39.26)
==============
Shares used in computation of basic and diluted net loss per share.............................. 646,752
==============
--------------
*Amortization of deferred stock compensation:
Cost of product revenues........................................................................ $ -- $ 232
Research and development........................................................................ -- 225
Sales and marketing............................................................................. -- 40
General and administrative...................................................................... -- 413
---------------- --------------
$ -- $ 910
================ ==============
</TABLE>
SEE ACCOMPANYING NOTES.
F-20
<PAGE>
ENDWAVE CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADVANCES ADDITIONAL
PREFERRED COMMON FROM TRW PAID-IN DEFERRED STOCK ACCUMULATED
STOCK STOCK INC. CAPITAL COMPENSATION DEFICIT TOTAL
------------ ----------- ------------ ------------- ---------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31,
1999.................... $ -- $ -- $ 13,047 $ 10,858 $ -- $ (5,892) $ 18,013
Net transfers from TRW Inc. -- -- 5,993 -- -- -- 5,993
Issuance of preferred stock 19,985 -- -- -- -- -- 19,985
Recapitalization in
connection with the
merger.................. 167,182 1 (19,040) (9,143) -- -- 139,000
Exercise of stock options.. -- -- -- 41 -- -- 41
Deferred stock compensation -- -- -- 20,218 (20,218) -- --
Amortization of deferred
stock compensation...... -- -- -- -- 910 -- 910
Net loss................... -- -- -- -- -- (27,401) (27,401)
------------ ----------- ------------ ------------- ---------------- -------------- ------------
Balance as of June 30, 2000 $ 187,167 $ 1 $ -- $ 21,974 $ (19,308) $ (33,293) $ 156,541
============ =========== ============ ============= ================ ============== ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-21
<PAGE>
ENDWAVE CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 2000
----------- -------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................................................................. $ (2,077) $ (27,401)
Adjustments to reconcile net loss to net cash used by operations:
Depreciation....................................................................................... 250 1,050
Amortization of goodwill and other intangible assets............................................... 768 5,186
Amortization of deferred compensation.............................................................. -- 910
In-process research and development................................................................ -- 11,700
Changes in operating assets and liabilities:
Accounts receivable.............................................................................. (537) (1,396)
Inventories...................................................................................... (1,593) (6,325)
Other assets..................................................................................... (385) 104
Account payable.................................................................................. (699) (5,446)
Accounts payable, affiliate...................................................................... 1,134 13,447
Accrued compensation............................................................................. 1,134 983
Other accrued liabilities........................................................................ (1,103) 217
Deferred taxes................................................................................... 324 (327)
Accounts receivable, affiliates.................................................................. -- (2,172)
Deferred income.................................................................................. -- (22)
----------- -------------
Net cash used in operating activities................................................................. (2,784) (6,700)
----------- -------------
INVESTING ACTIVITIES
Purchase of property and equipment.................................................................... (3,992) (2,946)
----------- -------------
Net cash used in investing activities................................................................. (3,992) (2,946)
----------- -------------
FINANCING ACTIVITIES
Payments under capital lease obligations.............................................................. -- (710)
Net advances from TRW Inc............................................................................. 6,691 5,993
Net cash acquired in conjunction with the acquisition of Endgate...................................... -- 20,882
Net proceeds from issuance of preferred stock in conjunction with the acquisition of Endgate.......... -- 19,985
Proceeds from stock options exercised................................................................. -- 41
----------- -------------
Net cash provided by financing activities............................................................. 6,691 46,191
----------- -------------
Net change in cash and cash equivalents............................................................... (85) 36,545
Cash and cash equivalents at the beginning of the period...... 283 373
----------- -------------
Cash and cash equivalents at the end of the period.................................................... $ 198 $ 36,918
=========== =============
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
Equipment acquired under capital lease arrangements................................................... $ 690 $ 1,283
=========== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-22
<PAGE>
ENDWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
On March 31, 2000, Endgate merged with TRW Milliwave Inc., a wholly-owned
subsidiary of TRW Inc. In the merger, Milliwave merged into Endgate and Endgate
issued 13,963,063 shares of its capital stock to TRW Inc. in exchange for TRW's
shares in TRW Milliwave. As a result, Endgate was the surviving corporation in
the merger and TRW Milliwave ceased to exist as a separate legal entity.
However, because TRW Inc. owned more than half of Endgate's outstanding capital
stock immediately after the merger, TRW Milliwave is treated as the acquiring
company for accounting purposes. As a result, Endgate ceased to be a separate
accounting entity as of the date of the merger, and the combined company's
financial statements prior to the merger are those of TRW Milliwave. In
connection with the merger, the combined company was renamed Endwave
Corporation. The unaudited pro forma condensed combining financial statements
referred to in these notes give effect to the merger of TRW Milliwave and
Endgate.
The total purchase costs of the transactions have been calculated with
Milliwave treated as the accounting acquiror. As consideration for the
acquisition, shares of Series T-1 preferred stock were issued. The acquisition
was accounted for using the purchase method of accounting. The aggregate
purchase price of $139.9 million was allocated to the assets and liabilities
acquired based on their fair values as follows (in thousands):
AMOUNT
-----------
Tangible net assets........................... $ 24,377
Purchased technology.......................... 16,100
Customer list................................. 2,600
Acquired workforce............................ 4,900
Goodwill...................................... 80,218
In-process research and development........... 11,700
-----------
Aggregate purchase price.................. $ 139,895
===========
In determining the total consideration as well as the allocation of the
purchase price including the amount of in-process research and development,
Milliwave considered as part of their analysis an appraisal prepared for TRW's
Space and Electronics Group by American Appraisal Associates, Inc., an
independent appraisal firm that used established valuation techniques
appropriate for the high technology industry. The amount allocated to in-process
research and development was expensed upon acquisition because technological
feasibility has not been established and no future alternative uses existed. A
one time charge of $11.7 million for purchased in-process research and
development arising from the acquisition has been reflected in the condensed
statement of operations of Endwave in the six month period ended June 30, 2000.
The accompanying unaudited condensed financial statements for the six
months ended June 30, 1999 are derived from the historical unaudited financial
statements of TRW Milliwave Inc. The accompanying unaudited condensed financial
statements for the six months ended June 30, 2000 are derived from the
historical financial statements of Endwave Corporation. Such financial
information is based on the historical financial information of TRW Milliwave
Inc. for the six months ended June 30, 2000 plus the effect of reflecting the
acquisition of Endgate as of March 31, 2000 using the purchase method of
accounting.
Giving effect to the merger retroactively, the Company has no outstanding
common stock prior to the merger. Accordingly, a basic net loss per share has
not been presented for periods prior to March 31, 2000. The net loss applicable
to common stockholders subsequent to the merger
F-23
<PAGE>
ENDWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
represents the net loss incurred since March 31, 2000, including the charge for
purchased in-process research and development. The net loss for the six months
ended June 30, 2000 was $27,401,000 less the net loss for the three months ended
March 31, 2000 of $2,005,000 which results in the net loss applicable to common
stockholders subsequent to the merger of $25,396,000. The shares used in
computing the net loss per share is the weighted average shares outstanding
since the merger date. Since the Company incurred losses for all periods
presented, the convertible preferred stock would be anti-dilutive and
accordingly, diluted net loss per share is the same as basic net loss per share.
These financial statements should be read in conjunction with the audited
financial statements of TRW Milliwave Inc. and Endgate Corporation included
elsewhere herein.
NOTE 2. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements and related notes as of June 30,
2000, and for the six months ended June 30, 1999 and 2000, are unaudited, but
include all adjustments, consisting only of normal recurring adjustments, that
management of Endwave considers necessary for a fair presentation of its
financial position, operating results, and cash flows for the interim date and
periods presented. Results for the six-month period ended June 30, 2000 are not
necessarily indicative of results to be expected for the full year ending
December 31, 2000 or for any future period.
NOTE 3. REVENUE RECOGNITION AND WARRANTY
The Company recognizes product revenue at the time title passes, which is
upon product shipment and provides for estimated warranty expense at the time of
sale. The Company's customers are primarily wireless systems integrators and
equipment manufacturers and the Company's products are integrated into the
products of its customers. There are no significant acceptance requirements or
post-shipment obligations on the part of Endwave. The Company recognizes
development fees ratably over the estimated term of the development period.
Up-front fees, if any, associated with development agreements are recognized
over the estimated development and production period. In no event are revenues
recognized prior to becoming payable by the customer. The costs incurred under
these agreements are included in research and development expenses.
NOTE 4. AMORTIZATION OF PURCHASED INTANGIBLES
In connection with the merger of TRW Milliwave Inc. and Endgate
Corporation, the company has recorded the amortization of purchased intangibles
over the estimated useful lives as follows (in years):
ESTIMATED
USEFUL LIFE
-----------
Purchased technology................................ 6
Customer list....................................... 5
Acquired workforce ................................. 5
Goodwill............................................ 6
F-24
<PAGE>
ENDWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
NOTE 5. INVENTORIES
Inventories are stated at the lower of cost or market (on a first-in,
first-out basis) and are comprised of the following as of June 30, 2000 (in
thousands):
Raw materials.................................... $ 9,377
Work in process.................................. 4,774
Finished goods................................... 394
-----------
$ 14,545
===========
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of June 30, 2000 (in
thousands):
Laboratory and demonstration equipment.................... $ 19,091
Software.................................................. 1,481
Computer equipment........................................ 1,499
Furniture and fixtures.................................... 433
Leasehold improvements.................................... 254
Building.................................................. 2,502
Land...................................................... 200
----------
25,460
Less accumulated depreciation and amortization (including
amortization of assets held under capital lease)......... (7,980)
-----------
Property and equipment, net............................... $ 17,480
===========
NOTE 7. DEFERRED STOCK COMPENSATION
In connection with the grant of stock options to employees, Endwave
recorded deferred stock compensation within stockholders' equity of
approximately $20,218,000, representing the difference between the deemed fair
value of the common stock for financial statement presentation purposes and the
option exercise price of these options at the date of grant. During the six
months ended June 30, 2000, Endwave amortized $910,000 of this deferred stock
compensation. Deferred stock compensation is amortized using the accelerated
method over the vesting period of the related options, generally four years.
