UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-31635
Endwave Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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95-4333817
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(State of
incorporation)
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(I.R.S. Employer Identification
No.)
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130 Baytech Drive
San Jose, CA
(Address of principal
executive offices)
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95134
(Zip
code)
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(408) 522-3100
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value per share
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The NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange
Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The aggregate market value of the common stock held by
non-affiliates of the registrant as of June 30, 2008 was
approximately $49 million. Shares of voting common stock
held by directors and executive officers have been excluded as
such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive
determination for other purposes. The aggregate market value has
been computed based on a price of $6.35, which was the closing
sale price on June 30, 2008 as reported by The NASDAQ
Global Market.
The number of shares outstanding of the registrants common
stock as of February 6, 2009 was 9,345,442. The number of
shares outstanding of the registrants preferred stock as
of such date was 300,000. Such shares are convertible at the
holders option into 3,000,000 shares of our common
stock.
ENDWAVE
CORPORATION
FORM 10-K
Year
Ended December 31, 2008
TABLE OF
CONTENTS
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FORWARD-LOOKING
INFORMATION
This report contains forward-looking statements within the
meaning of Section 17A of the Securities Act of 1933, or
the Securities Act, and within the meaning of Section 21E
of the Securities Exchange Act of 1934, or the Exchange Act,
that are subject to the safe harbor created by those
sections. These forward-looking statements can generally be
identified as such because the statement will include words such
as anticipate, believe,
continue, estimate, expect,
intend, may, opportunity,
plan, potential, predict or
will, the negative of these words or words of
similar import. Similarly, statements that describe our future
plans, strategies, intentions, expectations, objectives, goals
or prospects are also forward-looking statements. Discussions
containing these forward-looking statements may be found, among
other places, in the sections of this report entitled
Business, Risk Factors, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations. These forward-looking
statements are based largely on our expectations and projections
about future events and future trends affecting our business,
and so are subject to risks and uncertainties that could cause
actual results to differ materially from those anticipated in
the forward-looking statements. The risks and uncertainties are
attributable to, among other things: global economic conditions
and their impact on our customers; volatility resulting from
consolidation of key customers; our ability to achieve revenue
growth and maintain profitability; our customer and market
concentration; our suppliers abilities to deliver raw
materials to our specifications and on time; our successful
implementation of next-generation programs, including inventory
transitions; our ability to penetrate new markets; fluctuations
in our operating results from quarter to quarter; our reliance
on third-party manufacturers and semiconductor foundries;
acquiring businesses and integrating them with our own;
component, design or manufacturing defects in our products; our
dependence on key personnel; and fluctuations in the price of
our common stock. Because of the risks and uncertainties
referred to above and other risks and uncertainties, including
the risks described in the section of this report entitled
Risk Factors, actual results or outcomes could
differ materially from those expressed in any forward-looking
statements and you should not place undue reliance on any
forward-looking statements. New risks emerge from time to time,
and it is not possible for us to predict which risks will arise.
In addition, we cannot assess the impact of each risk on our
business or the extent to which any risk, or combination of
risks, may cause actual results to differ materially from those
contained in any forward-looking statements. Except as required
by law, we undertake no obligation to publicly revise our
forward-looking statements to reflect events or circumstances
that arise after the date of this report or the date of
documents incorporated by reference in this report that include
forward-looking statements.
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PART I
Introduction
We design, manufacture and market radio frequency, or RF,
modules that enable the transmission, reception and processing
of high frequency signals. Our target markets include
telecommunication networks, defense electronics, homeland
security systems, electronic instrumentation and other
applications that require high frequency RF circuitry and
subsystems. As used in this report, we,
us, our, Endwave and words
of similar import refer to Endwave Corporation and, except where
the context otherwise requires, its consolidated subsidiary,
Endwave Defense Systems Incorporated.
Many of our RF modules are deployed in telecommunication
networks, carrier class trunking networks and point-to-point
transmission networks. Our target customers for these
applications are telecommunication network original equipment
manufacturers and systems integrators, collectively referred to
in this report as telecom OEMs. Telecom OEMs provide the
equipment used by service providers to deliver voice, data and
video services to businesses and consumers. Telecom OEMs that
purchased our products accounted for 66% of our total revenues
during 2008 and included Nera ASA and Nokia Siemens Networks.
Our RF modules are also designed into various applications
outside of the telecommunication network market, including
defense electronics, homeland security and other systems. Our
target customers in the defense electronics market include
systems integrators and their subcontractors that design
aerospace systems, defense and electronics systems for both
domestic and foreign defense customers. Our target customers in
the homeland security market include those utilizing the
properties of high-frequency RF energy to create new systems
designed to detect and identify security threats. We also sell
modules to customers addressing other applications such as
semiconductor testing. In this report, we refer to our target
customers in the defense electronics and homeland security
markets as defense and homeland security systems integrators.
Revenues from our customers in the defense electronics, homeland
security and other systems markets include BAE Systems, L-3
SafeView Inc., Lockheed Martin Corporation and Teradyne and
accounted for 34% of our total revenues in 2008.
We were originally incorporated in California in 1991 and
reincorporated in Delaware in 1995. In March 2000, we merged
with TRW Milliwave Inc., a RF subsystem supplier that was a
wholly-owned subsidiary of TRW Inc. In connection with the
merger, we changed our name from Endgate Corporation to Endwave
Corporation. On October 17, 2000, we successfully completed
the initial public offering of our common stock.
Industry
Background and Markets
High-Frequency
RF Technology
The applications of RF technology are broad, extending from
terrestrial AM radio at the low end of the frequency spectrum,
which is less than 1 MHz (megahertz, or million cycles per
second), to atmospheric monitoring applications at the high end
of the frequency spectrum, which is around 100 GHz
(gigahertz, or billion cycles per second).
Microwave
technology
refers to technology for the transmission of
signals at high frequencies, from approximately 1 GHz to
approximately 20 GHz and
millimeter wave technology
refers to technology for the transmission of signals at very
high frequencies, from approximately 20 GHz to beyond
100 GHz. Our products employ both microwave and millimeter
wave technology. The term
microwave
, however, is commonly
understood in the industries we serve, and we use that term in
this report, as meaning both microwave and millimeter wave.
Our RF modules are typically designed to operate at frequencies
between 1 GHz and 100 GHz, which we refer to in this
report as high-frequency RF. Due to their physical attributes,
these signals are well-suited for applications in
telecommunication networks requiring high data throughput,
defense systems demanding advanced radar and communication
capabilities and homeland security systems requiring detection,
measurement and imaging capabilities not available by
conventional means. Within each of these market segments, we
address multiple applications as described below.
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Telecommunication
Networks
High-frequency transceiver modules are an integral part of
microwave radios, which in turn play a key role in many
telecommunication networks. Microwave radio links have a number
of applications:
Cellular Telephone Backhaul.
The communication
link between the cellular base station site and a mobile
telephone switching office, or MTSO, is referred to as cellular
backhaul. This is currently the most common use of microwave
radios. In most parts of the world, cellular backhaul is
typically accomplished through the use of microwave radios
either because of their ease of deployment and low overall cost
relative to available wireline options or because adequate
wireline facilities are not available. In the United States and
Canada, cellular backhaul has typically been accomplished
through the use of high-speed telephone lines because low-cost
wireline facilities are readily available.
Carrier Class Trunking.
Communications
carriers require high capacity links between major voice and
data switching centers, referred to as trunk circuits, to deploy
their networks. While fiber optic cables are the most common
type of trunk circuit facility, microwave radios are often used
for portions of these circuits when the intervening terrain,
such as mountains or bodies of water, is difficult to traverse
or as redundant backup links for the fiber optic network.
Private Voice and Data Networks.
When private
users, such as companies and universities, deploy stand-alone
campus area or metropolitan area voice and data networks, they
often encounter situations where it is not possible to access a
direct physical path between their facilities due to distance or
intervening structures and roads. If third-party wireline
facilities are not available or cost-effective, a microwave
radio link is often used to provide the network connection. In
addition, companies often implement microwave facilities as
redundant backup links for their wireline facilities.
Fixed Wireless Access Network
Backhaul.
Similar to the situation in cellular
telephone networks, fixed wireless access networks require a
backhaul infrastructure to move the data from individual access
points to an internet portal. Various approaches are being
considered for the widespread implementation of fixed wireless
access networks, including the IEEE 802.16 WiMAX standard and
LTE (Long Term Evolution) technology. Regardless of the
underlying access technology, such fixed wireless access
networks will face the technological and cost issues associated
with connecting individual access points to the wireline network
infrastructure. We believe this need for backhaul represents an
opportunity for microwave radios, particularly because the
anticipated high bandwidth requirements of fixed wireless access
networks are served more cost-effectively by microwave radios
than by wireline alternatives.
While current macroeconomic conditions have slowed the
deployment of telecommunication networks, we believe there will
be a long-term demand for microwave radios and the components
used to build them. In developing countries such as Brazil,
Russia and India, there has been a rapid growth in the
penetration of cellular telephone services. We expect that this
growth will result in a continuing demand for microwave backhaul
radios because these countries lack well-established wireline
infrastructures to support the backhaul requirements of a
wireless telephony network. In more mature economies, there has
been an increasing demand for mobile data services. In locations
where microwave radios currently fulfill the backhaul
requirements, this increased demand will necessitate equipment
upgrades or replacements.
Defense
Electronics
High-frequency RF modules are an integral part of various
defense electronics systems. Key applications in this market
include:
Electronic Warfare Systems.
Most military
aircraft are equipped with systems designed to detect if they
have been targeted by an opposing forces weapons system,
and are often equipped with electronic countermeasures that jam
the targeting radar. These systems employ a variety of
high-frequency RF modules.
Radar Systems.
RF modules are used in
traditional radar systems to detect large objects at significant
distances. In addition, many new weapons systems employ
complementary sophisticated radar systems designed to detect
small vehicles and combat personnel. These new systems often use
higher frequencies in
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order to provide greater resolution. A further use of high
frequency radar is airborne vision equipment that allows pilots
to see through low-lying haze and dust much in the same way
night vision goggles permit one to see in the dark.
Signal Intelligence Systems.
Information about
an opposing force can be gathered by monitoring their electronic
communications. Systems that gather such information utilize a
variety of RF and microwave modules to monitor and interpret
information over a broad spectrum of potential frequencies that
a hostile force might use.
Intelligent Battlefield Systems.
The United
States military has initiated an effort called the
intelligent battlefield with the goal of providing
military commanders with comprehensive, real-time information
about the situation on the battlefield. Intelligent battlefield
systems aggregate data from multiple radar and video sources
that survey the battlefield and relay information nearly
instantaneously to battlefield commanders. Such systems require
high-bandwidth communication capabilities similar to those found
in commercial telecommunication systems.
High Capacity Communications.
A modern,
widely-dispersed military force requires communication systems
for voice, video and data wherever and whenever it is needed.
Many military communication systems, whether terrestrial,
airborne or satellite, employ microwave technology to meet these
requirements. As the data rates in these systems increase, the
systems must be able to operate at higher frequencies to take
advantage of the bandwidth that is available at those
frequencies.
For these reasons, as well as the United States militarys
concentration on upgrading existing electronic systems rather
than building new platforms, we believe demand for
high-frequency RF modules in the defense electronics market is
growing.
Homeland
Security Systems
The global escalation of terrorist and insurgency threats is
resulting in increased governmental and private concern over
providing adequate security measures. Many existing security
systems and personnel screening techniques are inadequate to
address these increasing concerns. The need for new, more
capable systems has accelerated security system development.
Because of their physical properties, high-frequency RF signals
can be used in various detection and imaging systems applied to
threats of violence. For example:
Advanced Personnel Screening Portals.
The
human body reflects certain high-frequency RF signals. As a
result, high-frequency RF signals can be used in advanced
personnel screening portals that generate images showing
weapons, including plastic explosives or ceramic knives, which
are not detectable with conventional metal detection portals.
These systems can operate very quickly and safely, permitting a
highly efficient and low-cost screening operation.
Long Distance Personnel
Detection.
High-frequency RF signals can be used
to detect the presence of humans at significant distances, much
in the same way lower frequency radar systems can detect metal
objects at a distance. This phenomenon can be employed as a
radar fence to detect intrusion along lengthy security
perimeters such as airport runways, military bases and
international borders.
We believe that the growth of these new security markets may
represent a significant opportunity for our products.
Our
Business Approach
Historically, when OEMs and other systems integrators
incorporated high-frequency RF technology into their products,
they designed and manufactured the requisite hardware
internally. However, when faced with the need to generate cost
efficiencies and technological innovations with fewer resources,
OEMs and systems integrators frequently look to merchant
suppliers for these items. We believe there are several key
characteristics that define an attractive supply partner for
fulfilling these requirements, including:
Technical Depth.
OEMs and systems integrators
seek merchant suppliers of RF modules that have significant
experience in and understanding of the overall system design.
This depth and breadth of
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understanding is crucial to determining appropriate overall
system level tradeoffs and in providing sound advice, thereby
enabling the OEM or system integrator to design and deploy its
systems more cost-effectively.
Innovative Technology.
New technology is the
key to providing enhanced performance and continued cost
reduction. Thus, OEMs and systems integrators value this
capability and prefer partners that create new technologies
offering additional functionality, higher reliability, lower
cost and better performance.
Low Cost.
OEMs and systems integrators are
under increasing pricing pressure from their customers and
expect effective and persistent cost-reduction programs from
their merchant suppliers. These cost-reduction programs require
merchant suppliers to mount a comprehensive effort at multiple
levels, including integration of multiple functions, efficient
manufacturing, effective supply chain management, streamlined
life cycle support and use of low cost sub-contractors.
Flexible Supply Chain Capabilities.
Volatility
of demand is common in the market for RF modules. Therefore OEMs
and system integrators need merchant suppliers that can
accommodate fluctuations in the demand, whether in mix
and/or
quantity, and that can flexibly scale their manufacturing to
match the fluctuating demands.
We believe that few merchant suppliers comprehensively address
all of these requirements. Many of the merchant suppliers that
populate the industry are small and lack the requisite
operational strength and technical capability to address these
needs. Many merchant suppliers use labor-intensive circuit
manufacturing and test methods that limit their ability to
produce high-frequency RF products in high volume and at a low
cost. Others have limited in-house RF design expertise and rely
on third parties for their circuit designs. In contrast, we
believe that we possess several key strengths that enable us to
provide our customers with superior products and services. These
strengths include:
Extensive Technical Expertise.
We have
extensive experience in the design and manufacture of
high-frequency RF modules for a broad range of products. Our
body of intellectual property and a highly-skilled technical
team are critical when dealing with the higher frequencies
required by emerging applications. Our technical team has broad
expertise in device physics, semiconductor device and circuit
design, system engineering, test engineering and other critical
disciplines. In addition, our large library of proprietary
circuit designs enables us to introduce new products rapidly and
cost-effectively. We believe the depth and breadth of our
technical expertise differentiates us from many of our
competitors, enabling us to optimize our products for critical
performance factors and to assist our customers in developing an
optimal overall design.
A Commitment to Develop Next-Generation
Technology.
A key component of our value
proposition is providing our customers with powerful and
cost-effective technologies that offer them a major technical
and economic advantage. We have invested in the development of
next-generation circuit and packaging technologies that allow us
to provide our customers with high-performance and low-cost
solutions. Our ability to develop new semiconductor devices on a
custom basis provides us greater flexibility to optimize our
product designs for our customers and their specific
applications. Many of our competitors do not have the capability
to produce proprietary integrated circuit and device designs and
therefore are limited to using standard, commercially-available
semiconductor devices. We intend to continue to invest in
research and development, maintain a team of talented engineers
and scientists, and build on our manufacturing technologies.
Comprehensive Approach to Cost-Effective
Manufacturing.
We have taken a comprehensive
approach to developing cost-effective manufacturing capabilities
that allow us to compete on a worldwide basis and to offer our
customers product solutions at attractive prices:
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We design our products to be readily manufacturable and able to
tolerate a wide range of component performance and assembly
process variations. This speeds the flow of work through our
factories, reduces the required level of touch labor and
minimizes rework.
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For many of our products, we have implemented automated assembly
techniques that reduce labor content and enhance both product
uniformity and quality.
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Testing is often a large part of the manufacturing effort and we
have developed extensive automated testing capabilities that
speed this process and differentiate us from the labor-intensive
methods often used in our industry. We use state of the art
information technology systems to store, analyze and transmit
test data.