NOTE 8. STOCKHOLDERS' EQUITY--CONVERTIBLE PREFERRED STOCK
Effective March 31, 2000, Endgate issued 13,963,063 shares of its Series
T-1 preferred stock to TRW Inc. in connection with its merger with TRW Milliwave
Inc. In return for the issuance of the shares to TRW Inc., Endgate acquired all
outstanding shares in TRW Inc's formerly wholly-owned subsidiary, TRW Milliwave
Inc., plus cash in the amount of $20,000,000.
Also in connection with the Endgate-Milliwave merger, Endgate exchanged all
outstanding shares of its Series A through Series G preferred stock for shares
of its Series E-1 through Series E-7 preferred stock. The number of shares of
Series E-1 through E-7 preferred stock issued in exchange for the Series A
through G preferred stock was equivalent to the number of shares of
F-25
<PAGE>
ENDWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
common stock into which the Series A through G preferred stock was convertible
immediately prior to the exchange, and did not result in additional proceeds to
Endgate.
The Series T-1 preferred stock is convertible into common stock on a
one-for-one basis, subject to certain antidilution provisions. The Series T-1
preferred stock will automatically convert into common stock upon the
consummation of an underwritten public offering under the Securities Act of 1933
of Endwave's common stock in which the per share price is not less than $9.00
per share and the aggregate gross proceeds to the Company are at least
$15,000,000 or upon the election of a majority of the holders of all the
preferred shares outstanding voting together as a single class. The holder of
the Series T-1 preferred stock have the right to receive dividends when and if
declared by the directors. Upon liquidation, the holder of the Series T-1
preferred stock is entitled to receive a distribution of $3.46 per share in
preference to the common stockholders and on a parity with the other preferred
stockholders. Additionally, the holder of the Series T-1 preferred stock is
entitled to elect two members to Endwave's board of directors.
NOTE 9. STOCK OPTION PLAN
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
------------------------------------------------------
WEIGHTED-
NUMBER OF AVERAGE EXERCISE
SHARES EXERCISE PRICE PRICE
------------- -------------------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1999............................ -- -- $ --
Options assumed in conjunction with the
acquisition of Endgate............................. 1,507,355 $ 0.40-$ 6.00 $ 1.94
Options granted...................................... 3,042,500 $ 6.00-$ 12.00 $ 6.16
Options exercised.................................... (30,565) $ 0.40-$ 6.00 $ 1.32
Options canceled..................................... (33,152) $ 1.20-$ 6.00 $ 4.40
------------- -------------------- -----------------
Balance at June 30, 2000................................ 4,486,138 $ 0.40-$ 12.00 $ 4.79
============= ==================== =================
</TABLE>
NOTE 10. IN PROCESS RESEARCH AND DEVELOPMENT
As of March 31, 2000, Endgate had the following significant in process
research and development ("IPR&D") efforts under way:
o "Flip-Chip" Technology--Development projects aimed at designing and
producing a commercially viable gallium arsenide circuit and improving
the manufacturing efficiency of Endgate's proprietary "flip chip" die
attach technology. The development efforts were estimated to be 50%
complete, had a fair value of $7.6 million as of March 31, 2000 and
are expected to be complete early in 2001.
o Antennas--Development projects to enable the Company to produce
appropriate antennas for various market uses and needs for varying
frequencies and sizes. The development efforts were estimated to be
75% complete, had a fair value of $2.7 million as of March 31, 2000,
depending on the antenna product and are expected to be complete late
in 2000.
F-26
<PAGE>
ENDWAVE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
Efforts to complete these projects continue at the planned rate and their
successful completion underlies significant aspects of the company's future
operations. The in-process research and development was identified and valued
through extensive interviews and discussions with management and the analysis of
data provided by Endgate concerning developmental products, their respective
stage of development, the time and resources needed to complete them, their
expected income generating ability, target markets and associated risks. The
income approach, which includes an analysis of the markets, cash flows, and
risks associated with achieving such cash flows, was the primary technique
utilized in valuing the in-process research and development project. Revenue
from the in-process research and development projects is estimated to commence
in 2000 and to continue for approximately five years.
The discount rates used to discount the excess cash flows to their present
value were based on the business' overall weighted average cost of capital
("WACC"). The WACC produces the average required rate of return of an investment
in an operating enterprise, based on various required rates of return from
investments in various assets of the enterprise, including three classes of
technologies: completed, in-process, and future technologies. The required
return on these assets increase when moving from completed to future
technologies. The risk, therefore the required return on, the completed
technology should be lower than the required returns on the in-process and
future technologies. Because there is no completion risk associated with the
completed technology, a discount rate of 14.5% was used to discount the excess
cash flows attributed to the completed technologies. Because there is still
completion risk associated with the IPR&D the cash flows were discounted based
on the business' overall cost of capital of 18.5%, plus a completion risk
premium of 4%.
NOTE 11. STOCK SPLIT
Effective June 6, 2000, Endwave underwent a one-for-two reverse split of
all outstanding shares of preferred stock and common stock and all share and per
share data have been restated to reflect this split.
NOTE 12. SUBSEQUENT EVENT
On September 18, 2000, the Company entered into a common stock purchase
agreement with a potential customer to sell approximately 429,000 shares of the
Company's common stock for a total consideration of approximately $6.0 million.
The sale is expected to close on October 2, 2000.
F-27
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Endgate Corporation
We have audited the accompanying balance sheets of Endgate Corporation as
of June 30, 1998 and 1999, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended June 30, 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 audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Endgate Corporation at June
30, 1998 and 1999, and the results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999 in conformity with
accounting principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Palo Alto, California
August 24, 1999
F-28
<PAGE>
ENDGATE CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
--------------------- MARCH 31,
1998 1999 2000
---------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 9,274 $ 12,562 $ 20,882
Accounts receivable, less allowance for doubtful accounts of $24 as of
June 30, 1999 (none in 1998).......................................... 202 178 2,923
Inventories............................................................. 1,151 751 3,554
Other current assets.................................................... 31 99 367
---------- --------- ------------
Total current assets....................................................... 10,658 13,590 27,726
Property and equipment, net................................................ 2,411 2,713 3,424
Other assets, net.......................................................... 293 301 284
---------- --------- ------------
Total assets............................................................... $ 13,362 $ 16,604 $ 31,434
========== ========= ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable........................................................ $ 380 $ 531 $ 3,361
Accrued compensation.................................................... 401 627 983
Other accrued liabilities............................................... 579 164 180
Deferred income......................................................... 89 89 89
Current portion of capital lease obligations............................ 821 461 589
---------- --------- ------------
Total current liabilities................................................. 2,270 1,872 5,202
Deferred income............................................................ 199 357 616
Long-term portion of capital lease obligations............................. 440 456 1,239
Commitments................................................................
Stockholders' equity:
Preferred stock, $0.001 par value; 27,000,000 shares authorized, issuable in
series: Series E-1 convertible preferred stock; 426,250 shares designated,
issued and outstanding.............................................. 1,705 1,705 1,705
Series E-2 convertible preferred stock; 866,401 shares designated,
866,398 shares issued and outstanding............................... 6,006 6,006 6,006
Series E-3 convertible preferred stock; 1,008,353 shares designated,
991,423 shares issued and outstanding............................... 8,182 8,182 8,182
Series E-4 convertible preferred stock; 1,250,405 shares designated,
1,246,464 shares issued and outstanding............................. 14,196 14,196 14,196
Series E-5 convertible preferred stock; 2,487,934 shares designated,
2,481,677 shares issued and outstanding............................. 14,843 14,843 14,843
Series E-6 convertible preferred stock; 3,652,344 shares designated,
3,456,391 shares issued and outstanding............................. -- 20,714 20,714
Series E-7 convertible preferred stock; 2,549,246 shares designated,
2,449,636 shares issued and outstanding............................. -- -- 25,241
Common stock, $0.001 par value; 50,000,000 shares authorized, 314,583
shares and 306,037 shares issued and outstanding at June 30, 1999
and 1998, respectively.............................................. 151 161 5,096
Deferred stock compensation............................................. -- -- (3,380)
Accumulated deficit..................................................... (34,630) (51,888) (68,226)
---------- --------- ------------
Total stockholders' equity................................................. 10,453 13,919 24,377
---------- --------- ------------
$ 13,362 $ 16,604 $ 31,434
========== ========= ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-29
<PAGE>
ENDGATE CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
---------------------------------- ----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenues......................... $ 1,133 $ 1,560 $ 1,084 $ 875 $ 2,384
Development fees......................... 239 373 519 458 2,689
---------- ---------- ---------- ---------- ----------
Total revenues.............................. 1,372 1,933 1,603 1,333 5,073
Costs and expenses:
Cost of product revenues................. 3,957 4,230 5,836 4,500 9,011
Research and development................. 6,236 6,128 9,824 7,265 8,133
Sales and marketing...................... 474 489 751 531 904
General and administrative............... 1,303 1,528 1,843 1,218 1,548
Amortization of deferred stock
compensation*.......................... -- -- -- -- 1,191
---------- ---------- ---------- ---------- ----------
Total costs and expenses................. 11,970 12,375 18,254 13,514 20,787
---------- ---------- ---------- ---------- ----------
Loss from operations........................ (10,598) (10,442) (16,651) (12,181) (15,714)
Interest income (expense)
and other, net........................... 300 (133) (607) (582) (624)
---------- ---------- ---------- ---------- ----------
Net loss.................................... $ (10,298) $ (10,575) $ (17,258) $ (12,763) $ (16,338)
========== ========== ========== ========== ==========
--------------
*Amortization of deferred stock compensation:
Cost of product revenues................. $ -- $ -- $ -- $ -- $ 177
Research and development................. -- -- -- -- 456
Sales and marketing...................... -- -- -- -- 200
General and administrative............... -- -- -- -- 358
---------- ---------- ---------- ---------- ----------
$ -- $ -- $ -- $ -- $ 1,191
========== ========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-30
<PAGE>
ENDGATE CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
--------------------------------------------------------------------
SERIES SERIES SERIES SERIES SERIES SERIES SERIES COMMON
E-1 E-2 E-3 E-4 E-5 E-6 E-7 STOCK
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996............................ $ 1,705 $ 6,006 $ 8,182 $ 14,199 $ -- $ -- $ -- $ 139
Issuance costs associated with Series E-4
convertible preferred stock...................... -- -- -- (3) -- -- -- --
Issuance of 3,273 shares of common stock upon
exercise of stock option......................... -- -- -- -- -- -- -- 4
Net loss and comprehensive loss..................... -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1997............................ 1,705 6,006 8,182 14,196 -- -- -- 143
Issuance of Series E-5 preferred stock for cash at
$6.00 per share, net of issuance costs of $48 in
March and April 1998............................. -- -- -- -- 11,733 -- -- --
Conversion of notes payable and related accrued
interest to Series E-5 preferred stock at $6.00
per share in March and April 1998................ -- -- -- -- 2,591 -- -- --
Issuance of 86,380 shares of Series E-5 preferred
stock upon exercise of warrants at $6.00 per
share in March 1998.............................. -- -- -- -- 519 -- -- --
Issuance of 4,459 shares of common stock upon
exercise of stock options........................ -- -- -- -- -- -- -- 8
Net loss and comprehensive loss..................... -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1998............................ 1,705 6,006 8,182 14,196 14,843 -- -- 151
Issuance of 2,603,229 shares of Series E-6
preferred stock for cash at $6.004 per share,
net of issuance costs of $557 in April 1999...... -- -- -- -- -- 15,074 -- --
Issuance of warrants to purchase 170,621 shares of
Series E-6 preferred stock in connection with
issuance of convertible subordinated promissory
notes............................................ -- -- -- -- -- 519 -- --
Conversion of convertible subordinated promissory
notes and related accrued interest to 853,162
shares of Series E-6 preferred stock at $6.004
per share in April and June 1999................. -- -- -- -- -- 5,121 -- --
Issuance of 8,546 shares of common stock upon
exercise of stock options........................ -- -- -- -- -- -- -- 10
Net loss and comprehensive loss..................... -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1999............................ 1,705 6,006 8,182 14,196 14,843 20,714 -- 161
Issuance of 1,951,612 shares of Series E-7
preferred stock for cash at $10.12 per share,
net of issuance costs of $59 in March 2000
(unaudited)...................................... -- -- -- -- -- -- 19,691 --
Issuance of warrants to purchase 99,595 shares of
Series E-7 preferred stock in connection with
issuance of convertible subordinated promissory
notes (unaudited)................................ -- -- -- -- -- -- 510 --
Conversion of convertible subordinated promissory
notes and related accrued interest to 498,024
shares of Series E-7 preferred stock at $10.12
per share in March 2000 (unaudited).............. -- -- -- -- -- -- 5,040 --
Issuance of 318,874 shares of common stock upon
exercise of stock options (unaudited)............ -- -- -- -- -- -- -- 364
Deferred stock compensation (unaudited)............. -- -- -- -- -- -- -- 4,571
Amortization of deferred stock compensation
(unaudited)...................................... -- -- -- -- -- -- -- --
Net loss and comprehensive loss (unaudited)......... -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2000 (unaudited)............... $ 1,705 $ 6,006 $ 8,182 $ 14,196 $ 14,843 $ 20,714 $ 25,241 $ 5,096
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
DEFERRED STOCK ACCUMULATED STOCKHOLDERS'
COMPENSATION DEFICIT EQUITY
-------------- ----------- -------------
<S> <C> <C> <C>
Balance at June 30, 1996........................... $ -- $ (13,757) $ 16,474
Issuance costs associated with Series E-4
convertible preferred stock..................... -- -- (3)
Issuance of 3,273 shares of common stock upon
exercise of stock option........................ -- -- 4
Net loss and comprehensive loss.................... -- (10,298) (10,298)
-------------- ----------- -------------
Balance at June 30, 1997........................... -- (24,055) 6,177
Issuance of Series E-5 preferred stock for cash at
$6.00 per share, net of issuance costs of $48 in
March and April 1998............................ -- -- 11,733
Conversion of notes payable and related accrued
interest to Series E-5 preferred stock at $6.00
per share in March and April 1998............... -- -- 2,591
Issuance of 86,380 shares of Series E-5 preferred
stock upon exercise of warrants at $6.00 per
share in March 1998............................. -- -- 519
Issuance of 4,459 shares of common stock upon
exercise of stock options....................... -- -- 8
Net loss and comprehensive loss.................... -- (10,575) (10,575)
-------------- ----------- -------------
Balance at June 30, 1998........................... -- (34,630) 10,453
Issuance of 2,603,229 shares of Series E-6
preferred stock for cash at $6.004 per share,
net of issuance costs of $557 in April 1999..... -- -- 15,074
Issuance of warrants to purchase 170,621 shares of
Series E-6 preferred stock in connection with
issuance of convertible subordinated promissory
notes........................................... -- -- 519
Conversion of convertible subordinated promissory
notes and related accrued interest to 853,162
shares of Series E-6 preferred stock at $6.004
per share in April and June 1999................ -- -- 5,121
Issuance of 8,546 shares of common stock upon
exercise of stock options....................... -- -- 10
Net loss and comprehensive loss.................... -- (17,258) (17,258)
-------------- ----------- -------------
Balance at June 30, 1999........................... -- (51,888) 13,919
Issuance of 1,951,612 shares of Series E-7
preferred stock for cash at $10.12 per share,
net of issuance costs of $59 in March 2000
(unaudited)..................................... -- -- 19,691
Issuance of warrants to purchase 99,595 shares of
Series E-7 preferred stock in connection with
issuance of convertible subordinated promissory
notes (unaudited)............................... -- -- 510
Conversion of convertible subordinated promissory
notes and related accrued interest to 498,024
shares of Series E-7 preferred stock at $10.12
per share in March 2000 (unaudited)............. -- -- 5,040
Issuance of 318,874 shares of common stock upon
exercise of stock options (unaudited)........... -- -- 364
Deferred stock compensation (unaudited)............ (4,571) -- --
Amortization of deferred stock compensation
(unaudited)..................................... 1,191 -- 1,191
Net loss and comprehensive loss (unaudited)........ -- (16,338) (16,338)
------------- ----------- -------------
Balance at March 31, 2000 (unaudited).............. $ (3,380) $ (68,226) $ 24,377
============== =========== =============
</TABLE>
SEE ACCOMPANYING NOTES.
F-31
<PAGE>
ENDGATE CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JUNE 30, MARCH 31,
------------------------------------ -----------------------
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
OPERATING ACTIVITIES
<S> <C> <C> <C> <C> <C>
Net loss........................................... $ (10,298) $ (10,575) $ (17,258) $ (12,763) $ (16,338)
Adjustments to reconcile net loss to net cash used
by operations:
Depreciation and amortization................... 1,409 1,253 1,311 876 747
Amortization of deferred stock compensation..... -- -- -- -- 1,191
Warrants issued in connection with issuance of
convertible promissory notes.................. -- -- 519 519 510
Changes in operating assets and liabilities:
Accounts receivable........................... 322 (82) 24 18 (2,745)
Inventories................................... (55) (502) 400 378 (2,803)
Other assets.................................. (33) (111) (179) (124) (251)
Accounts payable.............................. (50) 172 151 220 2,830
Accrued compensation.......................... (143) 164 226 8 356
Other accrued liabilities..................... 60 359 (415) (432) 16
Deferred revenues............................. -- 288 158 180 259
----------- ----------- ----------- ----------- -----------
Net cash used in operating activities.............. (8,788) (9,034) (15,063) (11,120) (16,228)
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment................. (411) (766) (1,510) (704) (98)
Purchases of short-term investments................ (7,856) -- -- -- --
Maturities of short-term investments............... 7,856 -- -- -- --
Note receivable.................................... (84) 391 -- -- --
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities.............. (495) (375) (1,510) (704) (98)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Net proceeds from issuance of preferred stock,
convertible notes payable and warrants.......... (3) 14,843 20,195 4,977 24,731
Proceeds from issuance of common stock............. 4 8 10 5 364
Payments under capital lease obligations........... (1,465) (693) (344) (745) (449)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities...................................... (1,464) 14,158 19,861 4,237 24,646
----------- ----------- ----------- ----------- -----------
Net change in cash and cash equivalents............ (10,747) 4,749 3,288 (7,587) 8,320
Cash and cash equivalents at the beginning of the
period.......................................... 15,272 4,525 9,274 9,274 12,562
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at the end of the
period.......................................... $ 4,525 $ 9,274 $ 12,562 $ 1,687 $ 20,882
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest on bank borrowings.......... $ -- $ (3) $ -- $ -- $ --
=========== =========== =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING
ACTIVITIES
Equipment acquired under capital lease
arrangements.................................... $ 660 $ 494 $ -- $ 610 $ 1,360
=========== =========== =========== =========== ===========
Conversion of notes payable and accrued interest
to preferred stock.............................. $ -- $ 2,591 $ 5,121 $ -- $ 5,040
=========== =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-32
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Endgate Corporation ("Endgate" or the "Company") is a provider of radio
frequency, or RF, subsystems that enable the transmission and reception of data
signals in high data rate, or broadband, wireless systems.