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Because our products are highly manufacturable, we have been
able to contract with third-party, offshore manufacturers for
even greater labor cost savings. In 2002, we began moving most
of our high-volume commercial manufacturing to Hana
Microelectronics Co., Ltd., (or HANA), a
Thailand-based contract manufacturer. We consign raw materials
to HANA, as well as provide the specialized assembly and test
equipment needed to manufacture our products. HANA provides the
direct labor to assemble and test our products. This transition
has significantly improved our product margins and enables us to
adjust rapidly, efficiently and flexibly to our customers
varying quantity and product mix requirements, which are often
created by unexpected needs and variations in demand.
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The cost of raw materials and components employed in
high-frequency RF modules are a major part of the overall
manufacturing cost. We have reduced the cost of these components
by re-designing them, leveraging our purchasing power and
selecting more cost-effective suppliers. As an outgrowth of our
operational presence in Asia, we continue to identify low-cost,
high-quality Asian-based suppliers for several of the raw
materials and components used in our products.
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Semiconductors are both a critical technical element and a major
cost component of our products. Our ability to custom design
these devices allows us to optimize them for cost and
performance and to achieve significant cost savings by having
them fabricated in low cost, third-party foundries.
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Our high unit volumes enable us to achieve lower manufacturing
costs than many of our competitors as we increase our materials
purchasing power, amortize our overhead expenses over a larger
number of units and gain labor efficiencies.
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We intend to continue to improve our lean manufacturing methods
and further enhance our manufacturing expertise. This will be
particularly important for our high mix product lines,
characterized by low volume and high variability, which are
primarily manufactured in our Northern California facilities in
support of our Defense and Security revenues.
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Products
and Technology
Products
Our RF modules are used typically in high-frequency applications
and include integrated transceivers, amplifiers, synthesizers,
oscillators, up and down converters, frequency multipliers and
microwave switch arrays. Depending upon the requirements of our
customers, we supply our products at the following levels of
integration:
Single-Function Modules.
Single-function
modules are simple, standardized products that perform a single
function, such as amplification, frequency multiplication or
signal mixing. We employ these modules in the design of
prototype or low production volume systems that do not warrant
the development of a custom, fully-integrated module.
Multi-Function Modules.
Multi-function modules
are customized, complex products that combine a number of
individual functional elements into a single package. These
modules are typically more cost-effective for higher-volume
applications and provide greater reliability and performance
than systems assembled by the customer using single-function RF
modules.
Integrated Subsystem Modules.
Integrated
subsystem modules combine several functional RF blocks, such as
amplifiers, switches or oscillators, with various types of
control and support circuitry, such as a microprocessor or a
power supply, to form a stand-alone subsystem. These complex
subsystem modules, combine RF capability with sophisticated
analog and digital system interface and control capabilities.
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Circuit
Technologies
In high-frequency RF modules, the choice and implementation of
the basic microwave circuit technology largely determines the
performance, cost and manufacturability of the product. Our
products use one or more of the following three circuit
technologies.
HMIC (Hybrid Microwave Integrated
Circuit).
Individual devices and circuit
components are attached to a ceramic substrate and
interconnected with numerous individual bond wires. This circuit
approach is moderate in its design difficulty and its
configuration flexibility is useful in low production and
prototype applications. The material and set up costs are
modest; however, the numerous individual bond wires must be
manually tuned to achieve the desired performance and the touch
labor content is thus substantial. We have developed automated
techniques to enhance this technology and it is one of our
common circuit techniques for custom and low volume products.
MMIC (Monolithic Microwave Integrated
Circuit).
In this technology, individual devices,
components and interconnects are patterned onto a semiconductor
substrate (typically gallium arsenide, or GaAs) in a manner
similar to industry standard IC fabrication techniques. Because
of the design difficulty and large setup costs, this technology
is most appropriate for high volume applications and is the
circuit technology typically employed in our high volume telecom
module products. We have developed a large repertoire of custom
designed MMICs that have been optimized for cost, performance
and manufacturability.
MLMS (Multi-Lithic Micro System).
This is a
proprietary circuit technology that we have developed to
overcome the shortcomings of HMIC and MMIC technologies. This
technology consists of a multi-layer RF substrate onto which
individual devices are attached and electrically connected
without the use of bond wires. The features of this technology
are numerous including reduced design difficulty, elimination of
individual tuning, low cost substrate materials, automated
manufacture, use of multiple semiconductor technologies in the
same circuit (i.e. multi-lithic), integrated passive circuit
elements and the ability to provide a complete system on a
chip functionality. This technology is in its early stages
of deployment.
Circuit
Packaging Technologies
In high-frequency RF modules, the circuit packaging technology
also significantly impacts cost and performance. Our products
use one the following two packaging technologies.
Standard Planar Packaging.
Many of our current
products employ standard planar packaging technology which
consists of individual circuits being attached to a metal
carrier plate and then enclosed with a corresponding cover plate
to provide protection and shielding for the circuit. A variation
in this approach is to mount the carrier inside of a metal box
that is similarly sealed with a metallic cover. This technology
can be relatively easy to design and deploy however it utilizes
large, heavy and costly components.
Epsilon Packaging.
Many of our newer products
employ a unique packaging technology called Epsilon. In this
approach, circuits are directly mounted to a composite printed
wiring board and then enclosed with a metalized molded plastic
or machined cover. The composite wiring board consists of a top
RF circuit layer built on a low loss substrate with lower layers
of the board consisting of conventional printed wiring board
substrates for power and control circuitry. This approach
reduces the size, weight and cost of the packaging components.
Sales and
Marketing
We focus on multiple markets on a global basis. Our target
markets include telecommunication networks, defense electronics,
homeland security systems, high frequency electronic
instrumentation and other applications that require high
frequency RF circuitry and subsystems. We sell our products
through our direct sales efforts, which are supported by a
network of independent domestic and international
representatives. For each of our major customers, we assign a
technical account manager, who has responsibility for developing
and expanding our relationship with that customer. Our direct
sales efforts are augmented by traditional marketing activities,
including advertising, participation in industry associations
and presence at major trade shows.
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Our products are highly technical and the sales cycle can often
be long. Our sales efforts typically involve a collaborative and
iterative process with our customers to determine their specific
requirements, verify a product design and develop an effective
manufacturing approach in either our own on-shore factory or in
our off-shore contract manufacturing partners factory.
Depending on the product and market, the sales cycle can
typically take anywhere from 2 to 24 months.
Customers
In 2008, revenues from our telecom OEM customers comprised
approximately 66% of our total revenues and more specifically,
revenues from Nokia Siemens Networks accounted for 55% of our
total revenues. During the same period, revenues from our
defense electronics, homeland security and other system
integrator OEM customers comprised approximately 34% of our
total revenues. While historically revenues from our telecom OEM
customers have dominated our business and we expect our sales to
telecom OEMs to continue to be a significant portion of our
revenues, going forward the sales in our other target markets
could ultimately overtake our telecom market revenues. In the
telecom market, our revenues are attributable to a limited
number of telecom OEMs and we would expect this pattern to
remain for the foreseeable future. In contrast, sales in our
other target markets tend to be dispersed over a larger number
of individual customers.
Acquisitions
As part of our growth strategy, we have made acquisitions
designed to increase revenues and gain market share. We have
completed the following acquisitions since our initial public
offering:
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Acquisition
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Structure
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Key Benefits
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ALC Microwave, Inc. April 2007
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Purchased all of the outstanding capital stock of privately-held
ALC Microwave, Inc. whose primary product line was logarithmic
amplifiers and subsystems sold to defense markets.
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Provided a significant market position in specialized logarithmic amplifiers.
Expanded relationships with existing customers and added new customers.
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JCA Technology, Inc., a wholly-owned subsidiary of New Focus,
Inc., a subsidiary of Bookham Technology plc July
2004
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Purchased all of the outstanding capital stock of JCA, whose
primary product line was microwave amplifiers serving the
defense electronics industry
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Provided significant market position in RF amplifiers and modules for defense and related applications
Expanded relationships with existing customers and add new customers
Formed core of Endwave Defense Systems division
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Verticom, Inc. May 2003
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Purchased assets including customer contracts, equipment,
inventory, product designs and other intellectual property
required to manufacture and supply YIG-based frequency
synthesizers
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Enhanced high-performance oscillator technology
Added new customer relationship in the defense electronics market
Added new product application in the defense communication satellite terminal market
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Arcom Wireless Incorporated, a subsidiary of Dover Corporation
February 2003
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Purchased assets including customer contracts, equipment,
inventory, product designs and other intellectual property
required to manufacture and supply a 58 GHz integrated
transceiver
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Expanded relationship with an existing customer
Enhanced market position as a leading supplier of 58 GHz products
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Acquisition
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Structure
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Key Benefits
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Signal Technology Corp. Fixed Wireless Division
September 2002
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Purchased assets including customer contracts, equipment,
inventory, product designs and other intellectual property
required to manufacture and supply several transceiver products
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Expanded relationships with existing customers including Stratex Networks, Inc. and Nera ASA
Added new customers including Siemens AG and Ceragon Networks Ltd.
Significantly increased our product portfolio
Facilitated move to offshore production
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M/A-Com Tech, Inc., a subsidiary of Tyco Electronics formerly
known as Stellex Microwave Systems April 2001
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Purchased assets including customer contracts, equipment,
inventory, product designs and other intellectual property
required to manufacture and supply yttrium iron garnet-based
frequency synthesizers
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Added new product capabilities in high performance oscillators
Added new customer relationship with Stratex Networks, Inc.
Added new application in high capacity microwave radios
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Competition
Among merchant suppliers of microwave modules in the
telecommunication network market, we compete with Compel srl,
Filtronic plc, Microelectronics Technology Inc., Remec Broadband
Wireless, Inc. and Teledyne Technologies Incorporated, among
others. In addition to these companies, there are telecom OEMs,
such as Ericsson and NEC Corporation, that use their own captive
resources for the design and manufacture of high-frequency RF
transceiver modules, rather than using merchant suppliers such
as ourselves. To the extent that telecom OEMs presently, or in
the future, produce their own RF transceiver modules, we lose
the opportunity to gain a customer and related module revenue.
Conversely, if they should decide to outsource their
requirements, this may significantly expand the market available
to us.
In the defense electronics and homeland security markets, we
compete both with internal captive groups along with other
companies such as Aeroflex Incorporated, Akon Inc., AML
Communications Inc., Ciao Wireless, Cobham plc, CTT Inc., Herley
Industries, Inc., Millitech Inc., Miteq Inc., Renaissance
Electronics Corporation and Teledyne Technologies Incorporated,
among others.
We believe that the principal competitive factors in our
industry are:
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Product pricing and the ability to offer low-cost solutions;
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Technical leadership and product performance;
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Strong customer relationships;
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Product breadth;
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Time-to-market in the design and manufacturing of
products; and
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Logistical flexibility, manufacturing capability and scalable
capacity.
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Research
and Development
Our research efforts focus on developing advanced circuit and
packaging technologies, creating new proprietary circuit designs
and integrating these technologies and designs into the modules
and subsystems we provide
11
to our customers. Our product development activities focus on
designing products to meet specific customer and market needs
and introducing these products to manufacturing.
Our technical approach emphasizes the following capabilities:
Custom Semiconductor Design Capabilities.
Our
ability to design custom semiconductors allows us to optimize
and reduce the cost of designs beyond what is possible with
standard, off-the-shelf semiconductors.
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 extensive
computer modeling capabilities allow us to create designs
quickly and to minimize the number of iterations required to
develop specification compliant, cost-effective designs.
Extensive Library of Circuit Designs.
Our
extensive library of circuit, module and subsystem designs
enables us to generate new designs and produce prototypes
quickly to meet our customers time-to-market demands.
Automated Testing Processes.
High-frequency RF
products require extensive testing after assembly to verify
compliance with customer specifications. We use high speed,
custom-designed, automated test sets that are capable of rapidly
testing a complete RF module or subsystem. This increases
throughput in the manufacturing process and reduces the skill
level required to conduct the tests. Concurrently with the
development of these test methods, we develop data analysis and
reporting tools to facilitate rapid communication of test data
to our customers.
Our investment in research and development and related
engineering projects has resulted in expenses of
$8.9 million, $10.7 million and $11.9 million in
2006, 2007 and 2008, respectively.
Patents
and Intellectual Property Rights
Our success depends, 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. As of
December 31, 2008, we had 43 United States patents issued,
many with associated foreign filings and patents. Our issued
patents include those relating to basic circuit and device
designs, semiconductors, MLMS technology and system designs. Our
United States patents expire between 2009 and 2027. We do not
anticipate the impact of the expiration of patents over the near
term to have a significant impact on our research and
development or operations. We also license technology from other
companies, including Northrop Grumman Corporation. There are no
limitations on our rights to make, use or sell products we may
develop in the future using the technology licensed to us by
Northrop Grumman Corporation.
We maintain a vigorous technology development program that
routinely generates potentially patentable intellectual
property. Our decisions as to whether to seek formal patent
protection, and the countries in which to seek it, are taken on
a patent by patent basis and are based on the economic value of
the intellectual property, the anticipated strength of the
resulting patent, the cost of pursuing the patent and an
assessment of using a patent as an implement to protect the
underlying intellectual property. With regard to our pending
patent applications, it is possible that no patents may be
issued as a result of these or any future applications or the
allowed patent claims may be of reduced value and importance.
Further, any existing or future patents may be challenged,
invalidated or circumvented thus reducing or eliminating their
commercial value.
To protect our intellectual property, we 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. These measures
may not be adequate in all cases to safeguard the proprietary
technology underlying our products. 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 attempt to 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.
12
Operations
We currently have our products manufactured in three locations.
Domestically in 2008, we operated two plants in the Northern
California area for those products that are being produced in
low volumes or for defense electronics applications. During
2009, we intend to consolidate the activities of these two
locations into one new plant in Folsom, California. Products
made for defense electronics applications generally must be
manufactured within the United States due to government
regulations.
The third location produces our high volume telecom products and
is operated in Thailand by a contract manufacturer. Under our
manufacturing contract, HANA supplies the physical plant, direct
labor, basic assembly equipment and warehousing functions. We
supplement those activities with our own full-time, in-country
staff consisting of 17 people who provide production
planning, process engineering, test engineering, product
support, design engineering and quality assurance support. We
own certain assets held securely in HANAs factory,
including specialized test and assembly equipment and various
raw material and product inventories. Our arrangement with HANA
allows us to reduce our labor and facility expenses while
maintaining tight control of process and quality. To reduce our
costs further, we have identified lower cost Asian sources for
various raw materials, especially basic metal and circuit board
components. Our manufacturing agreement with HANA currently
expires in October 2009, but will renew automatically for
successive one-year periods unless either party notifies the
other of its desire to terminate the agreement at least one year
prior to the expiration of the term. In addition, either party
may terminate the agreement without cause upon 365 days
prior written notice to the other party, and either party may
terminate the agreement if the non-terminating party is in
material breach and does not cure the breach within 30 days
after notice of the breach is given by the terminating party.
There can be no guarantee that HANA will not seek to terminate
its agreement with us.
We use both industry-standard and custom-designed semiconductor
devices. We obtain industry-standard devices from various
suppliers of these parts and we contract with various
third-party foundries to produce our custom designs. Our use of
third-party foundries for custom designed devices 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 facilities. While the loss of
our relationship with or our access to any of the semiconductor
foundries we currently use, and any resulting delay or reduction
in the supply of semiconductor devices to us, would severely
impact our ability to fulfill customer orders and could damage
our relationships with our customers, we estimate that we could
shift production to a new foundry within six months. Our largest
suppliers of semiconductor devices and foundry services in 2008
included Hittite Microwave, MIMIX Broadband, Northrop Grumman
Space Technology and United Monolithic Semiconductor. These
suppliers provided approximately 79% of our semiconductor device
requirements in 2008.
All of the manufacturing facilities we operate or use worldwide
are registered under ISO
9001-2000,
an international certification standard of quality for design,
development and business practices. Additionally, we are
certified under AS-9100 in support of our defense and homeland
security activities. We maintain comprehensive quality systems
at all of these facilities to ensure compliance with customer
specifications, configuration control, documentation control and
supplier quality conformance.
We maintain raw materials and
work-in-process
inventory at our Northern California plants and in Thailand at
HANAs plant. We also maintain finished goods inventory on
consignment at or near the manufacturing plants of certain key
telecommunication customers. In order to maintain and enhance
our competitive position, we must be able to satisfy our
customers short lead-times and rapidly-changing needs.
Meeting this requirement necessitates that we maintain
significant raw material and finished goods inventories.
Maintaining these inventories is costly and requires significant
working capital and may increase our capital needs in the future.