At June 30, 1999, Endgate has recorded an accumulated deficit of
$51,888,000. The Company anticipates additional debt or equity financing may be
needed to finance ongoing operations in the fiscal year ending June 30, 2000. If
such additional funding is not available, management believes, based on
anticipated obligations, that available resources will be sufficient to enable
Endgate to meet its obligations through at least June 30, 2000. If anticipated
operations are not achieved, management has the intent and believes it has the
ability to delay or reduce expenditures so as not to require additional
financial resources if such resources were not available.
In connection with the Endgate-Milliwave merger, Endgate exchanged all
outstanding shares of its Series A through Series G preferred stock for shares
of its Series E-1 through Series E-7 preferred stock. The number of shares of
Series E-1 through E-7 preferred stock issued in exchange for the Series A
through G preferred stock was equivalent to the number of shares of common stock
into which the Series A through G preferred stock was convertible immediately
prior to the exchange.
Effective March 31, 2000, Endgate's board of directors approved a
one-for-two reverse split of the outstanding shares of all classes of preferred
stock and common stock. Effective June 6, 2000, the board of directors of
Endwave approved a further one-for-two reverse split of the then outstanding
share of all classes of preferred stock and common stock. All share and per
share data have been restated to reflect the exchange of preferred stocks and
these splits.
On March 31, 2000 TRW Milliwave merged with Endgate Corporation. In the
merger, Milliwave merged into Endgate and TRW received approximately 52% of the
merged company's capital stock in exchange for TRW's shares in Milliwave. As a
result, Endgate was the surviving corporation in the merger and TRW Milliwave
ceased to exist as a separate legal entity. However, because TRW owned more than
half of Endgate's outstanding capital stock after the merger, TRW Milliwave is
treated as the acquiring company for accounting purposes. As a result, Endgate
ceased to be a separate accounting entity as of the date of the merger, and the
combined company's historical financial statements are those of Milliwave. In
connection with the merger, Endgate issued TRW 13,963,063 shares of Series T-1
preferred stock which has not been reflected in these financial statements.
These financial statements present the financial position and results of
operations of Endgate, the acquired business, immediately prior to the
consummation of the merger with TRW Milliwave.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying financial statements and related notes as of March 31,
2000, and for the nine months ended March 31, 1999 and 2000, are unaudited, but
include all adjustments, consisting only of normal recurring adjustments, that
management considers necessary for a fair presentation of its financial
position, operating results, and cash flows for the interim date and
F-33
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
periods presented. Results for the nine-month period ended March 31, 2000 are
not necessarily indicative of results to be expected for the full fiscal year of
2000 or for any future period.
REVENUE RECOGNITION AND WARRANTY
The Company recognizes product revenue at the time title passes, which is
upon product shipment and provides for estimated warranty expense at the time of
sale. The Company's customers are primarily wireless systems integrators and
equipment manufacturers and Endgate's products are integrated into the products
of its customers. There are no significant customer acceptance requirements or
post-shipment obligations on the part of Endgate. The Company recognizes
development fees ratably over the estimated term of the development period.
Up-front fees, if any, associated with development agreements are recognized
over the estimated development and production period. In no event are revenues
recognized prior to becoming payable by the customer. The costs incurred under
these agreements are included in research and development expenses.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly-liquid investments purchased with a
maturity from the date of purchase of three months or less to be cash
equivalents; investments with maturities between three and twelve months are
considered to be short-term investments.
The Company invests its excess cash primarily in demand deposit and money
market accounts with United States banks and in short-term investments. These
securities, consisting of treasury bills, government notes, commercial paper and
money market funds, typically mature or are redeemable within six months and
bear minimal risk. The Company has not experienced any significant loss on the
investments. Excess cash at June 30, 1999 is held in a money market account with
a single California bank.
CONCENTRATION OF CREDIT RISK
The Company sells its products primarily to major telecommunications
equipment manufacturers. The Company performs ongoing credit evaluations of its
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and such losses have been immaterial and
within management's expectations.
Product revenue in fiscal 1999 is related to two major customers that make
up 42% and 38% of total revenues. Product revenue in fiscal 1997 and 1998
substantially related to a single major customer.
F-34
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
INVENTORIES
Inventories are stated at the lower of cost or market (on a first-in,
first-out basis) and are comprised of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------- MARCH 31,
1998 1999 2000
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................ $ 807 $ 652 $ 3,125
Work in process.......................................... 300 50 366
Finished goods........................................... 44 49 63
----------- ------------ ------------
$ 1,151 $ 751 $ 3,554
=========== ============ ============
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided for
using the straight-line method over the estimated useful lives of the assets,
which range from three to five years. Equipment with an aggregate cost of
$2,722,000 and accumulated amortization of $1,472,000 on hand at June 30, 1999
is subject to capital lease arrangements ($3,536,000 and $1,619,000 at June 30,
1998). The Company has the option to purchase the assets under these leases at
the conclusion of the lease term at a stated price.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Laboratory and demonstration equipment..................... $ 4,791 $ 5,882 $ 6,997
Software................................................... 475 600 732
Computer equipment......................................... 632 835 867
Furniture and fixtures..................................... 145 224 355
Leasehold improvements..................................... 194 206 254
----------- ----------- -----------
6,237 7,747 9,205
Less accumulated depreciation and amortization (including
amortization of assets held under capital lease)........ (3,826) (5,034) (5,781)
----------- ----------- -----------
Property and equipment, net................................ $ 2,411 $ 2,713 $ 3,424
=========== =========== ===========
</TABLE>
INTANGIBLE ASSETS
Included in Endgate's other assets are patent and license costs totaling
$407,000 and $308,000 as of June 30, 1999 and 1998. The cost of acquiring the
assets and certain transaction costs have been recorded on the balance sheet and
are being amortized on a straight-line basis over a period of five years.
Accumulated amortization on the patents and licenses totaled $148,000 and
$45,000 as of June 30, 1999 and 1998.
F-35
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
STOCK-BASED COMPENSATION
As described in Note 4, the Company has elected to account for stock option
grants to employees and directors in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and, to adopt the
disclosure-only provisions as permitted under Financial Accounting Standards
Board's Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS
123").
COMPREHENSIVE INCOME
As of July 1, 1998, Endgate adopted the Financial Accounting Standards
Board's Statement No. 130, "Reporting Comprehensive Income" ("FAS 130"), which
requires the reporting and presentation of comprehensive income (loss) and its
components in the financial statements. Comprehensive loss is the same as net
loss for all the periods presented as there are no adjustments reported in
stockholders' equity which are to be included in the computation. Accordingly,
the adoption of FAS 130 had no material impact on Endgate's results of
operations, cash flows, or financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted Financial Accounting Standards Board's Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 superseded Statement of Financial Accounting Standards No.
14, "Financial Reporting for Segments of a Business Enterprise." FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. FAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
As Endgate operates in one business segment, the adoption of FAS 131 did not
affect Endgate's results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"),
which is required to be adopted for the year ending June 30, 2001. The Company
has not, in the past, and does not anticipate in the future, using derivative
instruments nor does it anticipate that the adoption of FAS 133 will have any
material impact on results of operations, cash flows, or the financial position
of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. In connection with the initial public
offering, the Company modified its revenue recognition policy to conform to SAB
101. The Company believes that its revenue recognition policy is in compliance
with the provisions of SAB 101.
F-36
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
2. DEVELOPMENT FEES
In fiscal 1998, Endgate entered into a development and production agreement
with a major customer for development and production of a new radio product. In
fiscal 1999, the agreement was amended to include additional products. Under
this agreement, as amended, the customer will provide funding of Endgate's
development costs for this product up to a maximum of $3,500,000. The Company
recorded $670,000 and $400,000 under this agreement during the years ended June
30, 1999 and 1998. Costs incurred under this contract are included in research
and development expenses and amounted to approximately $1,020,000 and $286,000
in the years ended June 30, 1999 and 1998. Development fees are generated by
developing product prototypes and custom products pursuant to agreements that
provide for payment as milestones are met and prototype units are shipped.
3. CONVERTIBLE SUBORDINATED PROMISSORY NOTES
In February 1999, Endgate borrowed approximately $5,034,000 in the form of
convertible subordinated promissory notes issued to investors. The notes bore
interest at a rate of 10% per annum and were due on the earlier of (i) March 31,
1999, or (ii) on the date of the closing of a preferred stock financing of at
least $10,000,000 and wherein shares are issued to at least one new investor
having no prior investment in Endgate, which may include the cancellation of the
note. The notes were converted, along with all accrued interest, into 853,162
shares of Endgate's Series E-6 preferred stock in April 1999. In conjunction
with the convertible subordinated promissory notes, Endgate also issued the
investors warrants to purchase 170,621 shares of Endgate's Series E-6 preferred
stock. The fair value of the warrants was calculated to be $519,000 using the
Black-Scholes valuation method and was expensed in full during fiscal year 1999.