Backlog
Our backlog at February 20, 2009 for shipments expected to
occur through December 31, 2009 was approximately
$28.9 million. By comparison, our backlog as of
February 8, 2008 for shipments then expected to occur
through December 31, 2008 was approximately
$51.3 million.
13
Our order backlog consists of a combination of conventional
purchase orders and formal forecasts given to us under annual
and multi-year agreements. Typically, the forecast portion of
the backlog is the significantly larger amount. The forecasts we
receive normally have a firm commitment portion of one to three
months in duration that obligate the customer to accept at least
some portion of the amount forecasted for that period, with the
remainder of the forecast including no such obligation. These
forecasts are subject to change on a regular basis and we have
experienced significant forecast variations in both unit volumes
and product mix. As a result, we do not believe that backlog is
a reliable indicator of future revenues.
Governmental
Regulation
Government regulations directly affect our business in two
principal ways. In our telecommunication networks market, the
frequencies at which wireless systems transmit and receive data
are dictated by government licensing agencies in the location
where they are deployed. Unexpected difficulties in obtaining
licenses or changes in the operating frequencies allowed can
halt or delay microwave radio deployments and therefore halt or
delay the need for our products. Both national and international
regulatory bodies have set stringent standards on the
performance of microwave radios, especially spurious emissions
and their potential to cause interference in other systems.
Meeting these regulations is technologically challenging and
changes in the regulations could require a re-design of our
products to achieve compliance.
In our defense electronics market, some of the products we
supply to our foreign customers are controlled by United States
government export regulations promulgated by the Departments of
State, Commerce and Defense. Prior to shipment of these
products, we must apply for various approvals and licenses. This
application process can be lengthy and approval is not assured.
If we do not receive approval or the approval is delayed, it can
halt or delay our shipments. Further, our products for defense
electronics applications generally must be manufactured within
the United States due to government regulations regarding
foreign material content and socio-economic rules passed down to
federal subcontractors by law.
Seasonality
Although we have experienced significant quarterly fluctuations
in revenue at times over the past several years, we do not
believe that volatility was primarily attributable to
seasonality in our business.
Employees
As of December 31, 2008, we had 228 full-time
employees, including 129 in manufacturing, 60 in product and
process engineering, 18 in sales and marketing and 21 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.
Available
Information
Our principal executive offices are located at 130 Baytech
Drive, San Jose, CA 95134 and our main telephone number is
(408) 522-3100.
Our Internet address is
www.endwave.com
. We make
available free of charge through our website our annual report
on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission, or SEC.
The public may read and copy any material we file with the SEC
at the SECs Public Reference Room at
100 F Street, NE, Washington D.C., 20549. The public
may obtain information on the operations of the Public Reference
Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains an Internet site,
http://www.sec.gov
,
that contains reports, proxy and information statements and
other information regarding issuers that file electronically
with the SEC.
14
You should consider carefully the following risk factors as
well as other information in this report before investing in any
of our securities. If any of the following risks actually occur,
our business, operating results and financial condition could be
adversely affected. This could cause the market price of our
common stock to decline, and you may lose all or part of your
investment.
Risks
Relating to Our Business
We
have had a history of losses and may not be profitable in the
future.
We have had a history of losses. We had a net loss of
$14.8 million in 2008. We also had net losses of
$5.4 million and $1.3 million for the years ended
December 31, 2007 and 2006, respectively. There is no
guarantee that we will achieve or maintain profitability in the
future.
The
current turmoil in the global economy could adversely impact our
operations and financial results.
Over the past several months, global economic conditions have
continued to deteriorate. For example, credit has become
severely restricted. This restriction in credit could materially
impact our operations and financial results. Our customers often
rely on credit markets to finance the build-out of their
networks and systems. With the current restriction in credit
markets, capital may not be available to our customers or may
only be available at unfavorable terms. Without appropriate
capital, our customers may have difficulty funding their
on-going operations and may reduce their orders for our
products. This could significantly impact our operations and
financial results. Additionally, our vendors may rely on credit
markets to finance their operations. With the current
restriction in credit markets, capital may not be available to
our vendors or may only be available at unfavorable terms.
Without appropriate capital, our vendors may have difficulty
funding their on-going operations and may not be able to fulfill
requirements for their products. This could significantly impact
our operations and financial results through a reduction in our
revenues.
We
depend on a small number of key customers in the
telecommunications industry for a significant portion of our
revenues. If we lose any of our major customers, particularly
Nokia Siemens Networks, or there is any material reduction in
orders for our products from any of these customers, our
business, financial condition and results of operations would be
adversely affected.
We depend, and expect to continue to depend, on a relatively
small number of telecom customers for a significant part of our
revenues. The loss of any of our major customers, particularly
Nokia Siemens Networks, or any material reduction in orders from
any such customers, would have a material adverse effect on our
business, financial condition and results of operations.
Revenues from Nokia Siemens Networks (including Nokia and
Siemens AG revenues for 2007 prior to their merger) accounted
for 55% and 60% our total revenues in 2008 and 2007,
respectively.
Our
operating results may be adversely affected by substantial
quarterly and annual fluctuations and market
downturns.
Our revenues, earnings and other operating results have
fluctuated in the past and our revenues, earnings and other
operating results may fluctuate in the future. These
fluctuations are due to a number of factors, many of which are
beyond our control. These factors include, among others, global
economic conditions, overall growth in our target markets, the
ability of our customers to obtain adequate capital,
U.S. export law changes, changes in customer order
patterns, customer consolidation, availability of components
from our suppliers, the gain or loss of a significant customer,
changes in our product mix and market acceptance of our products
and our customers products. These factors are difficult to
forecast, and these, as well as other factors, could materially
and adversely affect our quarterly or annual operating results.
15
We
depend on the telecommunications industry for a substantial
portion of our revenues. As this industry is negatively impacted
by the global economic downturn, our revenues could decrease and
our profitability could suffer. In addition, consolidation in
this industry could result in delays or cancellations of orders
for our products, adversely impacting our results of
operations.
We depend, and expect to remain dependent, on the
telecommunications industry for a substantial portion of our
revenues. Revenues from all of our telecom OEM customers
comprised 66% of our total revenues in 2008 and 79% of our total
revenues in 2007.
The current global economic downturn and credit crisis has
impacted the telecommunications industry. We anticipate
decreased revenues from our telecommunication related customers
in 2009 and therefore we undertook certain restructuring
activities to reduce expenses. If the current downturn in the
telecommunications industry persists, our revenues will continue
to suffer and we may be forced to make provisions for excess
inventory, accounts receivable and abandoned or obsolete
equipment and further reduce our operating expenses through
additional restructuring activities. We cannot guarantee that we
would be able to reduce operating expenses to a level
commensurate with the lower revenues resulting from such a
prolonged industry downturn.
The telecommunications industry has undergone significant
consolidation in the past few years and we expect that
consolidation to continue. The acquisition of one of our major
customers in this market, or one of the communications service
providers supplied by one of our major customers, could result
in delays or cancellations of orders of our products and,
accordingly, delays or reductions in our anticipated revenues
and reduced profitability or increased net losses. In
particular, during April 2007, Nokia and Siemens merged their
telecommunication network businesses.
Implementing
our acquisition strategy could result in dilution to our
stockholders and operating difficulties leading to a decline in
revenues and operating profit.
One of our strategies is to grow through acquisitions. To that
end, we have completed six acquisitions since our initial public
offering in October 2000. We intend to continue to pursue
acquisitions in our markets that we believe will be beneficial
to our business. The process of investigating, acquiring and
integrating any business into our business and operations is
risky and may create unforeseen operating difficulties and
expenditures. The areas in which we may face difficulties
include:
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diversion of our management from the operation of our core
business;
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assimilating the acquired operations and personnel;
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integrating information technology and reporting systems;
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retention of key personnel;
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retention of acquired customers; and
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implementation of controls, procedures and policies in the
acquired business.
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In addition to the factors set forth above, we may encounter
other unforeseen problems with acquisitions that we may not be
able to overcome. Future acquisitions may require us to issue
shares of our stock or other securities that dilute our other
stockholders, expend cash, incur debt, assume liabilities,
including contingent or unknown liabilities, or create
additional expenses related to write-offs or amortization of
intangible assets with estimated useful lives, any of which
could materially adversely affect our operating results.
Our
strategy depends in part on our ability to further penetrate
into new non-telecommunication markets, such as defense
electronics, homeland security and other systems, and we may be
unable to do so.
Historically, a large majority of our revenues have been
attributable to sales of our RF modules to telecom OEMs such as
Nokia Siemens Networks. Part of our growth strategy is to design
and sell high-frequency RF modules for and to OEMs and systems
integrators in new non-telecommunication markets, particularly
defense electronics, homeland security and other systems. While
growing of significance to our business, to date, only a modest
percentage of our revenues have been attributable to sales of RF
modules to these alternate markets. We are
16
designing and selling products for the emerging homeland
security market. The potential size of this market is unclear
and we cannot predict how the market will evolve. If increased
demand for high-frequency RF modules in non-telecommunication
markets does not materialize, or if we fail to secure new design
wins in these markets or if we are unable to design readily
manufacturable products for these new markets, our growth and
revenues could be adversely impacted, thereby decreasing our
profitability or increasing our net losses.
We
rely on the semiconductor foundry operations of third-party
semiconductor foundries to manufacture the semiconductors
contained in our products. The loss of our relationship with any
of these foundries without adequate notice would adversely
impact our ability to fill customer orders and could damage our
customer relationships.
We utilize both industry standard semiconductor components and
our own custom-designed semiconductor devices. However, we do
not own or operate a semiconductor fabrication facility, or
foundry, and rely on a limited number of third parties to
produce our custom-designed components. If any of our
semiconductor suppliers is unable to deliver semiconductors to
us in a timely fashion, the resulting delay could severely
impact our ability to fulfill customer orders and could damage
our relationships with our customers. In addition, the loss of
our relationship with or our access to any of the semiconductor
foundries we currently use for the fabrication of custom
designed components and any resulting delay or reduction in the
supply of semiconductor devices to us, would severely impact our
ability to fulfill customer orders and could damage our
relationships with our customers.
We may not be successful in forming alternative supply
arrangements that provide us with a sufficient supply of gallium
arsenide devices. Gallium arsenide devices are used in a
substantial portion of the products we manufacture. Because
there are a limited number of semiconductor foundries that use
the particular process technologies we select for our products
and that have sufficient capacity to meet our needs, using
alternative or additional semiconductor foundries would require
an extensive qualification process that could prevent or delay
product shipments and revenues. We estimate that it may take up
to six months to shift production of a given semiconductor
circuit design to a new foundry.
Because
of the shortages of some components and our dependence on single
source suppliers and custom components, we may be unable to
obtain an adequate supply of components of sufficient quality in
a timely fashion, or we may be required to pay higher prices or
to purchase components of lesser quality.
Many of our products are customized and must be qualified with
our customers. This means that we cannot change components in
our products easily without the risks and delays associated with
requalification. Accordingly, while a number of the components
we use in our products are made by multiple suppliers, we may
effectively have single source suppliers for some of these
components.
In addition, we currently purchase a number of components, some
from single source suppliers, including, but not limited to:
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semiconductor devices;
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application-specific monolithic microwave integrated circuits;
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voltage-controlled oscillators;
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voltage regulators;
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unusual or low usage components;
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surface mount components compliant with the EUs
Restriction of Hazardous Substances, or RoHS, Directive;
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high-frequency circuit boards;
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custom connectors; and
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yttrium iron garnet components.
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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.
17
In the past, we suffered from shortages of and quality issues
with various components. These shortages and quality issues
adversely impacted our product revenues and could reappear in
the future. 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 and
their components are qualified with our customers on a timely
basis, identifying them and entering into arrangements with them
may be 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.
We are
exposed to fluctuations in the market values of our investment
portfolio.
Although we have not experienced any material losses on our
cash, cash equivalents and short-term investments, future
declines in their market values could have a material adverse
effect on our financial condition and operating results.
Although our portfolio has no direct investments in auction rate
or sub-prime mortgage securities, our overall investment
portfolio is currently and may in the future be concentrated in
cash equivalents including money market funds. If any of the
issuers of the securities we hold default on their obligations,
or their credit ratings are negatively affected by liquidity,
credit deterioration or losses, financial results, or other
factors, the value of our cash equivalents and short-term and
long-term investments could decline and result in a material
impairment.
Competitive
conditions often require us to reduce prices and, as a result,
we need to reduce our costs in order to be
profitable.
Over the past year, we have reduced many of our prices of
telecom products by 10% to 15% in order to remain competitive
and we expect market conditions will cause us to reduce our
prices in the future. In order to reduce our
per-unit
cost of product revenues, we must continue to design and
re-design products to require lower cost materials, improve our
manufacturing efficiencies and successfully move production to
lower-cost, offshore locations. The combined effects of these
actions may be insufficient to achieve the cost reductions
needed to maintain or increase our gross margins or achieve
profitability.
We
rely heavily on a Thailand facility of HANA Microelectronics
Co., Ltd., a contract manufacturer, to produce our RF modules.
If HANA is unable to produce these modules in sufficient
quantities or with adequate quality, or it chooses to terminate
our manufacturing arrangement, we will be forced to find an
alternative manufacturer and may not be able to fulfill our
production commitments to our customers, which could cause sales
to be delayed or lost and could harm our
reputation.
We outsource the assembly and testing of most of our
telecommunication related products to a Thailand facility of
HANA Microelectronics Co., Ltd., or HANA, a contract
manufacturer. We plan to continue this arrangement as a key
element of our operating strategy. If HANA does not provide us
with high quality products and services in a timely manner,
terminates its relationship with us, or is unable to produce our
products due to financial difficulties or political instability
we may be unable to obtain a satisfactory replacement to fulfill
customer orders on a timely basis. In the event of an
interruption of supply from HANA, sales of our products could be
delayed or lost and our reputation could be harmed. Our latest
manufacturing agreement with HANA expires in October 2009, but
will renew automatically for successive one-year periods unless
either party notifies the other of its desire to terminate the
agreement at least one year prior to the expiration of the term.
In addition, either party may terminate the agreement without
cause upon 365 days prior written notice to the other
party, and either party may terminate the agreement if the
non-terminating party is in material breach and does not cure
the breach within 30 days after notice of the breach is
given by the terminating party. There can be no guarantee that
HANA will not seek to terminate its agreement with us.
Our
products may contain component, manufacturing or design defects
or may not meet our customers performance criteria, which
could cause us to incur significant repair expenses, harm our
customer relationships and industry reputation, and reduce our
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, or replaced the product, in
accordance with our product warranties. Our product warranties
typically last twelve to thirty months. As a result of
component, manufacturing or design defects, we may be required
to repair or replace a substantial number of products under our
product warranties, incurring significant expenses as a result.
Further, our customers may discover latent defects in our
products that were not apparent when the warranty period
expired.
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These defects may cause us to incur significant repair or
replacement expenses beyond the normal warranty period. In
addition, any component, manufacturing or design defect could
cause us to lose customers or revenues or damage our customer
relationships and industry reputation.
We
depend on our key personnel. Skilled personnel in our industry
can be in short supply. If we are unable to retain our current
personnel or hire additional qualified personnel, our ability to
develop and successfully market our products would be
harmed.
We believe that our future success depends upon our ability to
attract, integrate and retain highly skilled managerial,
research and development, manufacturing and sales and marketing
personnel. Skilled personnel in our industry can be in short
supply. As a result, our employees are highly sought after by
competing companies and our ability to attract skilled personnel
is limited. To attract and retain qualified personnel, we may be
required to grant large stock option or other stock-based
incentive awards, which may harm our operating results or be
dilutive to our other stockholders. We may also be required to
pay significant base salaries and cash bonuses, which could harm
our operating results.
Due to our relatively small number of employees and the limited
number of individuals with the skill set needed to work in our
industry, 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 ability to conduct our business successfully
could be seriously harmed. We do not maintain key person life
insurance policies.
The
length of our sales cycle requires us to invest substantial
financial and technical resources in a potential sale before we
know whether the sale will occur. There is no guarantee that the
sale will ever occur and if we are unsuccessful in designing a
high-frequency RF module for a particular generation of a
customers products, we may need to wait until the next
generation of that product to sell our products to that
particular customer.
Our products are highly technical and the sales cycle can be
long. Our sales efforts involve a collaborative and iterative
process with our customers to determine their specific
requirements either in order to design an appropriate solution
or to transfer the product efficiently to our offshore contract
manufacturer. Depending on the product and market, the sales
cycle can take anywhere from 2 to 24 months, and we incur
significant expenses as part of this process without any
assurance of resulting revenues. We generate revenues only if
our product is selected for incorporation into a customers
system and that system is accepted in the marketplace. If our
product is not selected, or the customers development
program is discontinued, we generally will not have an
opportunity to sell our product to that customer until that
customer develops a new generation of its system. There is no
guarantee that our product will be selected for that new
generation 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.
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. In the
current market environment, the need to respond quickly is
particularly important. 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 customers
project and the availability of professionals with the requisite
level of expertise is limited. We have, in the past, expended
significant resources on research and design efforts on
potential customer products, that did not result in additional
revenue.
19
Each of our telecommunication network products is designed for a
specific range of frequencies. Because different national
governments license different portions of the frequency spectrum
for the telecommunication network market, and because
communications service providers license specific frequencies as
they become available, in order to remain competitive we must
adapt our products rapidly to use a wide range of different
frequencies. This may require the design of products at a number
of different frequencies simultaneously. 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 delay or cause us to lose
revenues.
Our customers often have specific requirements that can be at
the forefront of technological development and therefore
difficult and expensive to develop. If we are not able to devote
sufficient resources to these products, or we experience
development difficulties or delays, we could lose sales and
damage our reputation with those customers.
We may
not be able to manufacture and deliver our products as quickly
as our customers require, which could cause us to lose sales 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.
Manufacturing delays and interruptions can occur for many
reasons, including, but not limited to:
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the failure of a supplier to deliver needed components on a
timely basis or with acceptable quality;
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lack of sufficient capacity;
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poor manufacturing yields;
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equipment failures;
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manufacturing personnel shortages;
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labor disputes;
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transportation disruptions;
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changes in import/export regulations;
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infrastructure failures at the facilities of our offshore
contract manufacturer;
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natural disasters;
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acts of terrorism; and
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political instability.
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Manufacturing 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. For example, in the past, we have on occasion experienced
poor yields on certain products that have prevented us from
delivering products on time and have resulted in lost sales. If
we fail to manufacture and deliver products in a timely fashion,
our reputation may be harmed, we may jeopardize existing orders
and lose potential future sales, and we may be forced to pay
penalties to our customers.
As part of our strategy, we may expand our domestic
manufacturing capacity beyond the level required for our current
sales in order to accommodate anticipated increases in our
non-telecommunication business. As a result, our domestic
manufacturing facilities may be underutilized from time to time.
Conversely, if we do not maintain adequate manufacturing
capacity to meet demand for our non-telecommunication products,
we may lose opportunities for additional sales. Any failure to
have sufficient manufacturing capacity to meet demand could
cause us to lose revenues, thereby reducing our profitability,
or increasing our net losses, and could harm our reputation with
customers.
20
Although
we do have long-term commitments from many of our customers,
they are not for fixed quantities of product. As a result, we
must estimate customer demand, and errors in our estimates could
have negative effects on our cash, inventory levels, revenues
and results of operations.
We have been required historically to place firm orders for
products and manufacturing equipment 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. If we overestimate customer
demand, we may allocate resources to manufacturing products that
we may not be able to sell when we expect, if at all. As a
result, we would have additional usage of cash, excess inventory
and overhead expense, which would harm our financial results. On
occasion, we have experienced adverse financial results due to
excess inventory and excess manufacturing capacity. Conversely,
if we underestimate customer demand or if insufficient
manufacturing capacity were available, we would lose revenue
opportunities, 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. There is no
guarantee that we will be able to adequately respond to
unexpected increases in customer purchase orders in the future,
in which case we may lose the revenues associated with those
additional purchase orders and our customer relationships and
reputation may suffer.
Any
failure to protect our intellectual property appropriately could
reduce or eliminate any competitive advantage we
have.
Our success depends, 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. As of
December 31, 2008, we had 43 United States patents issued,
many with associated foreign filings and patents. Our issued
patents include those relating to basic circuit and device
designs, semiconductors, our multilithic microsystems technology
and system designs. Our issued United States patents expire
between 2009 and 2027. We maintain a vigorous technology
development program that routinely generates potentially
patentable intellectual property. Our decision as to whether to
seek formal patent protection is done on a case by case basis
and is based on the economic value of the intellectual property,
the anticipated strength of the resulting patent, the cost of
pursuing the patent and an assessment of using a patent as a
strategy to protect the intellectual property.
To protect our intellectual property, we regularly enter into
written confidentiality and assignment of rights to inventions
agreements with our employees, and confidentiality and
non-disclosure agreements with third parties, and generally
control access to and distribution of our documentation and
other proprietary information. These measures may not be
adequate in all cases to safeguard the proprietary technology
underlying our products. 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 attempt to 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. Moreover we occasionally agree to incorporate
a customers or suppliers intellectual property into
our designs, in which case we have obligations with respect to
the non-use and non-disclosure of that intellectual property. We
also license technology from other companies, including Northrop
Grumman Corporation. There are no limitations on our rights to
make, use or sell products we may develop in the future using
the chip technology licensed to us by Northrop Grumman
Corporation. Steps taken by us to prevent misappropriation or
infringement of our intellectual property or the intellectual
property of our customers may not be successful. 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.
We may receive in the future, notices of claims of infringement
of other parties proprietary rights. 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 other third parties that could be triggered upon an
allegation or finding
21
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 other third
parties of a product which was later discovered to infringe upon
another partys 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 partys intellectual property rights.
However, in such an instance, a license may not be available on
commercially reasonable terms, if at all.
With regard to our pending patent applications, it is possible
that no patents may be issued as a result of these or any future
applications or the allowed patent claims may be of reduced
value and importance. If they are issued, any patent claims
allowed may not be sufficiently broad to protect our technology.
Further, any existing or future patents may be challenged,
invalidated or circumvented thus reducing or eliminating their
commercial value. 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.
Risks
Relating to Our Industry
Our
revenues in the defense electronics and homeland security
markets largely depend upon the funding and implementation
decisions of the United States Government. These decisions could
change abruptly and without notice, unexpectedly reducing our
revenues from these markets.
Our revenues are partially dependent on sales to defense
electronics and homeland security prime contractors. Changes in
levels of government contract funding and in implementation of
government contracts may cause prime contractors to reduce
funding to subcontractors. These funding and implementation
decisions are difficult to predict and may change abruptly. As a
result, our quarterly revenues from prime contractors may
fluctuate significantly from quarter to quarter.
Our
failure to compete effectively could reduce our revenues and
margins.
Among merchant suppliers in the wireless telecommunication
market who provide integrated transceivers to radio OEMs, we
primarily compete with Compel Electronics Inc., Filtronic plc,
Microelectronics Technology Inc., and Teledyne Technologies
Incorporated. Additionally, there are telecom OEMs, such as
Ericsson and NEC Corporation, that use their own captive
resources for the design and manufacture of their high-frequency
RF transceiver modules, rather than using merchant suppliers
like us. We believe that over one-half of the high-frequency RF
transceiver modules manufactured today are being produced by
these captive resources. To the extent that telecom OEMs
presently, or may in the future, produce their own RF
transceiver modules, we lose the opportunity to gain a customer
and the potential related sales. Further, if a telecom OEM were
to sell its captive operation to a competitor, we would lose the
opportunity to acquire those potential sales. In
non-telecommunication markets, we compete both with internal
captive groups within many of the large defense OEMs, along with
other companies such as Aeroflex Incorporated, Akon Inc., AML
Communications Inc., Chelton, Ltd., Ciao Wireless, CTT Inc.,
Herley Industries, Inc., KMIC Technology, Inc., M/A-Com, Miteq,
Inc. and Teledyne Technologies Incorporated, and Terabeam HXI.
Many of our current and potential competitors are substantially
larger than us and have greater financial, technical,
manufacturing and marketing resources. In addition, we have
begun designing and selling products for homeland security
applications and the market for homeland security is only now
emerging. If we are unable to compete successfully, our future
operations and financial results will be harmed.
Our
failure to comply with any applicable environmental regulations
could result in a range of consequences, including fines,
suspension of production, excess inventory, sales limitations
and criminal and civil liabilities.
Due to environmental concerns, the need for lead-free solutions
in electronic components and systems is receiving increasing
attention within the electronics industry as companies are
moving towards becoming compliant with the Restriction of
Hazardous Substances Directive, or RoHS Directive. The RoHS
Directive is European Union legislation that restricts the use
of a number of substances, including lead, after July 2006. We
22
believe that our products impacted by these regulations are
compliant with the RoHS Directive and that materials will
continue to be available to meet these new regulations. However,
it is possible that unanticipated supply shortages or delays or
excess non-compliant inventory may occur as a result of these
new regulations. Failure to comply with any applicable
environmental regulations could result in a range of
consequences, including loss of sales, fines, suspension of
production, excess inventory and criminal and civil liabilities.
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. Further, the Federal
Communications Commission and foreign regulatory agencies have
adopted regulations that impose stringent RF emissions standards
on the communications industry. In response to the new
environmental regulations on health and safety in Europe and
China, we are required to design and build a lead-free product.
Changes to these regulations may require that we alter the
performance of our products.
Risks
Relating to Ownership of Our Stock
The
market price of our common stock has fluctuated historically and
is likely to fluctuate in the future.
The price of our common stock has fluctuated widely since our
initial public offering in October 2000. In 2008, the lowest
daily closing sales price for our common stock was $2.09 and the
highest daily closing sales price for our common stock was
$7.62. The market price of our common stock can fluctuate
significantly for many reasons, including, but not limited to:
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our financial performance or the performance of our competitors;
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the purchase or sale of common stock, short-selling or
transactions by large stockholders;
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technological innovations or other trends or changes in
telecommunication and non-telecommunication networks;
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successes or failures at significant product evaluations or site
demonstrations;
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the introduction of new products by us or our competitors;
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acquisitions, strategic alliances or joint ventures involving us
or our competitors;
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decisions by major participants in the communications industry
not to purchase products from us or to pursue alternative
technologies;
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decisions by investors to de-emphasize investment categories,
groups or strategies that include our company or industry;
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market conditions in the industry, the financial markets and the
economy as a whole;
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existence of preferred stock with rights differing from those of
common stock; and
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the low trading volume of our common stock.
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It is likely that our operating results in one or more future
quarters may be below the expectations of security analysts and
investors. In that event, the trading price of our common stock
would likely decline. In addition, the stock market has
experienced extreme price and volume fluctuations. These market
fluctuations can be unrelated to the operating performance of
particular companies and the market prices for securities of
technology companies have been especially volatile. Future sales
of substantial amounts of our common stock, or the perception
that such sales could occur, could adversely affect prevailing
market prices for our common stock. Additionally, future stock
price volatility for our common stock could provoke the
initiation of securities litigation, which may divert
substantial management resources and have an adverse effect on
our business, operating results and financial condition. Our
existing insurance coverage may not sufficiently cover all costs
and claims that could arise out of any such securities
litigation. We anticipate that prices for our common stock will
continue to be volatile.
23
We
have a few shareholders that each own a large percentage of our
outstanding capital stock and, as a result of their significant
ownership, are able to significantly affect the outcome of
matters requiring stockholder approval.
Oak Technology Partners XI, Limited Partnership, or Oak, owns
300,000 shares of our Series B preferred stock that
are convertible into 3,000,000 shares of our common stock
and a warrant to purchase 90,000 shares of our
Series B preferred stock that upon issuance will be
convertible into 900,000 shares of our common stock.
Assuming the exercise in full of the warrant issued to Oak and
the conversion of Oaks preferred shares into common stock,
as of February 6, 2009, Oak beneficially owned 29.4% of our
capital stock. In addition, two other shareholders each
beneficially owned more than 10% of our capital stock on
February 6, 2009.
Because most matters requiring approval of our stockholders
require the approval of the holders of a majority of the shares
of our outstanding capital stock present in person or by proxy
at the annual meeting, the significant ownership interest of
these shareholders allows them to affect significantly the
election of our directors and the outcome of corporate actions
requiring stockholder approval. 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 their support, even if the transaction is favorable to
our stockholders as a whole.
Our
certificate of incorporation, bylaws, arrangements with
executive officers and the rights of our preferred shareholder
contain provisions that could delay or prevent a change in
control.
We are subject to certain Delaware anti-takeover laws by virtue
of our status as a Delaware corporation. 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 our outstanding voting
stock, for three years following the date that the stockholder
acquired 15% or more of our voting stock, unless our 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 at least
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. Our certificate of incorporation and bylaws
include a number of provisions that may deter or impede hostile
takeovers or changes of control of 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. Additionally, we have adopted a
Stockholder Rights Plan, providing for the distribution of one
preferred share purchase right for each outstanding share of
common stock that may lead to the delay or prevention of a
change in control that is not approved by our board of
directors. We have an Executive Officer Severance and Retention
Plan and a Key Employee Severance and Retention Plan that
provide for severance payments and the acceleration of vesting
of a percentage of certain stock options granted to our
executive officers and certain senior, non-executive employees
under specified conditions.
The preferred shareholder has certain rights upon any
liquidation, merger, reorganization
and/or
consolidation of Endwave into or with another corporation or any
transaction or series of related transactions in which a person,
entity or group acquires 50% or more of the combined voting
power of our then outstanding securities. If such an event were
to occur the holders of the preferred shares are entitled to
receive prior and in preference to any distribution to holders
of our common stock or any other class or series of stock
subordinate in liquidation preference to the preferred stock,
the amount invested plus all accumulated or accrued and unpaid
dividends thereon.
These plans may make us a less attractive acquisition target or
may reduce the amount a potential acquirer may otherwise be
willing to pay for our company.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
24
Our principal executive offices are located in San Jose,
California, where we lease approximately 33,000 square
feet, which encompasses our corporate headquarters and research
and development facilities. This lease expires in August 2011.
During 2008, we moved our Northeast operations to Salem, New
Hampshire where we lease approximately 5,000 square feet.
This lease expires in November 2013.
We lease approximately 21,000 square feet in Diamond
Springs, California for our manufacturing facilities under a
lease that expires in June 2009. We lease approximately
7,000 square feet in El Dorado Hills, California under a
lease that expires in February 2009. During 2009, we plan to
consolidate our Diamond Springs and El Dorado Hills facilities
into a new facility located in Folsom, California and have
leased approximately 31,000 square feet under a lease that
expires in May 2014.
In Chiang Mai, Thailand, near the facilities of our contract
manufacturer, HANA Microelectronics Co., Ltd., we lease
approximately 3,000 square feet under an office lease that
expires in March 2010. We believe that these facilities are
adequate to meet our current and near term future needs.
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Item 3.
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Legal
Proceedings
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On Friday, October 31, 2008, we filed a complaint with the
Canadian Superior Court in Montreal, Quebec alleging that
Advantech Advanced Microwave Technologies Inc.
(Advantech) the parent company of Allgon Microwave
Corporation AB, had breached its contractual obligations with
Endwave and owes us $994,500 in a note receivable, purchased
inventory and accepted purchase orders. We cannot predict the
outcome of these proceedings. An adverse decision in these
proceedings could harm our consolidated financial position and
results of operations. Although we may have pending various
legal actions arising in the ordinary course of business from
time to time, other than the complaint against Advantech, we are
not currently a party to any material litigation.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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Not applicable.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Information
Relating to our Common Stock
Our common stock is traded on the NASDAQ Global Market under the
symbol ENWV. The following table sets forth the high
and low daily sales prices per share of our common stock, as
reported by the NASDAQ Global Market.
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High
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Low
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Fiscal Year Ended December 31, 2007
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First Quarter
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$
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13.75
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$
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10.50
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Second Quarter
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$
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12.86
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$
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9.50
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Third Quarter
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$
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12.09
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$
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8.25
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Fourth Quarter
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$
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10.49
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$
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5.40
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Fiscal Year Ended December 31, 2008
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First Quarter
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$
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7.69
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$
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5.56
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Second Quarter
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$
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7.53
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$
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5.38
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Third Quarter
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$
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7.00
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$
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4.77
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Fourth Quarter
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$
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5.49
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$
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1.93
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The last reported sale price of our common stock on the NASDAQ
Global Market on February 6, 2009 was $1.89 per share. As
of February 6, 2009, there were approximately 101 holders
of record of our common stock.
25
Dividend
Policy
We have never paid any cash dividends on our common or preferred
stock. Because we currently intend to retain any future earnings
to fund the development and growth of our business, we do not
anticipate paying any cash dividends in the near future.
Equity
Compensation Plan Information
The following table provides certain information with respect to
all of our equity compensation plans in effect as of the end of
December 31, 2008.