In January 2000, Endgate borrowed approximately $5,000,000 in the form of
convertible subordinated promissory notes issued to investors. The notes bore
interest at a rate 10% per annum and were due within 128 days or on the date of
the closing of a preferred stock financing of at least $10,000,000. The notes
were converted, along with all accrued interest, into 498,024 shares of
Endgate's Series E-7 preferred stock in March 2000. In conjunction with the
convertible subordinated promissory notes, Endgate also issued the investors
warrants to purchase 99,595 shares of Endgate's Series E-7 preferred stock. The
fair value of the warrants was calculated to be $510,000 using the Black-Scholes
valuation method and was expensed in full during the nine-month period ended
March 31, 2000.
4. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At June 30, 1999, Endgate has issued and outstanding 426,250, 866,398,
991,423, 1,246,464, 2,481,677, and 3,456,391 shares of Series E-1, E-2, E-3,
E-4, E-5, and E-6 preferred stock. Each share of preferred stock is convertible
into common stock on a one-for-one basis, subject to certain antidilution
provisions. In conjunction with the Series E-6 preferred stock issuance, the
conversion rates for Series E-3 and E-4 preferred stock were adjusted under
these antidilution provisions such that each share of preferred stock will
convert to 1.45 and 1.81 shares of common stock. The Series E-1, E-2, E-3, E-4,
and E-5 preferred stock will automatically convert
F-37
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
into common stock upon the consummation of an underwritten public offering under
the Securities Act of 1933 of Endgate's common stock in which the sales price to
the public is not less than $9.00 per share and from which the gross proceeds to
the company is not less than $10,000,000, or upon election of a majority of the
Series E-1, E-2, E-3, E-4 and E-5 preferred shares outstanding voting together
as a single class.
The Series E-6 preferred stock will automatically convert into common stock
upon the consummation of an underwritten public offering under the Securities
Act of 1933 of Endgate's common stock in which the sales price to the public is
not less than $6.004 per share and in which the aggregate offering price is not
less than $15,000,000, or upon election of two thirds of the Series E-6
preferred shares outstanding.
The holders of preferred stock have the right to receive dividends as and
if declared by the directors at a dividend rate set by the directors when
declared. No dividends have been declared as of June 30, 1999.
Upon liquidation and before any distribution or payment shall be made to
Series E-1, E-2, E-3, E-4 and E-5 preferred stockholders, the Series E-6
preferred stockholders are entitled to receive a distribution of:
o $8.70 per share (subject to adjustment for a
recapitalization) plus all declared but unpaid dividends if
the valuation of such liquidation is less than $111,000,000
or
o $6.004 per share (subject to adjustment for a
recapitalization) plus all declared but unpaid dividends of
the valuation if such liquidation is more than $111,000,000.
The Series E-1, E-2, E-3, E-4 and E-5 preferred stockholders are entitled
to receive, upon liquidation, a distribution of $4.00, $7.00, $8.28, $11.44, and
$6.00 per share (subject to adjustment for a recapitalization) plus all declared
but unpaid dividends. To the extent that remaining assets are available upon
liquidation, common stockholders will then receive a distribution equal to $4.00
per share. Any remaining assets shall be divided pro rata among the holders of
common and preferred stock on an as-converted basis. The preferred stockholders
participate in the voting rights of Endgate as if their shares were converted
into common stock using the conversion rate in effect at the record date.
In March 2000, Endgate issued and sold 2,449,636 shares of Series E-7
preferred stock at $10.12 per share for cash and forgiveness of the
then-existing subordinated notes.
COMMON STOCK
Under a stock purchase agreement executed by employee stockholders, common
stock purchased by employees for cash is subject to a repurchase option by
Endgate upon termination of the purchaser's employment. The repurchase right
lapses ratably over a four-year period. At June 30, 1999, 4,687 shares of common
stock issued upon early exercise of options (9,375 shares at June 30, 1998) were
subject to repurchase in the event of termination of employment.
F-38
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
Included in Endgate's capitalization are shares of common stock reserved
for issuance upon the conversion of preferred stock and warrants and the
exercise of stock options.
1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan (the "Plan") was adopted in September
1992, amended in April 1999, and provides for the issuance of options for up to
1,318,750 shares of common stock to directors, employees, and consultants.
Under the Plan, options may be granted by the board of directors to
employees, directors and consultants. Options granted may be either incentive
stock options or nonstatutory stock options. Incentive stock options under the
plan are at exercise prices not less than fair value and nonstatutory stock
options cannot be at an exercise price less than 85% of the fair value on the
date of grant, as determined by the board of directors. The term of the plan is
10 years. Options become exercisable over a term of exercise as specified in
each option agreement. Subject to approval by the board of directors, options
may be exercised early, however, unvested options are subject to a repurchase
option by Endgate upon termination of the purchaser's employment or services.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING STOCK OPTIONS
----------------------------------------------------------------
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE EXERCISE PRICE
-------------------- ------------------- ---------------------
<S> <C> <C> <C>
Balance at June 30, 1996........................ 164,469 $0.40--$2.40 $0.84
Options granted.............................. 119,875 $4.24 $4.24
Options exercised............................ (3,273) $0.70--$4.24 $1.16
Options canceled............................. (26,391) $0.70--$4.24 $2.48
-------------------- ------------------- ---------------------
Balance at June 30, 1997........................ 254,680 $0.40--$4.24 $1.50
Options granted.............................. 841,575 $1.20--$4.24 $1.48
Options exercised............................ (4,459) $0.70--$4.24 $1.68
Options canceled............................. (192,751) $0.70--$4.24 $4.00
-------------------- ------------------- ---------------------
Balance at June 30, 1998........................ 899,045 $0.40--$4.24 $1.36
Options granted.............................. 75,750 $1.20 $1.20
Options exercised............................ (8,545) $0.70--$1.20 $1.08
Options canceled............................. (25,672) $1.20 $1.20
-------------------- ------------------- ---------------------
Balance at June 30, 1999........................ 940,578 $0.40--$4.24 $1.36
Options granted (unaudited).................. 946,320 $1.20--$6.00 $2.23
Options exercised (unaudited)................ (318,874) $0.40--$4.24 $1.18
Options canceled (unaudited)................. (60,669) $1.20--$4.00 $1.29
-------------------- ------------------- ---------------------
Balance at March 31, 2000 (unaudited)........... 1,507,355 $0.40--$6.00 $1.94
==================== =================== =====================
</TABLE>
F-39
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
The following table summarizes information concerning outstanding and
exercisable options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT JUNE 30,
JUNE 30, 1999 1999
-------------------------------- WEIGHTED-AVERAGE ---------------------------------
EXERCISE PRICE WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
PER SHARE SHARES EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE
------------------- ------------ ------------------ ------------------ ------------ -------------------
(IN YEARS)
<S> <C> <C> <C> <C> <C> <C>
$0.40 9,016 $0.40 4.02 9,016 $0.40
$0.70 21,063 $0.70 5.24 21,188 $0.70
$1.20 884,312 $1.20 7.61 391,125 $1.20
$2.40 25,250 $2.40 6.88 18,937 $2.40
$4.24 937 $4.24 7.25 312 $4.24
------------ ------------
940,578 440,578
============ ============
</TABLE>
The weighted-average per share fair value of options granted in 1999 and
1998 was $0.24 and $0.40.
Future pro forma net income and earnings/loss per share results may be
materially different from actual amounts presented. The value of each option was
estimated at the date of grant using the minimum value method with the following
weighted-average assumptions: no dividends, an expected life of four years, and
a risk-free interest rate of 5.0% and 6.0% for the years ended June 30, 1999 and
1998.
For the purpose of pro forma disclosures, the estimated fair value of the
above awards is amortized to expense over the awards' periods. The Company's pro
forma net loss for the year ended June 30, 1999 is $(17,207,000). The effect of
applying FAS 123 to Endgate's stock option awards did not result in pro forma
net loss that was materially different from amounts reported at June 30, 1998.
As of June 30, 1999, 1,200,380 shares of common stock are available for
future grants under the Plan.
In April 1998, the board of directors voted on and approved a repricing of
certain stock options. The Company repriced options as an incentive plan in
order to retain key employees. The Company repriced options to adjust the fair
value of exercise prices for certain options granted in prior years based on the
pricing of the Series E-5 preferred stock issuance in March 1998. In April 1998,
173,564 options outstanding at $4.24 were repriced to $1.20. The vesting period
for the repriced options was left unchanged and had approximately 2.5 years
remaining.
DEFERRED STOCK COMPENSATION
In connection with the grant of stock options to employees for the nine
month period ended March 31, 2000, the Company recorded deferred stock
compensation within stockholders' equity of approximately $4,571,000,
representing the difference between the deemed fair value of the Common Stock
for financial statement presentation purposes and the option exercise price of
these options at the date of grant. During the nine months ended March 31, 2000
we amortized $1,191,000 respectively, of this deferred stock compensation. We
will amortize the remaining deferred stock compensation using the accelerated
method, over the vesting period of the related options, generally four years.
F-40
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
STOCK WARRANTS
In September 1994, in connection with a new lease line, Endgate issued to
the lessor warrants to purchase 4,285 shares of Series E-2 preferred stock at an
exercise price of $8.85 per share, on or before September 30, 1999. The warrants
are subject to acceleration upon the occurrence of certain events. The Company
has reserved 57,143 shares of Series E-2 preferred stock for issuance under the
stock warrants.
In November 1995, in connection with a new lease line, Endgate issued to
the lessor warrants to purchase 16,924 shares of Series E-3 preferred stock at
an exercise price of $15.00 per share, on or before November 15, 2000. The
warrants are subject to acceleration upon the occurrence of certain events. The
Company has reserved 16,924 shares of Series E-3 preferred stock for issuance
under the stock warrants.