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Number of
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Securities
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Remaining
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Available
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Number of
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Weighted-
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for Issuance
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Securities to be
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Average
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Under Equity
|
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Issued Upon
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Exercise
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Compensation
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Exercise of
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Price of
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Plans
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Outstanding
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|
Outstanding
|
|
|
(Excluding
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Options,
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Options,
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|
Securities
|
|
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Warrants and
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Warrants and
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Reflected in
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Plan Category
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Rights (a)
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Rights (b)
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Column (a))(1)(c)
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Equity compensation plans approved by security holders
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3,008,917
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$
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9.23
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2,243,497
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(2)
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Equity compensation plans not approved by security holders
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0
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|
0
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|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
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|
3,008,917
|
|
|
$
|
9.23
|
|
|
|
2,243,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The number of shares that may be issued under the 2007 Equity
Incentive Plan is increased automatically on January 1 of each
year, beginning in 2008 and ending in 2012, by a number of
shares equal to the lesser of (i) six percent of the number
of shares of our common stock outstanding (assuming conversion
of all outstanding shares of preferred stock) on such date,
(ii) 1,500,000 shares and (iii) such lower number
of shares as determined by our board of directors prior to such
date.
|
|
(2)
|
|
Includes 360,369 shares issuable under the 2000 Employee
Stock Purchase Plan.
|
26
Performance
Measurement Comparison
The graph below shows the cumulative total stockholder return of
an investment of $100 (and the reinvestment of any dividends
thereafter) on December 31, 2003 in (i) our common
stock, (ii) the NASDAQ Stock Market Index
(U.S. Companies) and (ii) the NASDAQ
Telecommunications Index. Our stock price performance shown in
the graph below is not indicative of future stock price
performance.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among
Endwave Corporation, The NASDAQ Composite Index
And The NASDAQ Telecommunications Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
|
|
12/07
|
|
|
12/08
|
Endwave Corporation
|
|
|
|
100.00
|
|
|
|
|
237.09
|
|
|
|
|
160.05
|
|
|
|
|
147.15
|
|
|
|
|
98.78
|
|
|
|
|
32.61
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
110.06
|
|
|
|
|
112.92
|
|
|
|
|
126.61
|
|
|
|
|
138.33
|
|
|
|
|
80.65
|
|
NASDAQ Telecommunications
|
|
|
|
100.00
|
|
|
|
|
106.63
|
|
|
|
|
103.01
|
|
|
|
|
131.04
|
|
|
|
|
135.00
|
|
|
|
|
78.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
$100 invested on 12/31/03 in stock or index-including
reinvestment of dividends.
|
|
|
Fiscal year ending December 31.
|
27
|
|
Item 6.
|
Selected
Consolidated Financial Data
|
The following selected consolidated financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and the notes thereto
included elsewhere in this report. The selected consolidated
statements of operations data for the fiscal years ended
December 31, 2008, 2007 and 2006 and the selected
consolidated balance sheet data as of December 31, 2008 and
2007 are derived from the audited consolidated financial
statements that are included elsewhere in this report. The
selected consolidated statements of operations data for the
fiscal years ended December 31, 2005 and 2004 and the
selected consolidated balance sheet data as of December 31,
2006, 2005 and 2004 are derived from our audited consolidated
financial statements not included in this report. The historical
results are not necessarily indicative of the results of
operations to be expected in any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
58,255
|
|
|
$
|
56,476
|
|
|
$
|
62,226
|
|
|
$
|
48,735
|
|
|
$
|
33,162
|
|
Cost of product revenues
|
|
|
42,091
|
|
|
|
41,764
|
|
|
|
44,220
|
|
|
|
33,586
|
|
|
|
22,576
|
|
Impairment of goodwill and intangible assets
|
|
|
6,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
26,068
|
|
|
|
23,701
|
|
|
|
21,901
|
|
|
|
16,799
|
|
|
|
16,115
|
|
Loss from operations
|
|
|
(16,065
|
)
|
|
|
(8,989
|
)
|
|
|
(3,895
|
)
|
|
|
(1,650
|
)
|
|
|
(5,529
|
)
|
Net loss
|
|
$
|
(14,751
|
)
|
|
$
|
(5,401
|
)
|
|
$
|
(1,344
|
)
|
|
$
|
(874
|
)
|
|
$
|
(4,404
|
)
|
Basic and diluted net loss per share
|
|
$
|
(1.60
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term and long-term investments
|
|
$
|
45,348
|
|
|
$
|
48,957
|
|
|
$
|
67,587
|
|
|
$
|
22,415
|
|
|
$
|
25,137
|
|
Total assets
|
|
|
70,340
|
|
|
|
82,589
|
|
|
|
100,653
|
|
|
|
53,149
|
|
|
|
50,094
|
|
Long-term obligations, less current portion
|
|
|
73
|
|
|
|
116
|
|
|
|
231
|
|
|
|
385
|
|
|
|
559
|
|
Total stockholders equity
|
|
|
62,041
|
|
|
|
71,848
|
|
|
|
89,398
|
|
|
|
43,083
|
|
|
|
39,064
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and
related notes included elsewhere in this report, as well as the
information set forth in the Risk Factors section of
this report. In addition to historical consolidated financial
information, this discussion contains forward-looking statements
that involve known and unknown risks and uncertainties,
including statements regarding our expectations, beliefs,
intentions or strategies regarding the future. All
forward-looking statements included in this report are based on
information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our
actual results could differ materially from those discussed in
the forward-looking statements. You are cautioned not to place
undue reliance on these forward-looking statements. In the past,
our operating results have fluctuated and are likely to continue
to fluctuate in the future.
Overview
We design, manufacture and market radio frequency, or RF,
modules that enable the transmission, reception and processing
of high frequency signals in telecommunication network, defense
electronics, homeland security and other systems.
28
Markets
and Diversification Strategy
Telecommunications market.
Most of our RF
modules are deployed in telecommunication networks, carrier
class trunking networks and point-to-point transmission
networks. Our target customers for these applications are
telecommunication network original equipment manufacturers and
systems integrators, collectively referred to in this report as
telecom OEMs. Telecom OEMs provide the equipment used by service
providers to deliver voice, data and video services to
businesses and consumers. Telecom OEMs that purchased our
products accounted for 66% of our total revenues during 2008 and
included Nera ASA and Nokia Siemens Networks.
From 2007 to 2008, we experienced a decrease of 13% in our
telecommunications-related revenues. This decline in revenues
was due primarily to decreased demand, particularly during the
fourth quarter of 2008, from our telecommunications customers
and lower average sales prices of our modules.
Non-telecommunication markets.
Our RF modules
are also designed into various applications outside of the
telecommunication network market, including defense electronics,
homeland security and other systems. Our target customers in the
defense electronics market include defense systems integrators
and their subcontractors that design aerospace systems, defense
systems and weapons and electronics platforms for both domestic
and foreign defense customers. Our target customers in the
homeland security market include those utilizing the properties
of high-frequency RF energy to create new systems designed to
detect and identify security threats. We also sell modules to
customers addressing other applications such as semiconductor
testing. In this report, we refer to our target customers in the
defense electronics and homeland security markets as defense and
homeland security systems integrators. Revenues from our
customers in the defense electronics, homeland security and
other systems markets include BAE Systems, L-3 SafeView Inc.,
Lockheed Martin Corporation and Teradyne and accounted for 34%
of our total revenues in 2008.
From 2007 to 2008, we experienced growth of 61% in our
non-telecommunication related revenues. We continue to seek
growth through enhancing our position as a leading merchant
supplier of RF modules, continuing our expansion into the
defense electronics, homeland security and other systems markets
and pursuing strategic acquisitions.
Current market outlook.
Over the past several
months, the global economic conditions have continued to
deteriorate. For example, credit has become severely restricted.
This restriction in credit has materially impacted our customers
and vendors, which could have a negative effect on our business.
We expect the restriction in credit will continue to impact our
customers and vendors for the foreseeable future. The
installation and enhancement of telecommunication networks
integrating our products and the rollout of certain security and
other systems, often rely on the availability of credit. With
the current restriction in credit markets, capital may not be
available for the build-out of these networks or systems.
Without appropriate capital, our customers may have difficulty
funding their on-going operations and may reduce their orders
for our products. As a result, we currently estimate revenues
for 2009 to be below revenues in 2008. In addition to a
reduction in revenue, we have experienced a negative impact to
our operations and financial results through an increase in our
bad debt expense related to a note receivable, increased
write-offs of excess inventory and the write-down of our
goodwill and intangible assets. We expect these risks to
continue for the foreseeable future.
Additionally, our vendors may rely on credit markets to finance
their operations. With the current restriction in credit
markets, capital may not be available to our vendors or may only
be available at unfavorable terms. Without appropriate capital,
our vendors may have difficulty funding their on-going
operations and may not be able to fulfill orders for their
products. This could significantly impact our operations and
financial results.
Seasonality
Although we have experienced significant quarterly fluctuations
in revenue at times over the past several years, we do not
believe that volatility was primarily attributable to
seasonality in our business.
29
Critical
Accounting Policies and Estimates
General
Managements discussion and analysis of its financial
condition and results of operations is based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated
financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to revenue recognition,
allowance for doubtful accounts, warranty obligations,
inventories, stock-based compensation, income taxes, asset
impairments and other commitments and contingencies. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates or our estimates
may be affected by different assumptions or conditions. We
discuss these policies further, as well as the estimates and
judgments involved, below.
Revenue
Recognition
Our primary customers are telecom OEMs, defense electronics,
homeland security and other systems integrators that incorporate
our products into their systems. We recognize product revenues
at the time title passes, which is generally upon product
shipment or when withdrawn from a consignment location, coupled
with persuasive evidence that an arrangement exists, delivery
has occurred or services have been rendered, our price to the
buyer is fixed or determinable and collectibility is reasonably
assured. Revenues under development contracts are generally
recorded on a percentage of completion basis, using project
hours as the basis to measure progress toward completing the
contract and recognizing revenues. Alternatively, where a
development contract specifies defined progress gates or
milestones tied to payments, revenue is recognized on a pro rata
basis matching the milestones. Revenues attributable to
development fees accounted for 2.0% of our total revenues in
2006, 1.5% of our total revenues in 2007 and 1.2% of our total
revenues in 2008. The costs incurred under these development
agreements are included in research and development expenses.
Allowance
for Doubtful Accounts
We make ongoing assumptions relating to the collectibility of
our accounts receivable in our calculation of the allowance for
doubtful accounts. In determining the amount of the allowance,
we make judgments about the creditworthiness of customers based
on ongoing credit evaluations and assess current economic trends
affecting our customers that might impact the level of credit
losses in the future and result in different rates of bad debts
than previously seen. We also consider our historical level of
credit losses. Our reserves were $67,000 at December 31,
2007 and $64,000 at December 31, 2008. If actual credit
losses were to be significantly greater than the reserves we
have established, our selling, general and administrative
expenses would increase.
Warranty
Reserves
We generally offer a twelve to thirty month warranty on all of
our products. We record a liability based on estimates of the
costs that may be incurred under our warranty obligations and
charge to cost of product revenues the amount of such costs at
the time revenues are recognized. Our warranty obligation is
affected by product failure rates, material usage and service
delivery costs incurred in correcting a product failure. Our
estimates of anticipated rates of warranty claims and costs per
claim are primarily based on historical information and future
forecasts. At December 31, 2007 and 2008 our warranty
reserves were $2.7 million and $2.4 million,
respectively. We periodically assess the adequacy of our
recorded warranty liabilities and adjust the amounts as
necessary. If actual warranty claims are significantly higher
than forecast, or if the actual costs incurred to provide the
warranty is greater than the forecast, our gross margins could
be adversely affected.
Inventory
Valuation
We evaluate our ending inventories for excess quantities and
obsolescence at each balance sheet date. This evaluation
includes review of materials usage, market conditions and
product life cycles and an analysis of sales
30
levels by product and projections of future demand and market
conditions. We adjust inventory balances to approximate the
lower of our manufacturing cost or market value. If actual
future demand or market conditions are less favorable than those
projected by management, additional inventory write-downs may be
required, and would be reflected in cost of product revenues in
the period the revision is made. This would have a negative
impact on our gross margins in that period. At the time of write
down, a new, lower cost basis for that inventory is established
and subsequent changes in facts and circumstances do not result
in the restoration or increase in that newly established cost
basis. If in any period we are able to sell inventories that
were not valued or that had been written off in a previous
period, related revenues would be recorded without any
offsetting charge to cost of product revenues, resulting in a
net benefit to our gross margin in that period. To the extent
these factors materially affect our gross margins, we would
disclose them.
Stock-Based
Compensation
We recognize stock-based compensation in accordance with
Statement of Financial Accounting Standards, or SFAS,
No. 123 (revised 2004), Share-Based Payment, or
SFAS No. 123(R) which establishes accounting for
stock-based awards exchanged for employee services. Accordingly,
stock-based compensation cost is measured at the grant date,
based on the fair value of the award, and is recognized as
expense over the requisite service period. All of our stock
compensation is accounted for as an equity instrument.
We estimate the fair value of stock options and shares under our
stock purchase plan using the Black-Scholes valuation model,
consistent with the provisions of SFAS No. 123(R) and
Securities and Exchange Commission Staff Accounting
Bulletin No. 107. The fair value of each option grant
and the shares under our stock purchase plan are estimated on
the date of grant using the Black-Scholes option valuation model
and the graded-vesting method with assumptions concerning
expected dividend yield, stock price volatility, risk free
interest rate and expected life of the award.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. As our stock
option awards have characteristics that differ significantly
from traded options, and as changes in the subjective
assumptions can materially affect the estimated value, our
estimate of fair value may not accurately represent the value
assigned by a third party in an arms-length transaction. There
currently is no market-based mechanism to verify the reliability
and accuracy of the estimates derived from the Black-Scholes
option valuation model or other allowable valuation models, nor
is there a means to compare and adjust the estimates to actual
values. While our estimate of fair value and the associated
charge to earnings materially affects our results of operations,
it has no impact on our cash position.
Deferred
Taxes
We currently have significant deferred tax assets, which are
subject to periodic recoverability assessments. We record a
valuation allowance to reduce our deferred tax assets to the
amount that we believe to be more likely than not realizable. We
have recorded a valuation allowance in an amount equal to the
net deferred tax assets to reflect uncertainty regarding future
realization of these assets based on past performance and the
likelihood of realization of our deferred tax assets.
Long-Lived
Assets
We periodically review our property and equipment and
identifiable intangible assets for possible impairment whenever
facts and circumstances indicate that the carrying amount may
not be fully recoverable. Assumptions and estimates used in the
evaluation of impairment may affect the carrying value of
long-lived assets, which could result in impairment charges.
Significant assumptions and estimates include the projected cash
flows based upon estimated revenues and expense growth rates,
the estimated royalty rates used for the valuation of acquired
tradenames, and the discount rate applied to expected cash
flows. In addition, our depreciation and amortization policies
reflect judgments on the estimated useful lives of assets.
During the fourth quarter of 2008, we reviewed our long-lived
assets for indicators of impairment in accordance with
SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. Based on reduced estimates
of future revenues and future negative cash flow, we identified
potential indicators of impairment.
31
As a result, we compared the fair value of our long-lived assets
to their carrying value. Based on our discounted future cash
flow and revenue projections, we recorded non-cash impairment
charges of $2.1 million for intangible assets with a
defined useful life. The impairment charges represent the excess
of the carrying value of these assets over their fair value.
These impairment charges are not expected to result in any
future cash expenditures.
Goodwill
and Intangible Assets with an Indefinite Life
We are required to assess the carrying value of goodwill and
other intangible assets with an indefinite life annually or
whenever circumstances indicate that a decline in value may have
occurred. Based on the fair value of our common stock relative
to our book value, revised estimates for our future revenues and
the continued worsening of the global economy, we determined
that indicators of potential impairment were present during the
fourth quarter of 2008. As a result, we assessed the carrying
value of acquired goodwill and intangible assets with an
indefinite life for impairment, in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. Based on the fair market value of the business and
our discounted future cash flow and revenue projections, we
recorded non-cash impairment charges of $3.0 million for
goodwill and $1.1 million for intangible assets with an
indefinite life.
These impairment charges are not expected to result in any
future cash expenditures.
Fair
Value Measurement
On January 1, 2008, we adopted SFAS No. 157,
Fair Value Measurements or SFAS No. 157
which defines fair value, establishes a framework for using fair
value to measure assets and liabilities, and expands disclosures
about fair value measurements. SFAS No. 157 applies
whenever other statements require or permit assets or
liabilities to be measured at fair value. SFAS No. 157
is effective for fiscal years beginning after November 15,
2007, except for nonfinancial assets and liabilities that are
recognized or disclosed at fair value in the financial
statements on a nonrecurring basis, for which application has
been deferred for one year. Our financial assets that require
recognition under SFAS No. 157 include certain cash
equivalents and short-term investments.
Our financial assets and liabilities are valued using market
prices on both active markets (Level 1) and less
active markets (Level 2). Level 1 instrument
valuations are obtained from real-time quotes for transactions
in active exchange markets involving identical assets.
Level 2 instrument valuations are obtained from
readily-available pricing sources for comparable instruments. As
of December 31, 2008, we did not have any assets or
liabilities without observable market values that would require
a high level of judgment to determine fair value (Level 3).
Business
Combinations
In accordance with the provisions of SFAS No. 141,
Business Combinations, the purchase price of an
acquired company is allocated between the intangible assets and
the net tangible assets of the acquired business with the
residual of the purchase price recorded as goodwill. The
valuation of intangible assets is based on an income approach
methodology that values the intangible assets based on the
future cash flows that could potentially be generated by the
asset over its estimated remaining life discounted to its
present value utilizing an appropriate weighted average cost of
capital. As a result of business acquisitions, the allocation of
the purchase price to goodwill and intangible assets could have
a significant impact on our future operating results.
32
Results
of Operations
The following tables set forth selected consolidated statements
of operations data for each of the periods indicated in dollars
and as a percentage of total revenues.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
57,559
|
|
|
$
|
55,611
|
|
|
$
|
60,956
|
|
Development fees
|
|
|
696
|
|
|
|
865
|
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
58,255
|
|
|
|
56,476
|
|
|
|
62,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
41,495
|
|
|
|
41,216
|
|
|
|
43,771
|
|
Cost of product revenues, amortization of intangible assets
|
|
|
596
|
|
|
|
548
|
|
|
|
449
|
|
Research and development
|
|
|
11,878
|
|
|
|
10,707
|
|
|
|
8,856
|
|
Selling, general and administrative
|
|
|
13,474
|
|
|
|
12,463
|
|
|
|
12,689
|
|
Transaction costs
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Amortization of intangible assets
|
|
|
716
|
|
|
|
531
|
|
|
|
156
|
|
Impairment of goodwill and intangible assets
|
|
|
6,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
74,320
|
|
|
|
65,465
|
|
|
|
66,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,065
|
)
|
|
|
(8,989
|
)
|
|
|
(3,895
|
)
|
Interest and other income, net
|
|
|
1,248
|
|
|
|
3,590
|
|
|
|
2,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income tax expense (benefit)
|
|
|
(14,817
|
)
|
|
|
(5,399
|
)
|
|
|
(1,247
|
)
|
Income tax expense (benefit)
|
|
|
(66
|
)
|
|
|
2
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,751
|
)
|
|
$
|
(5,401
|
)
|
|
$
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(As a percentage of total revenues)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
|
98.8
|
%
|
|
|
98.5
|
%
|
|
|
98.0
|
%
|
Development fees
|
|
|
1.2
|
|
|
|
1.5
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
71.2
|
|
|
|
73.0
|
|
|
|
70.3
|
|
Cost of product revenues, amortization of intangible assets
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
0.7
|
|
Research and development
|
|
|
20.4
|
|
|
|
19.0
|
|
|
|
14.2
|
|
Selling, general and administrative
|
|
|
23.1
|
|
|
|
22.1
|
|
|
|
20.4
|
|
Transaction costs
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Amortization of intangible assets
|
|
|
1.2
|
|
|
|
0.9
|
|
|
|
0.3
|
|
Impairment of goodwill and intangible assets
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
127.5
|
|
|
|
116.0
|
|
|
|
106.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(27.5
|
)
|
|
|
(16.0
|
)
|
|
|
(6.3
|
)
|
Interest and other income, net
|
|
|
2.1
|
|
|
|
6.4
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income tax expense (benefit)
|
|
|
(25.4
|
)
|
|
|
(9.6
|
)
|
|
|
(2.0
|
)
|
Income tax expense (benefit)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(25.3
|
)%
|
|
|
(9.6
|
)%
|
|
|
(2.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations
Year
ended December 31, 2008 compared to year ended
December 31, 2007
Total
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Total revenues
|
|
$
|
58,255
|
|
|
$
|
56,476
|
|
|
|
3.2
|
%
|
Product revenues
|
|
$
|
57,559
|
|
|
$
|
55,611
|
|
|
|
3.5
|
%
|
Development fees
|
|
$
|
696
|
|
|
$
|
865
|
|
|
|
(19.5
|
)%
|
Total revenues consist of product revenues and development fees.
Product revenues are attributable to sales of our RF products.
Development fees are attributable to the development of product
prototypes and custom products pursuant to development
agreements that provide for payment of a portion of our research
and development or other expenses. We expect to enter into more
development contracts in the future as we seek to further
penetrate the defense electronics market, where development
contracts are customary, but we do not expect development fees
to represent a significant percentage of our total revenues for
the foreseeable future.
Product revenues increased 3.5% from 2007 to 2008 as a result of
increased demand from our non-telecommunication customers. We
experienced a $7.4 million increase in revenues from our
non-telecommunication customers which was offset in part by a
$5.6 million decrease in revenues from our
telecommunication customers. During 2008, revenues from our
non-telecommunication customers comprised 34% of our total
revenues, compared with 21% in 2007. During 2008, revenues from
our telecommunication customers comprised 66% of our total
revenues, compared with 79% in 2007.
34
Due to the current economic downturn, we currently expect
revenues in 2009 to be lower than in 2008, primarily due to a
decrease in our telecommunication related revenues that we
believe will be partially offset by an increase in our
non-telecommunication related revenues.
Cost of
product revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of product revenues
|
|
$
|
41,495
|
|
|
$
|
41,216
|
|
|
|
0.7
|
%
|
Percentage of revenues
|
|
|
71.2
|
%
|
|
|
73.0
|
%
|
|
|
|
|
Cost of product revenues consists primarily of: costs of direct
materials and labor utilized to assemble and test our products;
equipment depreciation; costs associated with procurement,
production control, quality assurance and manufacturing
engineering; costs associated with maintaining our manufacturing
facilities; fees paid to our offshore manufacturing vendor;
reserves for potential excess or obsolete material; costs
related to stock-based compensation; and accrued costs
associated with potential warranty returns offset by the benefit
of usage of materials that were previously written off.
During 2008, the cost of product revenues as a percentage of
revenues decreased due primarily to the increased absorption of
our overhead costs resulting from increased production and to a
change in product mix favoring certain higher margin products,
partially offset by increased inventory reserves associated with
a customer of ours that filed for bankruptcy protection during
the fourth quarter of 2008. The cost of product revenues in both
periods was favorably impacted by the utilization of inventory
that was previously written off, amounting to $283,000 during
2008 and $572,000 during 2007.
We continue to focus on reducing the cost of product revenues as
a percentage of total revenues through the introduction of new
designs and technology and further improvements to our
manufacturing processes. In addition, our product costs are
impacted by the mix and volume of products sold and will
continue to fluctuate as a result.
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Research and development expenses
|
|
$
|
11,878
|
|
|
$
|
10,707
|
|
|
|
10.9
|
%
|
Percentage of revenues
|
|
|
20.4
|
%
|
|
|
19.0
|
%
|
|
|
|
|
Research and development expenses consist primarily of salaries
and related expenses for research and development personnel,
outside professional services, prototype materials, supplies and
labor, depreciation for related equipment, allocated facilities
costs and expenses related to stock-based compensation.
During 2008, research and development expenses increased both as
a percentage of total revenues and in absolute dollars compared
to 2007. The increase in research and development expenses was
primarily attributable to an increase of $1.0 million in
personnel-related expenses and an increase of $85,000 for stock
based compensation.
During 2009, we expect research and development expenses to be
lower relative to 2008 in absolute dollar terms, as we have
undertaken restructuring activities during the first quarter of
2009 to reduce investment in research and development related
expenses.
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
13,474
|
|
|
$
|
12,463
|
|
|
|
8.1
|
%
|
Percentage of revenues
|
|
|
23.1
|
%
|
|
|
22.1
|
%
|
|
|
|
|
35
Selling, general and administrative expenses consist primarily
of salaries and related expenses for executive, sales,
marketing, finance, accounting, legal, information technology
and human resources personnel, professional fees, facilities
costs, expenses related to stock-based compensation and
promotional activities.
During 2008, selling, general and administrative expenses
increased in both as a percentage of total revenues and in
absolute dollars compared to 2007. This increase in selling,
general and administrative expenses primarily attributable to an
increase of $1.0 million in personnel-related expenses and
an increase of $315,000 for a reserve on a note receivable from
one of our customers. We originally set up a note receivable in
the third quarter of 2008 as one of our customers was unable to
meet the terms of their accounts receivable to us. During the
fourth quarter of 2008 this customer filed for bankruptcy
protection and we therefore reserved a significant portion of
the remaining note receivable. These increases were partially
offset by a decrease of $176,000 for stock-based compensation
and a decrease of $101,000 for professional services.
During 2009, we expect selling, general and administrative
expenses to be lower relative to 2008 in absolute dollar terms,
as we have undertaken restructuring activities during the first
quarter of 2009 to reduce our expenses.
Amortization
of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of product revenues, amortization of intangible assets
|
|
$
|
596
|
|
|
$
|
548
|
|
|
|
8.8
|
%
|
Amortization of intangible assets
|
|
$
|
716
|
|
|
$
|
531
|
|
|
|
34.8
|
%
|
As part of our acquisition of ALC Microwave, Inc., or ALC, in
April 2007, we acquired $2.9 million of identifiable
intangible assets, including $900,000 for customer
relationships, $880,000 for developed technology, $560,000 for
customer backlog, $370,000 for the non-compete agreement and
$230,000 for the tradename. During the fourth quarter of 2008,
these assets were fully written down based on an analysis
indicating impairment of our intangible assets.
As part of our acquisition of JCA Technology, Inc., or JCA, in
July 2004, we acquired $4.2 million of identifiable
intangible assets, including $2.3 million for developed
technology, $1.1 million for the tradename, $780,000 for
customer relationships and $140,000 for customer backlog. During
the fourth quarter of 2008, these assets were fully written down
based on an analysis indicating impairment of our intangible
assets.
The amortization associated with developed technology was a
charge to cost of product revenues. The amortization associated
with developed technology was $596,000 and $548,000 for 2008 and
2007, respectively. During 2008, the increase was attributable
to the full year of amortization related to the ALC intangibles.
The amortization associated with customer backlog, customer
relationships, non-compete and tradename was a charge to
operating expenses. During 2008, the $716,000 of amortization
was comprised of the following: $307,000 for customer
relationships, $280,000 for customer backlog, $93,000 for the
non-compete agreement and $36,000 for the tradename. During
2007, the $531,000 of amortization was comprised of the
following: $256,000 for customer relationships, $187,000 for
customer backlog, $61,000 for the non-compete agreement and
$27,000 for the tradename. During 2008, the increase was
attributable to the full year of amortization related to the ALC
intangibles.
Impairment
of goodwill and intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Impairment of goodwill and intangible assets
|
|
$
|
6,161
|
|
|
$
|
|
|
|
|
100.0
|
%
|
We are required to assess the carrying value of goodwill and
other intangible assets annually or whenever circumstances
indicate that a decline in value may have occurred. Based on the
fair value of our common stock relative to our book value,
revised estimates for our future revenues and the continued
worsening of the global
36
economy, we determined that indicators of potential impairment
were present during the fourth quarter of 2008. As a result, we
assessed the carrying value of acquired goodwill and intangible
assets with an indefinite life for impairment, in accordance
with SFAS No. 142, Goodwill and Other Intangible
Assets. Based on the fair market value of the business and
our discounted future cash flow and revenue projections, we
recorded non-cash impairment charges of $3.0 million for
goodwill and $1.1 million for intangible assets with an
indefinite life.
During the fourth quarter of 2008, we reviewed our long-lived
assets for indicators of impairment in accordance with
SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. Based on reduced estimates
of future revenues and future negative cash flow, we identified
potential indicators of impairment. As a result, we compared the
fair value of our long-lived assets to their carrying value.
Based on the discounted future cash flow and revenue
projections, we recorded non-cash impairment charges of
$2.1 million for intangible assets with a defined useful
life. The impairment charges represent the excess of the
carrying value of these assets over their fair value.
These impairment charges are not expected to result in any
future cash expenditures.
Interest
and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Interest and other income, net
|
|
$
|
1,248
|
|
|
$
|
3,590
|
|
|
|
(65.2
|
)%
|
Interest and other income, net consists primarily of interest
income earned on our cash, cash equivalents and investments, the
amortization of the deferred gain from the sale of our Diamond
Springs, California location and gains and losses related to
foreign currency transactions.
The decrease in interest and other income, net during 2008 was
primarily the result of decreased interest earned on our
investments. We had a lower cash and investment balance due to
our stock repurchase in the fourth quarter of 2007 and our
acquisition of ALC during the second quarter of 2007.
Additionally, interest rates have decreased significantly from
the prior year, especially on the highest rated investment
vehicles, leading to lower interest income. During 2008, we
earned $1.2 million of interest income and recognized
$154,000 of other income from the amortization of the deferred
gain from the sale of our Diamond Springs, California location
which were partially offset by banking charges and losses on
foreign currency transactions. During 2007, we earned
$3.5 million of interest income and recognized $154,000 of
other income from the amortization of the deferred gain from our
sale of the Diamond Springs, California location which were
partially offset by banking charges and losses on foreign
currency transactions.
Our functional currency is the U.S. dollar. Transactions in
foreign currencies other than the functional currency are
remeasured into the functional currency at the time of the
transaction. Foreign currency transaction losses consist of the
remeasurement losses that arise from exchange rate fluctuations
related to our operations in Thailand. During 2008 and 2007, we
recorded a foreign currency loss of $59,000 and $17,000.
Income
tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
(66
|
)
|
|
$
|
2
|
|
|
|
3,400
|
%
|
A net income tax benefit of $66,000 was recorded in the year
ended December 31, 2008 compared to a net income tax
expense of $2,000 recorded in the year ended December 31,
2007. The main change in 2008 was due to recording a benefit
from refundable research and development tax credits in the
United States. No other income tax expense (benefit) has been
recorded because we have incurred operating losses that cannot
be benefitted due to a full valuation allowance.
37
Year
ended December 31, 2007 compared to year ended
December 31, 2006
Total
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Total revenues
|
|
$
|
56,476
|
|
|
$
|
62,226
|
|
|
|
(9.2
|
)%
|
Product revenues
|
|
$
|
55,611
|
|
|
$
|
60,956
|
|
|
|
(8.8
|
)%
|
Development fees
|
|
$
|
865
|
|
|
$
|
1,270
|
|
|
|
(31.9
|
)%
|
Product revenues decreased 9% from 2006 to 2007 as a result of
decreased demand primarily from our telecommunications
customers. We experienced an $8.0 million decrease in
revenues from our telecommunications customers which was offset
in part by a $2.2 million increase in revenues from our
defense and homeland security customers. The decrease in
telecommunication revenue was primarily attributable to
decreased revenues from the former Siemens product lines of
Nokia Siemens Networks as they reduced purchases of legacy
products that historically have been outsourced to us. During
2007, revenues from our telecom OEM customers comprised 79% of
our total revenues, compared with 84% in 2006. During 2007,
revenues from our defense and homeland security and other
customers were 21% of our total revenues, compared with 16% in
2006.
The decrease in development fees from 2006 to 2007 was
attributable to decreased development of custom-designed
products for new and existing customers for both our
telecommunications customers and our defense and homeland
security customers.
Cost of
product revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of product revenues
|
|
$
|
41,216
|
|
|
$
|
43,771
|
|
|
|
(5.8
|
)%
|
Percentage of revenues
|
|
|
73.0
|
%
|
|
|
70.3
|
%
|
|
|
|
|
During 2007, the cost of product revenues as a percentage of
revenues increased due primarily to the decreased absorption of
our overhead costs resulting from decreased total revenues and
the write down of certain inventory associated with the end of
life of one of our customer programs. The cost of product
revenues in both periods was favorably impacted by the
utilization of inventory that was previously written off,
amounting to approximately $572,000 during 2007 as compared to
$678,000 in 2006.
Research
and development expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Research and development expenses
|
|
$
|
10,707
|
|
|
$
|
8,856
|
|
|
|
20.9
|
%
|
Percentage of revenues
|
|
|
19.0
|
%
|
|
|
14.2
|
%
|
|
|
|
|
During 2007, research and development costs increased both as a
percentage of total revenues and in absolute dollars compared to
2006. The increase in research and development costs was
primarily attributable to an increase of $717,000 of
personnel-related expenses, an increase of $437,000 related to
the acquisition of the ALC engineering group, an increase of
$343,000 in project-related expenses and an increase of $305,000
for SFAS No. 123 (R) stock-based compensation expense.