In September 1997, in conjunction with a lease line agreement, Endgate
issued warrants to a leasing company to purchase 3,936 shares of Endgate's
Series E-4 preferred stock with an exercise price of $21.20 per share. The
warrants are exercisable at any time for five years from the date of grant, or
upon the closing of a public offering by Endgate's common stock. The Company has
reserved 3,936 shares of Series E-4 preferred stock for issuance under stock
warrants.
In October 1997, in conjunction with the secured promissory notes issued to
investors, Endgate issued warrants to purchase 86,380 shares of preferred stock
in Endgate's Series E-5 preferred stock financing. The warrants were exercisable
at any time for five years from the date of issuance, or upon the closing of a
public offering of Endgate's common stock in excess of $10,000,000 or upon the
election of a majority of the preferred shares outstanding, if earlier. In March
1998, all of these warrants were exercised for $6.00 per share.
In March 1998, in conjunction with a loan agreement with a bank, Endgate
issued to the bank warrants to purchase 6,250 shares of Series E-5 preferred
stock at an exercise price of $6.00 per share. The warrants are exercisable at
any time for five years from the date of issuance, or upon the closing of a
public offering of Endgate's common stock in excess of $7,500,000. The Company
has reserved 6,250 shares of Series E-5 preferred stock for issuance under stock
warrants.
In April 1999, in conjunction with the issuance of Series E-6 preferred
stock, Endgate issued warrants to the underwriter to purchase 25,316 shares of
Series E-6 preferred stock at an exercise price of $6.004 per share, on or
before February 2004. The Company has reserved 25,316 shares of Series E-6
preferred stock for issuance under the stock warrants.
5. LEASES AND COMMITMENTS
The Company leases its office and design facilities, as well as certain
equipment under operating leases. Rent expense was approximately $270,000,
$532,000 and $649,000 for the years ended June 30, 1997, 1998 and 1999. In
addition, Endgate received rental income of approximately $172,000 for the year
ended June 30, 1999 ($83,000 in 1998).
F-41
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
Future minimum lease payments under operating and noncancelable capital
leases as of June 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- --------------
Years ending June 30,
---------------------
<S> <C> <C>
2000....................................................................... $ 571 $ 564
2001....................................................................... 510 354
2002....................................................................... 410 106
2003....................................................................... -- 15
2004....................................................................... -- 1
------------- --------------
Total minimum payments required............................................... $ 1,491 1,040
=============
Less: amount representing interest............................................ (123)
--------------
Present value of future minimum lease payments................................ 917
Less current portion.......................................................... (461)
--------------
Long-term portion............................................................. $ 456
==============
</TABLE>
6. INCOME TAXES
As of June 30, 1999, the Company had federal and state net operating loss
carryforwards of approximately $42,300,000 and $12,900,000, respectively. The
Company also had federal research and development tax credit carryforwards of
approximately $800,000. The net operating loss and credit carryforwards will
expire at various dates beginning on 2008 through 2019, if not utilized.
Utilization of the net operating loss and credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets for financial reporting and the amount
used for income tax purposes. Significant components of the Company's deferred
tax assets for federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 JUNE 30, 1999
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................................... $ 11,300 $ 15,100
Research credit carryforwards............................................. 700 1,200
California manufacturing and research credit carryforwards................ 200 200
Capitalized research and development...................................... 1,100 3,100
Other..................................................................... 800 400
---------------- ----------------
Total deferred tax assets.................................................... 14,100 20,000
Valuation allowance for deferred tax asset................................... (14,100) (20,000)
---------------- ----------------
Deferred tax assets, net..................................................... $ -- $ --
================ ================
</TABLE>
F-42
<PAGE>
ENDGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999 AND THE NINE-MONTH PERIODS ENDED
MARCH 31, 1999 (UNAUDITED) AND 2000 (UNAUDITED)
Financial Accounting Standards Boards Statement No. 109 (FAS 109)
"Accounting for Income Taxes," provides for the recognition of deferred tax
assets if realization of such is more likely than not. Based upon the weight of
available evidence, which includes historical operating performance and the
reported cumulative net losses in all prior periods, the Company has provided a
full valuation allowance against its net deferred tax assets.
The valuation allowance increased by $4,500,000 during the year ended June
30, 1998.
F-43
<PAGE>
APPENDIX A
Prospective investors will be able to log on to a website maintained
by Epoch Securities, Inc., where a prospectus will be available for review. The
text set forth below will be included as Appendix A to the prospectus. Within
designated sections of the prospectus, consisting of the table of contents and
Appendix A, an embedded hyperlink for the "Meet the Management" Presentation
will provide exclusive access to the on-line visual media presentation of the
information set forth in textual format below. This presentation highlights
selected information contained elsewhere in the prospectus. This presentation
does not contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including the "Risk Factors" and our financial statements and notes to those
financial statements, before making an investment decision.
VISUAL 1: DISCLAIMER
Imagery: Border and Company logo.
Visual Text: Title: Disclaimer. The "Meet the Management" Presentation is
part of our prospectus. This presentation highlights selected information
contained elsewhere in this prospectus. This presentation does not contain all
of the information that you should consider before investing in our common
stock. You should read the entire prospectus carefully, including the "Risk
Factors" and our financial statements and notes to those financial statements,
before making an investment decision.
Script: (Ed Keible) The "Meet the Management" Presentation is part of our
prospectus. This presentation highlights selected information contained
elsewhere in this prospectus. This presentation does not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus carefully, including the "Risk Factors" and
our financial statements and notes to those financial statements, before making
an investment decision.
VISUAL 2: INTRODUCTION TO ENDWAVE'S CEO AND CFO
Imagery: Border and Company logo.
Visual Text: Ed Keible, President and Chief Executive Officer. Bruce
Margetson, Chief Financial Officer
Script: (Ed Keible) (see "Business - Overview") Welcome to the "Meet the
Management" Presentation for Endwave Corporation. I'm Ed Keible, President and
CEO and I would like to introduce Bruce Margetson, our Chief Financial Officer.
We would like to talk to you about Endwave, a provider of radio frequency, or
RF, subsystems that enable the transmission and reception of data signals in
broadband wireless systems.
VISUAL 3: INTRODUCTION TO ENDWAVE
Imagery: Border and Company logo.
Visual Text: Title: Introduction to Endwave. We sell our products to
wireless systems integrators that provide the broadband wireless equipment used
by communications service providers to offer data services.
Script: (Ed Keible) (see "Business - Overview") We primarily sell our
products to wireless systems integrators that provide the broadband wireless
equipment used by communications service providers to offer data services. Our
products are used in applications including high-speed
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<PAGE>
point-to-point access, point-to-multipoint access, point-to-consecutive point
access and cellular backhaul.
VISUAL 4: INDUSTRY BACKGROUND
Imagery: Border, Company logo and graphic at the bottom. The graphic is
titled "Access Bottleneck". Within the graphic, there is a building on the left
and a cloud on the right. The building has text within that reads "Subscribers'
Internal Networks" and text below that reads "100 mbps." The cloud has text
within that reads "Fiber Trunking Network" and text below that reads ">10,000
mbps." Between the building and the cloud is a string of ones and zeroes in a
pipe that is funnel shaped on both the building and the cloud ends and smaller
in the middle. Underneath the string of ones and zeroes in the pipe, the text
reads "1.5 mbps."
Visual Text: Title: Industry Background. To the right of the first bullet
reads, "Demand for high speed data transmission services." To the right of the
first sub-bullet underneath the first bullet reads, "Share data, collaborate,
and conduct commerce." To the right of the second sub-bullet underneath the
first bullet reads, " `Any time, anywhere' data access from mobile devices." To
the right of the second bullet reads, "The access network bottleneck."
Script: (Ed Keible) (see "Business - Industry Background"):
The growth of the Internet as a medium to share data, collaborate and
conduct commerce across and within enterprises has led to a dramatic increase in
the volume of data traffic on communications networks. This demand for
high-speed data transmission services is further increased by the recent growth
in demand for "anytime, anywhere" data access from mobile devices including
cellular phones. This has caused service providers to migrate to new high-speed
mobile data transfer standards including "third generation" cellular, or 3G. To
meet this demand, providers must upgrade their network infrastructure to
increase system speed and capacity.
Communications networks broadly consist of three interconnected segments:
the subscribers' internal network, the trunking network and the access network.
Based on presently available technology, access networks transmit data at a
fraction of the speed provided by subscribers' internal networks and the
trunking networks. Today, they typically provide maximum data transmission rates
of only 1.5 megabits per second, compared with 100 megabits per second for
subscribers' internal networks to more than 10,000 megabits per second for
trunking networks. As a result, access networks are presently a bottleneck
between subscriber networks and trunking networks.
VISUAL 5: LIMITATIONS OF ALTERNATIVE APPROACHES
Imagery: Border, Company logo and text box.
Visual Text: Title: Limitations of Alternative Approaches. Inside the text
box reads, "To address the limitations of today's primarily copper-based access
networks, communications service providers are adopting new technologies." To
the right of the first bullet reads, "DSL." To the right of the sub-bullet
underneath the first bullet reads, "Only supports higher speeds with asymmetric
data transmission configuration." To the right of the second bullet reads,
"Cable." To the right of the first sub-bullet underneath the second bullet
reads, "Generally installed only in residential areas." To the right of the
second sub-bullet underneath the second bullet reads, "Only supports asymmetric
data transmission." To the right of the third bullet reads, "Fiber optic cable."
To the right of the first sub-bullet underneath the third bullet reads,
"Presently only a small minority of businesses have direct access to fiber optic
cable networks." To the right of the second sub-bullet underneath the third
bullet reads, "Physical deployment is difficult and costly."