38
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
12,463
|
|
|
$
|
12,689
|
|
|
|
(1.8
|
)%
|
Percentage of revenues
|
|
|
22.1
|
%
|
|
|
20.4
|
%
|
|
|
|
|
During 2007, selling, general and administrative expenses
decreased in absolute dollars compared to 2006 primarily due to
a $389,000 decrease in sales commissions and a $106,000 decrease
in personnel-related expenses partially offset by a $271,000
increase for SFAS No. 123(R) stock-based compensation
expense.
Transaction
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Transaction costs
|
|
$
|
|
|
|
$
|
200
|
|
|
|
(100
|
)%
|
During 2006, as part of our growth strategy, we pursued
acquiring another company and capitalized the associated
transaction costs in other current assets on our consolidated
balance sheet. By the end of 2006, we decided not to pursue the
acquisition and expensed the amount accordingly.
Amortization
of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cost of product revenues, amortization of intangible assets
|
|
$
|
548
|
|
|
$
|
449
|
|
|
|
22.0
|
%
|
Amortization of intangible assets
|
|
$
|
531
|
|
|
$
|
156
|
|
|
|
240.4
|
%
|
The amortization associated with developed technology is a
charge to cost of product revenues. The amortization associated
with developed technology was $548,000 and $449,000 for 2007 and
2006, respectively. The increase in cost of product revenues,
amortization of intangible assets was due to $98,000 of
amortization for the ALC developed technology.
The amortization associated with customer backlog, customer
relationships, non-compete and tradename is a charge to
operating expenses. During 2007, the $531,000 of amortization
was comprised of the following: $256,000 for customer
relationships, $187,000 for customer backlog, $61,000 for the
non-compete agreement and $27,000 for the tradename. During
2006, the $156,000 of amortization was due to the amortization
of customer relationships of JCA. This increase in amortization
was attributable to the amortization of the ALC intangibles.
Interest
and other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Interest and other income, net
|
|
$
|
3,590
|
|
|
$
|
2,648
|
|
|
|
35.6
|
%
|
The increase in interest and other income, net during 2007 was
primarily the result of increased interest earned on a higher
cash and investment balance due to the proceeds received from
the sale of preferred stock and warrants to Oak Investment
Partners XI, Limited Partnership or Oak during the second
quarter of 2006. During 2007, we earned $3.5 million of
interest income and recognized $154,000 of other income from the
amortization of the deferred gain from our sale of the Diamond
Springs, California location which were partially offset by
banking charges and losses on foreign currency transactions.
During 2006, we earned $2.6 million of interest income and
recognized $154,000 of other income primarily from the
amortization of the deferred gain from our sale of the
39
Diamond Springs, California location partially offset by banking
charges and a $77,000 loss on the sale of fixed assets related
to the move of our corporate headquarters.
During 2007, we recorded a foreign currency transaction loss of
$17,000. There were no such losses in 2006.
Liquidity
and Capital Resources
At December 31, 2008, we had $34.0 million of cash and
cash equivalents, $11.4 million in short-term investments,
working capital of $57.1 million and no long-term or
short-term debt outstanding. The following table sets forth
selected consolidated statements of cash flows data for our
three most recent fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(153
|
)
|
|
$
|
3,921
|
|
|
$
|
2,776
|
|
Net cash provided by (used in) investing activities
|
|
|
(5,270
|
)
|
|
|
24,860
|
|
|
|
(29,343
|
)
|
Net cash provided by (used in) financing activities
|
|
|
417
|
|
|
|
(15,953
|
)
|
|
|
44,287
|
|
Cash, cash equivalents, restricted cash, short-term and
long-term investments at end of period
|
|
$
|
45,948
|
|
|
$
|
48,982
|
|
|
$
|
67,848
|
|
During 2008, operating activities used $153,000 of cash as
compared to generating $3.9 million of cash in 2007. Our
net loss adjusted for depreciation and other non-cash items, was
a loss of $2.1 million in 2008 as compared to income of
$767,000 in 2007. The remaining provision of $1.9 million
of cash in 2008 was primarily due to a $4.6 million
decrease in accounts receivable and a $424,000 decrease in other
assets partially offset by a $2.0 million increase in
inventory and a $1.2 million decrease in accounts payable.
During 2007, $3.9 million of cash was generated by
operating activities as compared to $2.8 million in 2006.
Our net loss adjusted for depreciation and other non-cash items,
was income of $767,000 in 2007 as compared to income of
$3.6 million in 2006. The remaining provision of
$3.2 million in cash in 2007 was primarily due to a
$5.8 million decrease in inventories partially offset by a
$1.1 million decrease in accrued compensation,
restructuring and other current and long-term accrued
liabilities, a $939,000 decrease in accounts payable, a $374,000
decrease in accrued warranty and a $355,000 decrease in other
assets.
During 2008, investing activities used $5.3 million of cash
compared to providing $24.9 million of cash in 2007. The
use of cash by investing activities in 2008 was primarily due to
the purchase of $2.5 million in property and equipment, a
net $1.2 million purchase of investments, the
$1.0 million final payment for the purchase of ALC and a
$575,000 increase in restricted cash.
During 2007, investing activities provided cash of
$24.9 million compared to using $29.3 million of cash
in 2006. The provision of cash by investing activities in 2007
was primarily due to the net proceeds of short-term investments
of $89.2 million which was partially offset by purchases of
investments of $57.8 million, the use of $5.8 million
to purchase ALC and purchases of equipment of $1.1 million.
During 2008, financing activities provided cash of $417,000 as
compared to using cash of $16.0 million in 2007. During
2008, we received $791,000 in cash from the proceeds of stock
issuance which was partially offset by $356,000 of payments we
made related to the common stock we repurchased in 2007 and
capital lease payments.
During 2007, financing activities used cash of
$16.0 million as compared to providing cash of
$44.3 million in 2006. The use of cash by financing
activities during 2007 was primarily due to the use of
$16.8 million of cash to repurchase 2,502,247 shares
of our common stock which was partially offset by $766,000 from
the sale of common stock under our stock purchase plan and
$130,000 from the exercise of stock options.
At December 31, 2008, we had a net unrealized gain of
$42,000 related to $11.4 million of investments in twelve
debt securities. The increase in the value of these investments
is primarily related to changes in interest rates. The
investments all mature during 2009 and we believe that we have
the ability to hold these investments until the maturity date.
Realized gains were $57,000 in 2008. Realized gains and losses
were insignificant for the years ended December 31, 2007
and 2006. We recorded a foreign currency translation gain of
$12,000 in 2008 and a translation loss of $12,000 in 2007. There
were no such losses in 2006.
40
We believe that our existing cash and investment balances will
be sufficient to meet our operating and capital requirements for
at least the next 12 months. With the exception of
operating leases discussed in the notes to the consolidated
financial statements included in this report, we have not
entered into any off-balance sheet financing arrangements and we
have not established or invested in any variable interest
entities. We have not guaranteed the debt or obligations of
other entities or entered into options on non- financial assets.
The following table summarizes our future cash obligations for
operating leases, capital leases and purchase obligations,
excluding interest, at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations, including interest
|
|
$
|
43
|
|
|
$
|
23
|
|
|
$
|
20
|
|
|
$
|
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
4,389
|
|
|
|
1,035
|
|
|
|
1,860
|
|
|
|
1,263
|
|
|
|
231
|
|
Purchase obligations
|
|
|
3,676
|
|
|
|
3,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,108
|
|
|
$
|
4,734
|
|
|
$
|
1,880
|
|
|
$
|
1,263
|
|
|
$
|
231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have purchase obligations to certain suppliers. In some cases
the products we purchase are unique and have provisions against
cancellation of the order. At December 31, 2008, we had
approximately $3.7 million of purchase obligations, which
are due within the following 12 months.
Other
Long-Term Liabilities
At December 31, 2008, we had $73,000 of other long-term
liabilities consisting of $55,000 of a long-term tax liability
and $18,000 related to the long-term portion of our capital
leases.
Recent
Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board, or
FASB, issued SFAS No. 141 (revised 2007),
Business Combinations, or SFAS No. 141R.
SFAS No. 141R establishes principles and requirements
for how the acquirer of a business recognizes and measures in
its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree. SFAS No. 141R also provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to
enable users of the financial statement to evaluate the nature
and financial effects of the business combination.
SFAS No. 141R is effective for financial statements
issued for fiscal years beginning after December 15, 2008.
We are currently evaluating the impact of
SFAS No. 141R on our consolidated financial position
and results of operations.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51, or
SFAS No. 160. SFAS No. 160 changes the
accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests
and will be reported as a component of equity separate from the
parents equity, and purchases or sales of equity interests
that do not result in a change in control will be accounted for
as equity transactions. In addition, net income attributable to
the noncontrolling interest will be included in consolidated net
income on the face of the income statement and upon a loss of
control, the interest sold, as well as any interest retained,
will be recorded at fair value with any gain or loss recognized
in earnings. SFAS No. 160 is effective for financial
statements issued for fiscal years beginning after
December 15, 2008. We are currently evaluating the
potential impact that the adoption of SFAS No. 160
will have on our future consolidated financial statements.
In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157, or
FSP 157-2,
to partially defer SFAS No. 157, Fair Value
Measurements, or SFAS 157.
FSP 157-2
defers the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal
41
years, and interim periods within those fiscal years, beginning
after November 15, 2008. We are currently evaluating the
impact of
FSP 157-2
on our consolidated financial position and results of operations.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities, or FSP
EITF 03-6-1.
FSP
EITF 03-6-1
provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method. Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including
any amounts related to interim periods, summaries of earnings
and selected financial data) to conform with the provisions in
FSP
EITF 03-6-1.
Unvested restricted stock is considered a participating
security. FSP
EITF 03-6-1
is effective for fiscal years beginning after December 15,
2008, including interim periods within those fiscal years. We do
not expect FSP
EITF 03-6-1
will have a material impact on our consolidated financial
statements.
In August 2008, the U.S. Securities and Exchange
Commission, or SEC, announced that it will issue for comment a
proposed roadmap regarding the potential use by
U.S. issuers of financial statements prepared in accordance
with International Financial Reporting Standards, or IFRS. IFRS
is a comprehensive series of accounting standards published by
the International Accounting Standards Board, or IASB. Under the
proposed roadmap, we could be required in fiscal year 2014 to
prepare financial statements in accordance with IFRS and the SEC
will make a determination in 2011 regarding mandatory adoption
of IFRS. We are currently assessing the impact that this
potential change would have on our consolidated financial
statements and will continue to monitor the development of the
potential implementation of IFRS.
In October 2008, the FASB issued FASB Staff Position
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active, or
FSP 157-3.
FSP 157-3
clarifies the application of SFAS No. 157 in a market
that is not active and it is effective upon the issuance date.
The adoption of
FSP 157-3
did not have a material impact on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Quantitative
and Qualitative Disclosures about Market Risk
Our exposure to market risk based on changes in interest rates
relates primarily to our investment portfolio. In order to
reduce this interest rate risk, we invest our cash primarily in
investments with short maturities. As of December 31, 2008,
our investments in our portfolio were classified as cash
equivalents and short-term investments. The cash equivalents and
short-term investments consisted primarily of United States
government agency notes, United States government money market
funds, commercial paper and corporate notes. Since our
investments consist of cash equivalents and short-term
investments, a change in interest rates would not have a
material effect on our consolidated financial condition or
results of operations. Declines in interest rates over time
will, however, reduce interest income.
Currently, all sales to international customers are denominated
in United States dollars and, accordingly, we are not exposed to
foreign currency rate risks in connection with these sales.
However, if the dollar were to strengthen relative to other
currencies that could make our products less competitive in
foreign markets and thereby lead to a decrease in revenues
attributable to international customers. We currently pay a
number of expenses related to our Thai personnel and office in
Thai Bhat. During 2008, the total payments made in Thai Bhat
were $853,000 and we recorded a related foreign currency
transaction loss of $59,000.
42
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
|
44
|
|
|
|
|
45
|
|
|
|
|
46
|
|
|
|
|
47
|
|
|
|
|
48
|
|
|
|
|
49
|
|
43
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Endwave Corporation:
We have audited the accompanying consolidated balance sheets of
Endwave Corporation and its subsidiaries (the
Company) as of December 31, 2008 and 2007, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2008. Our audits
also included the financial statement schedule listed in
Item 15(a)(2). These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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. The Company is not required to
have, nor have we been engaged to perform, an audit of the
Companys internal control over financial reporting. Our
audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Endwave Corporation and its subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ Burr,
Pilger & Mayer LLP
San Jose, California
March 19, 2009
44
ENDWAVE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
33,998
|
|
|
$
|
38,992
|
|
Short-term investments
|
|
|
11,350
|
|
|
|
5,464
|
|
Accounts receivable, net of allowance for doubtful accounts of
$64 in 2008 and $67 in 2007
|
|
|
4,762
|
|
|
|
9,362
|
|
Inventories
|
|
|
14,454
|
|
|
|
12,434
|
|
Other current assets
|
|
|
738
|
|
|
|
1,168
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
65,302
|
|
|
|
67,420
|
|
Long-term investments
|
|
|
|
|
|
|
4,501
|
|
Property and equipment, net
|
|
|
4,220
|
|
|
|
2,999
|
|
Other assets
|
|
|
218
|
|
|
|
212
|
|
Restricted cash
|
|
|
600
|
|
|
|
25
|
|
Goodwill and intangible assets, net
|
|
|
|
|
|
|
7,432
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
70,340
|
|
|
$
|
82,589
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,263
|
|
|
$
|
3,422
|
|
Accrued warranty
|
|
|
2,439
|
|
|
|
2,712
|
|
Accrued compensation
|
|
|
2,811
|
|
|
|
2,240
|
|
Other current liabilities
|
|
|
713
|
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
8,226
|
|
|
|
10,625
|
|
Other long-term liabilities
|
|
|
73
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,299
|
|
|
|
10,741
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.001 par value;
5,000,000 shares authorized; 300,000 shares issued and
outstanding in 2008 and 2007, respectively
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 50,000,000 shares
authorized; 9,345,442 and 9,174,622 shares issued and
outstanding in 2008 and 2007, respectively
|
|
|
9
|
|
|
|
9
|
|
Additional paid-in capital
|
|
|
349,855
|
|
|
|
345,038
|
|
Treasury stock, at cost, 39,150 shares at December 31,
2007
|
|
|
|
|
|
|
(79
|
)
|
Accumulated other comprehensive gain (loss)
|
|
|
42
|
|
|
|
(6
|
)
|
Accumulated deficit
|
|
|
(287,865
|
)
|
|
|
(273,114
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
62,041
|
|
|
|
71,848
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
70,340
|
|
|
$
|
82,589
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
45
ENDWAVE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
57,559
|
|
|
$
|
55,611
|
|
|
$
|
60,956
|
|
Development fees
|
|
|
696
|
|
|
|
865
|
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
58,255
|
|
|
|
56,476
|
|
|
|
62,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues*
|
|
|
41,495
|
|
|
|
41,216
|
|
|
|
43,771
|
|
Cost of product revenues, amortization of intangible assets
|
|
|
596
|
|
|
|
548
|
|
|
|
449
|
|
Research and development*
|
|
|
11,878
|
|
|
|
10,707
|
|
|
|
8,856
|
|
Selling, general and administrative*
|
|
|
13,474
|
|
|
|
12,463
|
|
|
|
12,689
|
|
Transaction costs
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Amortization of intangible assets
|
|
|
716
|
|
|
|
531
|
|
|
|
156
|
|
Impairment of goodwill and intangible assets
|
|
|
6,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
74,320
|
|
|
|
65,465
|
|
|
|
66,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(16,065
|
)
|
|
|
(8,989
|
)
|
|
|
(3,895
|
)
|
Interest and other income, net
|
|
|
1,248
|
|
|
|
3,590
|
|
|
|
2,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense (benefit)
|
|
|
(14,817
|
)
|
|
|
(5,399
|
)
|
|
|
(1,247
|
)
|
Income tax expense (benefit)
|
|
|
(66
|
)
|
|
|
2
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,751
|
)
|
|
$
|
(5,401
|
)
|
|
$
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(1.60
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic and diluted net loss per share
|
|
|
9,211,110
|
|
|
|
11,563,716
|
|
|
|
11,429,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Includes the following amounts related to stock-based
compensation:
|
Cost of product revenues
|
|
$
|
732
|
|
|
$
|
661
|
|
|
$
|
435
|
|
Research and development
|
|
|
930
|
|
|
|
845
|
|
|
|
540
|
|
Selling, general and administrative
|
|
|
2,433
|
|
|
|
2,608
|
|
|
|
2,337
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
ENDWAVE
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Preferred
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(In thousands, except for share data)
|
|
|
Balance as of December 31, 2005
|
|
|
|
|
|
$
|
|
|
|
|
11,358,816
|
|
|
$
|
11
|
|
|
$
|
309,583
|
|
|
$
|
(79
|
)
|
|
$
|
(63
|
)
|
|
$
|
(266,369
|
)
|
|
$
|
43,083
|
|
Change in unrealized gain on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,344
|
)
|
|
|
(1,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,306
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
120,395
|
|
|
|
1
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
77,735
|
|
|
|
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
751
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,321
|
|
Tax benefit from employee stock transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Issuance of preferred stock and warrant, net of issuance costs
of $1,927
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
300,000
|
|
|
|
|
|
|
|
11,556,946
|
|
|
|
12
|
|
|
|
357,203
|
|
|
|
(79
|
)
|
|
|
(25
|
)
|
|
|
(267,713
|
)
|
|
|
89,398
|
|
Change in unrealized gain on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
31
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
(12
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,401
|
)
|
|
|
(5,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,382
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
24,685
|
|
|
|
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145
|
|
Repurchase and retirement of common stock
|
|
|
|
|
|
|
.