A-2
<PAGE>
Script: (Ed Keible) (see "Business - Industry Background"):
To address the limitations of today's access networks, service providers
are adopting new technologies including digital subscriber line, or DSL, cable
and fiber optic cable. Each of these alternatives differs in features such as
bandwidth, ease of deployment and cost. DSL, while able to support high-speed
asymmetric data transmission, offers a lower speed symmetric data transfer
option. Cable networks generally support only asymmetric high-speed data
transmission, and are widely available only in residential areas. Fiber optic
cable networks, while offering very high speeds of up to 155 megabits per second
or more, are not widely available today. In addition, the time and cost for
service providers to extend fiber optic cable to include access networks and
obtain permissions to lay new cable limits the attractiveness of fiber
deployment in many areas.
VISUAL 6: EMERGENCE OF BROADBAND WIRELESS ACCESS SYSTEMS
Imagery: Border and Company logo. There is a small icon on the left side of
the page that is labeled "Indicates location of Endwave product." This icon is
on top of all icons representing buildings and the Cellular Base Station and
represents the connection point. Breaking the slide into four quadrants, there
are pictures in each quadrant as described below: The TOP LEFT QUADRANT is a
picture labeled "Point-to-Point Access." The picture shows two icons, which
represent two buildings, connected by a straight line with a wave in the middle.
The left most icon is labeled "Corporate Office" and has "Point-to-Point Access"
on top of the line representing the connection. The icon on the right is labeled
"Trunking Network Access Point." The BOTTOM LEFT QUADRANT is a picture labeled
"Point-to-Multipoint Access." The picture shows four icons, which represent
buildings. There are three icons labeled "Point-to-Multipoint Subscriber" and
are connected to an icon on the right side labeled "Point-to-Multipoint Hub
Station." The BOTTOM RIGHT QUADRANT is a picture labeled "Cellular Backhaul."
The picture has three icons for cellular phones that are connected by a dotted
line to a circle that is labeled "Cellular Base Station." The Cellular Base
Station is connected to an icon on the left side of the quadrant, representing a
building and is labeled "Mobile Telephone Switching Office." The connection
between the Cellular Base Station and the Mobile Telephone Switching Office is
labeled "Point-to-Point Cellular Backhaul." The TOP RIGHT QUADRANT is a picture
labeled "Point-to-Consecutive-Point Deployed in a Ring." The picture shows four
icons representing buildings that are laid in the form of a parallelogram. The
buildings are connected to each other along the sides of the parallelogram by
two lines that are labeled "Point-to-Consecutive-Point Access." The left most
icon is labeled "Trunking Network Access Point" and the three other icons are
labeled "Point-to-Consecutive-Point Subscriber." In the center of the slide is a
cloud with text labeled "High Capacity Fiber Trunking Network." The lines
between the cloud and the "Trunking Network Access Point" icons in the top left
and top right quadrant, the "Mobile Telephone Switching Office" icon in the
bottom right quadrant and the "Point-to-Multipoint Hub Station" icon in the
bottom left quadrant, are labeled "Fiber Optic Cable." In each of the quadrants
there is a dotted quarter circle that encompasses each of the pictures.
Visual Text: Title: Emergence of Broadband Wireless Access Systems.
Script: (Ed Keible) (see "Business - Industry Background - EMERGENCE OF
BROADBAND WIRELESS ACCESS"):
Broadband wireless access systems use high frequency radio to address many
of these limitations. Broadband wireless technology links multiple points in a
communications network, enabling high-speed data transmissions between buildings
or between a fixed location and the trunking network. These can be deployed in
either point-to-point, point-to-multipoint, point-to-consecutive-point or
cellular backhaul configurations. They are also used for high capacity data
transmission from a cellular base station to the trunking network.
Communications service providers can deploy broadband wireless access
systems faster than other alternatives because they do not require the laying of
cables or obtaining of time consuming right-of-way permissions. Additionally,
broadband wireless access systems can be configured by
A-3
<PAGE>
service providers to offer symmetric or asymmetric data transmissions, depending
on a customer's needs.
VISUAL 7: BROADBAND WIRELESS ACCESS OPPORTUNITY
Imagery: Border, Company logo and textbox. There is a picture of a smaller
bar with a larger bar to the right of it.
Visual Text: Title: Broadband Wireless Access Opportunity. Inside text box
reads, "Wireless Customer Premises Equipment Market." On top of small bar reads,
"$443 million." Underneath small bar reads, "2000." On top of larger bar reads,
"$5.4 billion." Underneath larger bar reads, "2004." On the bottom left hand
corner reads, "Source: The Strategis Group."
Script: (Ed Keible) (see "Business - Industry Background - EMERGENCE OF
BROADBAND WIRELESS ACCESS"):
The Strategis Group, an independent research firm, estimates that the
customer premises equipment market alone will grow from approximately $443
million in 2000 to $5.4 billion in 2004. This market encompasses sales of the
equipment installed at subscribers' premises to complete the link of a broadband
wireless access system to the subscribers' internal networks.
VISUAL 8: NEEDS OF WIRELESS SYSTEMS INTEGRATORS
Imagery: Border and Company logo.
Visual Text: Title: Needs of Wireless Systems Integrators. To the right of
the first bullet reads, "High performance." To the right of the second bullet
reads, " Ability to migrate to low cost, high volume solutions." "To the right
of the third bullet reads, "Short time-to-market." To the right of the fourth
bullet reads, "Multiple levels of integration." To the right of the fifth bullet
reads, "Access to high volume manufacturing capability."
Script: (Ed Keible) (see "Business - Industry Background - Challenges
facing wireless systems integrators and the need for RF subsystem suppliers"):
To meet the needs of service providers, differentiate their products and
compete most effectively, wireless systems integrators require RF subsystems
suppliers that offer important advantages.
Wireless systems integrators want RF subsystems suppliers that offer lower
cost solutions as compared to providers of alternatives to broadband access and
also offer the highest practicable data transmission rates within a given
segment of the radio frequency spectrum. In addition, wireless systems
integrators require RF subsystems providers that are able to facilitate a short
time to market and offer multiple levels of integration of their products.
Lastly, RF subsystems providers must be able to manufacture products in
sufficient volumes to enable wireless systems integrators to meet and exceed
demand.
We believe that, although there is significant demand for wireless
subsystems today, few RF subsystems suppliers are able to comprehensively
address the challenges facing wireless systems integrators.
VISUAL 9: OUR SOLUTION
Imagery: Border and Company logo.
Visual Text: Title: Our Solution. To the right of the first bullet reads,
"Superior performance through technological leadership." To the right of the
second bullet reads, "Path to low cost, high volume manufacturing through
patented circuit technology." To the right of the third bullet reads,
A-4
<PAGE>
"Rapid design and prototype capability." To the right of the fourth bullet
reads, "Broad product portfolio." To the right of the fifth bullet reads, "High
volume production capability."
Script: (Ed Keible) (see "Business - Our Solution"):
At Endwave, our solution is to design and manufacture a broad portfolio of
products to best meet our customers' needs.
Our products offer superior performance through technological leadership.
We have extensive experience in the design and manufacture of high performance
RF subsystems. Our technical team has broad expertise in device physics, circuit
design, antenna modeling and design, transceiver design and test engineering. We
have a product development team experienced in the design of RF devices based on
gallium arsenide, the semiconductor material most widely used in broadband
wireless access applications. We use third-party semiconductor fabrication
facilities to manufacture the gallium arsenide devices we design.
In addition, we offer a path to low cost, high volume manufacturing through
our patented circuit technology. By using a combination of our proprietary
circuit and process technologies, we are able to meet our customers' volume and
time-to-market requirements.
We also offer rapid design and prototyping capabilities. We have developed
an extensive library of RF circuit designs that allow us to rapidly and
economically combine standard circuits into custom assemblies with various
performance capabilities and support for multiple frequencies. We believe that
this ability to migrate from prototype to volume production in a short period of
time is an important competitive advantage.
Further, we offer a broad range of products, from RF modules to integrated
transceivers and outdoor units. Our product portfolio supports a wide range of
frequencies, from 18 GHz to 65 GHz, and addresses multiple market applications.
This enables wireless systems integrators to rapidly design products for new
frequencies or emerging applications.
Finally, we offer high volume production capability. Our automated assembly
and testing capabilities and multiple manufacturing facilities and production
lines allow us to rapidly achieve high volume production of our products.
VISUAL 10: OUR PRODUCTS
Imagery: Border and Company logo. See description of artwork in the
prospectus on page titled "Description of Inside Front Cover of Prospectus".
Visual Text: Title: Our Products.
Script: (Ed Keible) (see "Business - Products"): Our products can be
categorized into four primary areas of focus: RF modules, integrated
transceivers, broadband antennas and outdoor units.
Our RF modules provide basic RF functions and can be used to rapidly
develop product prototypes. RF modules include low noise amplifiers, power
amplifiers, frequency converters and frequency multipliers.
The integrated transceivers we build have the ability to transmit and
receive data signals in a variety of broadband wireless applications and combine
the high frequency transmit and receive functions of a radio system into one
package.
Our broadband antennas radiate and receive high frequency signals. They are
used in point-to-point, cellular backhaul and point-to-multipoint systems.
A-5
<PAGE>
Our outdoor units transmit and receive radio signals to and from one or
more other outdoor units and provide complete radio functionality in a single
unit. These units are used in all types of broadband wireless systems as a
complete RF subsystem.
VISUAL 11: CIRCUIT TECHNOLOGIES
Imagery: Border and Company logo. See artwork in Registration Statement
("Business -Technology and Product Development - CIRCUIT TECHNOLOGIES")
Visual Text: Title: Circuit Technologies. . First text box reads, "Hybrid
Microwave Integrated Circuits." Second text box reads, "Monolithic Microwave
Integrated Circuits." Third text box reads, "Multi-Chip Integrated Circuit MCIC
(`Flip - Chip') Technology."
Script: (Ed Keible) (see "Business - Technology and Product Development -
CIRCUIT TECHNOLOGIES"):
We use three circuit technologies in our products, allowing us to offer our
customers the most appropriate and cost-effective solution for each customer's
performance and volume requirements.
Due to their labor-intensive nature, we use our hybrid microwave integrated
circuit, or HMIC, technology most frequently for rapid prototyping and low
volume production orders. Our monolithic microwave integrated circuit, or MMIC,
technology is less labor-intensive than our HMIC technology, but they utilize
substantially more costly material and require more design time and expertise
than our HMICs. Our patented multi-chip integrated circuit, or MCIC, or
"flip-chip", technology enables us to design and manufacture RF circuits that
use smaller amounts of costly material as compared to MMIC circuits and require
less labor-intensive work than HMIC circuits. As a result, our MCIC circuits
lend themselves to cost effective automated manufacturing processes and enable
high product quality and reliability and lower unit cost at high volume.
VISUAL 12: OUR STRATEGY
Imagery: Border and Company logo.
Visual Text: Title: Our Strategy. To the right of the first bullet reads,
"Extend technological leadership." To the right of the second bullet reads,
"Target new frequencies and emerging applications." To the right of the third
bullet reads, "Provide best-in-class manufacturing capability." To the right of
the fourth bullet reads, "Maintain rapid prototyping capability." To the right
of the fifth bullet reads, "Leverage strategic relationship with TRW."
Script: (Ed Keible) (see "Business - Strategy"):
Our objective at Endwave is to be the leading global supplier of RF
subsystems for broadband wireless applications.
We intend to continue to invest in research and development, seek to
attract the most talented engineers and scientists, and build on our
manufacturing technologies to remain a technological leader. We intend to
continue offering products that are optimized for the performance factors that
are most important to our customers.
We plan to offer our current products globally as regulatory authorities
license new bands of the frequency spectrum for broadband wireless access
applications. We intend to aggressively offer products for new frequency bands
and emerging market applications.
Our goal is to continue to improve upon our manufacturing processes and
continue our philosophy of building capacity in advance of demand to offer
customers short product lead times.
A-6
<PAGE>
We intend to maintain our position as a supplier of choice through our
ability to rapidly prototype a design to meet our customers' needs and also meet
their high volume manufacturing demands.
We believe our relationship with TRW gives us a competitive advantage in
designing and manufacturing our products. In addition, our supply agreement with
TRW provides us with a long-term supply of gallium arsenide devices.
VISUAL 13: CUSTOMERS
Imagery: Border and Company logo. One box subdivided into two sections.
Visual Text: Title: Customers. Text box reads, "Global Wireless Systems
Integrators and Equipment Manufacturers." In the first text box from the left
there are four bullet points that read, "Allgon, Anritsu, Hughes Network
Systems, Lockheed Martin, Nokia." In the second text box the bullet points read,
"Nortel Networks, P-Com, Rockwell International, Toshiba, WinNet MCS"
Script: (Ed Keible) (see "Business - Customers"):
We sell our products to global wireless systems integrators and equipment
manufacturers, including Allgon, Anritsu, Hughes Network Systems, Lockheed
Martin Nokia, Nortel Networks, P-Com, Rockwell International, Toshiba and WinNet
MCS.
With the exception of a portion of our sales to Nokia and our sales to
Nortel Networks, the revenues attributable to each of these customers were
generated through direct sales by us to them. Nortel Networks is not our direct
customer; instead, we deliver products directly to them under an exclusive
supply contract we have with TRW, which has a corresponding agreement with
Nortel Networks. We deliver products to Nokia in part pursuant to direct
purchase orders and in part under an exclusive production agreement we have with
TRW, which has a corresponding agreement with Nokia.
VISUAL 14: COMPETITION
Imagery: Border and Company logo. Two boxes.
Visual Text: Title: Competition. The header of the first text box from the
left reads, "RF Modules, Transceivers and Outdoor Units." First bullet
underneath the first box from the left reads, "Celeritek." The second bullet
reads, "Filtronics." The third bullet reads, "Infineon Technologies." The fourth
bullet reads, "MTI Technology." The fifth bullet reads, "Raytheon." The sixth
bullet reads, "REMEC." The seventh bullet reads, "Signal Technologies." The
eighth bullet reads, "Telaxis Communications." The ninth bullet reads,
"Thomson-CSF" The tenth bullet reads, "WJ Communications." The second text box
from the left reads, "Antennas." The first bullet underneath the second text box
from the left reads, "Andrew Corporation." The second bullet reads,
"Electromagnetic Sciences." The third bullet reads, "Nurad Technologies." The
fourth bullet reads, "Radio Waves." The fifth bullet reads, "REMEC."
Script: (Ed Keible) (see "Business - Competition"):
Competition in the market for RF subsystems for broadband wireless access
systems is intense. In the markets for RF modules, transceivers and outdoor
units, we primarily compete with Celeritek, Filtronics, Infineon Technologies,
MTI Technology, Raytheon, REMEC, Signal Technologies, Telaxis Communications,
Thomson-CSF and WJ Communications. In the market for antennas, we primarily
compete with Andrew Corporation, Electromagnetic Sciences, Nurad Technologies,
Radio Waves and REMEC.
A-7
<PAGE>
VISUAL 15: QUARTERLY RESULTS OF OPERATIONS
Imagery: Border and Company logo.
Visual Text: Title: Quarterly Results of Operations (The remainder of the
visual text is an exact replica of the Statement of Operations data, which is
pro forma for each of the periods ending Mar. 31, 1999, June 30, 1999, Sept. 30,
1999, Dec. 31, 1999, and Mar. 31, 2000 and actual for the period ended June 30,
2000.)
Script: (Bruce Margetson) (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview and Six Quarters Ended
June 30, 2000"):
On March 31, 2000, Endwave, formerly named Endgate, merged with TRW
Milliwave, with Endwave as the surviving corporation in the merger. The data
presented here, with the exception of the data for the quarter ended June 30,
2000, is presented on a pro forma basis giving effect to our merger with
Milliwave as if it were completed on January 1, 1999.
On this slide are unaudited quarterly pro-forma and actual results of
operations, presented for the six quarters ended June 30, 2000. This information
has been derived from our unaudited financial and pro-forma financial
statements. These unaudited quarterly results should be read in conjunction with
the financial statements and notes appearing elsewhere in the prospectus.
Product revenues increased in each of the four quarters in 1999, primarily
as a result of increased shipments of product and our introduction of a new
antenna product. There was no significant change in product revenues from Q4
1999 to Q1 2000. However, our product revenues increased substantially during Q2
2000, primarily due to further increases in product shipments to Nokia, Nortel
Networks and Hughes Network Systems.
Our cost of product revenues shows a slight decrease from Q1 to Q2 1999,
primarily as a result of reserves for obsolescence taken in the first quarter.
Cost of product revenues increased from the Q2 to Q4 1999, due to an increased
level of production for Nokia. Cost of product revenues increased substantially
from the Q4 1999 to Q2 2000, primarily due to investments in equipment,
management and facilities to support anticipated higher production volumes, as
well as an increase in prices for components purchased from TRW in Q2 2000
following the completion of our merger with Milliwave. We have experienced
increasingly negative gross margins as a result of these investments in
manufacturing capacity. However, we believe the investments will result in lower
unit costs if our production volume increases in future quarters.
Research and development expenses decreased from Q1 to Q3 1999, primarily
as a result of decreasing purchases of materials. R&D expenses increased from Q3
to Q4 1999 due to increased costs for material and labor for production of
prototype units. R&D expenses also increased from Q4 1999 to Q1 2000 due to
TRW's one-time allocation of R&D expenses to Milliwave in Q1. The absence of
this allocation in Q2 resulted in a decrease of R&D expenses from Q1 to Q2 2000.
VISUAL 16: CONCLUSION
Imagery: Border and Company logo.
Visual Text: Title: Conclusion. We strongly encourage you to refer back to
the prospectus for additional information as well as to take a look at the "Risk
Factors." Thank you for your interest in Endwave.
Script: (Ed Keible): We hope that this presentation was helpful in
understanding Endwave's business, solutions, products and strategy. We strongly
encourage you to refer back to the prospectus for additional disclosure as well
as to take a look at the "Risk Factors." Thank you for your interest in Endwave.
A-8
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED
IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND [ENDWAVE LOGO]
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.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................... 1
Risk Factors................................ 6
Special Note Regarding 6,000,000 SHARES
Forward-Looking Statements............... 22
Use of Proceeds............................. 23
Dividend Policy............................. 23 COMMON STOCK
Capitalization.............................. 24
Dilution.................................... 25
Selected Financial Data..................... 26
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................ 30 DEUTSCHE BANC ALEX. BROWN
Business.................................... 43
Management.................................. 57 J.P. MORGAN & CO.
Certain Transactions........................ 71
Principal Stockholders...................... 74 U.S. BANCORP PIPER JAFFRAY
Description of Capital Stock................ 76
Shares Eligible for Future Sale............. 79 EPOCH PARTNERS
Underwriting................................ 81
Legal Matters............................... 85
Experts..................................... 85
Where You Can Find More
Information.............................. 85
Index to Financial Statements............... F-1
Meet the Management......................... A-1
[Investors will be able to click on the "Meet the
Management" text above for a direct link to the
visual media Meet the Management presentation]
DEALER PROSPECTUS DELIVERY OBLIGATIONS:
PROSPECTUS
UNTIL NOVEMBER 11, 2000 (25 DAYS AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR
TRADE IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED October 17, 2000
TO DELIVER A PROSPECTUS. DEALERS ARE ALSO
OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
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