|
|
|
|
(2,504,847
|
)
|
|
|
(3
|
)
|
|
|
(17,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,205
|
)
|
Issuance of common stock under employee stock purchase plan
|
|
|
|
|
|
|
|
|
|
|
97,838
|
|
|
|
|
|
|
|
766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
766
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,141
|
|
Issuance costs from the sale of preferred stock and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
300,000
|
|
|
|
|
|
|
|
9,174,622
|
|
|
|
9
|
|
|
|
345,038
|
|
|
|
(79
|
)
|
|
|
(6
|
)
|
|
|
(273,114
|
)
|
|
|
71,848
|
|
Change in unrealized gain on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
36
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,751
|
)
|
|
|
(14,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,703
|
)
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
2,748
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Retirement of common stock
|
|
|
|
|
|
|
|
|
|
|
(39,150
|
)
|
|
|
|
|
|
|
(79
|
)
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under employee stock purchase plan
|
|
|
|
|
|
|
.
|
|
|
|
207,222
|
|
|
|
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
791
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
300,000
|
|
|
$
|
|
|
|
|
9,345,442
|
|
|
$
|
9
|
|
|
$
|
349,855
|
|
|
$
|
|
|
|
$
|
42
|
|
|
$
|
(287,865
|
)
|
|
$
|
62,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
ENDWAVE
CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,751
|
)
|
|
$
|
(5,401
|
)
|
|
$
|
(1,344
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,201
|
|
|
|
970
|
|
|
|
858
|
|
Stock compensation expense
|
|
|
4,095
|
|
|
|
4,114
|
|
|
|
3,312
|
|
Tax benefit from employee stock transactions
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Amortization of intangible assets
|
|
|
1,312
|
|
|
|
1,079
|
|
|
|
605
|
|
Amortization of investments
|
|
|
(43
|
)
|
|
|
1
|
|
|
|
55
|
|
Loss (gain) on the sale of land and equipment
|
|
|
(3
|
)
|
|
|
4
|
|
|
|
77
|
|
Gain on sale of investments
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
Impairment of goodwill and intangible assets
|
|
|
6,161
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
4,600
|
|
|
|
67
|
|
|
|
1,774
|
|
Inventories
|
|
|
(2,015
|
)
|
|
|
5,841
|
|
|
|
(3,670
|
)
|
Other assets
|
|
|
424
|
|
|
|
(355
|
)
|
|
|
(93
|
)
|
Accounts payable
|
|
|
(1,159
|
)
|
|
|
(939
|
)
|
|
|
1,326
|
|
Accrued warranty
|
|
|
(273
|
)
|
|
|
(374
|
)
|
|
|
(329
|
)
|
Accrued compensation, restructuring and other current and long
term liabilities
|
|
|
355
|
|
|
|
(1,086
|
)
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(153
|
)
|
|
|
3,921
|
|
|
|
2,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid in business combinations
|
|
|
(1,027
|
)
|
|
|
(5,771
|
)
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,493
|
)
|
|
|
(1,092
|
)
|
|
|
(1,650
|
)
|
Proceeds from sale of property and equipment
|
|
|
74
|
|
|
|
11
|
|
|
|
12
|
|
Change in restricted cash
|
|
|
(575
|
)
|
|
|
236
|
|
|
|
(236
|
)
|
Purchases of investments
|
|
|
(19,731
|
)
|
|
|
(57,756
|
)
|
|
|
(36,319
|
)
|
Proceeds on sales and maturities of investments
|
|
|
18,482
|
|
|
|
89,232
|
|
|
|
8,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(5,270
|
)
|
|
|
24,860
|
|
|
|
(29,343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale of Series B preferred stock and
warrants, net of issuance costs
|
|
|
|
|
|
|
(15
|
)
|
|
|
43,107
|
|
Common stock repurchased
|
|
|
(356
|
)
|
|
|
(16,849
|
)
|
|
|
|
|
Payments on capital leases
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercises of stock options
|
|
|
5
|
|
|
|
145
|
|
|
|
429
|
|
Proceeds from issuance of common stock
|
|
|
791
|
|
|
|
766
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
417
|
|
|
|
(15,953
|
)
|
|
|
44,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate changes on cash and cash
equivalents
|
|
|
12
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(4,994
|
)
|
|
|
12,816
|
|
|
|
17,720
|
|
Cash and cash equivalents at beginning of year
|
|
|
38,992
|
|
|
|
26,176
|
|
|
|
8,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
33,998
|
|
|
$
|
38,992
|
|
|
$
|
26,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed assets acquired under capital lease
|
|
$
|
|
|
|
$
|
66
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on investments
|
|
$
|
36
|
|
|
$
|
31
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized stock-based compensation
|
|
$
|
5
|
|
|
$
|
27
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
ENDWAVE
CORPORATION
Endwave Corporation and its wholly-owned subsidiary, Endwave
Defense Systems Incorporated (together referred to as
Endwave or the Company), design,
manufacture and market radio frequency (RF) modules
that enable the transmission, reception and processing of
high-frequency signals. The Companys target markets
include telecommunication networks, defense electronics,
homeland security systems, high frequency electronic
instrumentation and other applications that require high
frequency RF circuitry and subsystems. The Companys RF
modules are typically used in high-frequency applications and
include:
|
|
|
|
|
integrated transceivers
combinations of
electronic devices that combine both the transmit and receive
functions necessary for a bi-directional radio link;
|
|
|
|
amplifiers
electronic devices used to
increase the amplitude and power of an electronic signal;
|
|
|
|
synthesizers
electronic devices that can be
used to generate several different radio frequency signals from
a single source;
|
|
|
|
oscillators
electronic devices that generate
radio frequency signals at a fixed frequency;
|
|
|
|
up and down converters
electronic devices
that shift the center frequency of a radio signal without
altering the signals data modulation;
|
|
|
|
frequency multipliers
electronic devices that
increase the frequency of a radio signal in integer
multiples; and
|
|
|
|
microwave switch arrays
electronic devices
that can switch the routing of a radio signal.
|
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Consolidation
The accompanying consolidated financial statements of Endwave
include the financial results of Endwave Defense Systems
Incorporated, and have been prepared in conformity with
accounting principles generally accepted in the United States of
America. All significant intercompany accounts and transactions
have been eliminated.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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.
Revenue
Recognition
The Companys primary customers are telecom original
equipment manufacturers (OEM), defense electronics,
homeland security and other systems integrators that integrate
the Companys products into their systems. The Company
recognizes product revenues at the time title passes, which is
generally upon product shipment or when withdrawn from a
consignment location and when persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, the Companys price to the buyer is fixed or
determinable, and collectibility is reasonably assured. After
title passes, there are no customer acceptance requirements or
other remaining obligations and customers do not have a right of
return. Revenues under development contracts are generally
recorded on a percentage of completion basis, using project
hours as the basis to measure progress toward completing the
contract and recognizing revenues. The costs incurred under
these development agreements are expensed as incurred and
included in research and development expenses.
49
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warranty
The warranty periods for the Companys products are between
twelve and thirty months from date of shipment. The Company
provides for estimated warranty expense at the time of shipment.
While the Company engages in extensive product quality programs
and processes, including actively monitoring and evaluating the
quality of component suppliers, its warranty obligation is
affected by product failure rates, material usage, and service
delivery costs incurred in correcting a product failure. Should
actual product failure rates, material usage, or service
delivery costs differ from the estimates, revisions to the
estimated warranty accrual and related costs may be required.
Changes in the Companys accrued warranty during the years
ended December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
2,712
|
|
|
$
|
2,928
|
|
Warranties accrued
|
|
|
793
|
|
|
|
816
|
|
Warranties settled or reversed
|
|
|
(1,066
|
)
|
|
|
(1,032
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
2,439
|
|
|
$
|
2,712
|
|
|
|
|
|
|
|
|
|
|
Allowance
for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability of its customers
to make required payments. The Company provides an allowance for
specific customer accounts where collection is doubtful and also
provides an allowance for other accounts based on historical
collection and write-off experience. If the financial condition
of customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be
required.
Cash
Equivalents and Short-Term Investments
The Company invests its excess cash primarily in highly liquid
investment grade commercial paper and money market accounts with
three United States banks. The Companys deposits are
generally in excess of federally insured amounts.
The Company considers all highly liquid investments with
maturities of 90 days or less from the date of purchase to
be cash equivalents. Management has classified the
Companys short-term investments as available-for-sale
securities in the accompanying consolidated financial
statements. Available-for-sale securities are carried at fair
value based on quoted market prices, with unrealized gains and
losses, net of tax, included in accumulated other comprehensive
income (loss) in stockholders equity. Interest income is
recorded using an effective interest rate, with the associated
premium or discount amortized to interest income. Realized gains
and losses and declines in the value of securities determined to
be other-than-temporary are included in interest and other
income. The cost of securities sold is based on the specific
identification method.
Restricted
Cash
At December 31, 2008, the Company had a restricted cash
balance of $600,000, which represents a certificate of deposit
held by a financial institution as collateral for a letter of
credit in connection with the Companys building lease in
Folsom, California. During the second quarter of 2008, the
Company executed an agreement to lease approximately
31,000 square feet in Folsom, California. The lease term
will be for sixty months. The letter of credit terms permit an
annual 25% reduction of the certificate of deposit at the end of
each year of the lease.
50
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, the Company had a $25,000
certificate of deposit that secured a letter of credit in
connection with the Companys building lease in Andover,
Massachusetts. The Andover, Massachusetts lease terminated in
2008.
During 2008, the Company moved its Northeast operations to
Salem, New Hampshire. Restricted cash is not required for the
Salem, New Hampshire lease.
Inventory
Valuation
Inventories are stated at the lower of standard cost (determined
on a
first-in,
first-out basis) or market (net realizable value). Standard
costs approximate average actual costs. The Company makes
inventory provisions for estimated excess and obsolete inventory
based on managements assessment of future demand and
market conditions. If actual future demand or market conditions
are less favorable than those projected by management,
additional inventory write-downs may be required.
Property
and Equipment
Property 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 seven years. Leasehold
improvements and assets acquired under capital lease are
amortized using the straight-line method based upon the shorter
of the estimated useful lives or the lease term of the
respective assets. Repairs and maintenance costs are charged to
expense as incurred.
|
|
|
|
|
|
|
Depreciable
|
|
|
|
Life
|
|
|
Software
|
|
|
3 years
|
|
Leasehold improvements
|
|
|
2 to 5 years
|
|
Machinery and equipment
|
|
|
5 to 7 years
|
|
Goodwill,
Intangible and Long-Lived Assets
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identifiable intangible
assets acquired in a business combination. Intangible assets
resulting from the acquisitions of entities accounted for using
the purchase method of accounting are estimated by management
based on the fair value of assets received. In accordance with
Statement of Financial Accounting Standards (SFAS)
No. 142 (SFAS No. 142),
Goodwill and Other Intangible Assets, goodwill is no
longer subject to amortization. Rather, the Company evaluates
goodwill and intangible assets with indefinite lives for
impairment at least annually, in the third quarter, or more
frequently if events or changes in circumstances suggest that
the carrying amount may not be recoverable.
During the fourth quarter of 2008, the Company determined that
indicators of potential impairment were present based on the
fair value of the Companys common stock relative to its
book value, revised estimates for future revenues and the
continued worsening of the global economy. As a result, the
Company assessed the carrying value of acquired goodwill and
intangible assets with an indefinite life for impairment, in
accordance with SFAS No. 142. Based on the fair market
value of the business and the Companys discounted future
cash flow and revenue projections, the Company recorded non-cash
impairment charges of $3.0 million for goodwill and
$1.1 million for intangible assets with an indefinite life.
The Company reviews long-lived assets and identifiable
intangible assets for impairment, whenever certain events or
changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. Such events or
circumstances include, but are not limited to, a prolonged
industry downturn, or a significant reduction in projected
future cash flows.
51
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For long-lived assets used in operations, the Company records
impairment losses when events and circumstances indicate that
these assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the
carrying amounts of those assets. If less, the impairment losses
are based on the excess of the carrying amounts over their
respective fair values. Their fair values would then become the
new cost basis. Fair value is determined by discounted future
cash flows, appraisals, or other methods. For assets to be
disposed of other than by sale, impairment losses are measured
as the excess of their carrying amount over the salvage value,
if any, at the time the assets cease to be used.
During the fourth quarter of 2008, the Company reviewed its
long-lived assets for indicators of impairment in accordance
with SFAS No. 144
(SFAS No. 144), Accounting for
Impairment or Disposal of Long-Lived Assets. Based on
reduced estimates of future revenues and future negative cash
flow, the Company identified potential indicators of impairment.
As a result, the Company compared the fair value of its
long-lived assets to their carrying value. Based on the
Companys discounted future cash flow and revenue
projections, the Company recorded non-cash impairment charges of
$2.1 million for intangible assets with a defined useful
life. The impairment charges represent the excess of the
carrying value of these assets over their fair value.
These impairment charges are not expected to result in any
future cash expenditures.
Income
Taxes
Income taxes have been provided using the asset and liability
method. 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.
The Company adopted the Financial Accounting Standards Board
(FASB), Interpretation No. 48
(FIN 48), Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, on January 1, 2007. FIN 48 is an
interpretation of SFAS No. 109
(SFAS 109), Accounting for Income
Taxes, and it seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition
in accounting for income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position that an entity takes or expects to take in a tax
return. Additionally, FIN 48 provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition.
Under FIN 48, an entity may only recognize or continue to
recognize tax positions that meet a more likely than
not threshold. In accordance with its accounting policy,
the Company recognizes accrued interest and penalties related to
unrecognized tax benefits as a component of income tax expense.
The impact on adoption of FIN 48 is more fully described in
Note 12, Income Taxes.
Stock-Based
Compensation
The Company recognizes stock-based compensation in accordance
with the provisions of SFAS No. 123 (revised
2004) Share-Based Payment
(SFAS No. 123(R)) which establishes
accounting for stock-based awards exchanged for employee
services. Accordingly, stock-based compensation cost is measured
at the grant date, based on the fair value of the award, and is
recognized as expense over the requisite service period. All of
the Companys stock compensation is accounted for as an
equity instrument.
Upon adoption of SFAS No. 123(R), the Company elected
the alternative transition method for calculating the tax
effects of stock-based compensation pursuant to
SFAS No. 123(R). The alternative transition method
provides a simplified method to establish the beginning balance
of the additional paid-in capital pool, or APIC Pool, related to
the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC Pool and
consolidated statements of cash flows of the tax effects of
employee stock-based compensation awards that are outstanding
upon adoption of SFAS No. 123(R).
The Company uses the with and without approach as
described in Emerging Issues Task Force Topic
No. D-32
in determining the order in which its tax attributes are
utilized. The with and without approach results in
52
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the recognition of the windfall stock option tax benefits after
all other tax attributes have been considered in the annual tax
accrual computation. SFAS No. 123(R) prohibits the
recognition of a deferred tax asset for an excess tax benefit
that has not yet been realized. As a result, the Company will
only recognize a benefit from stock-based compensation in
paid-in capital if an incremental tax benefit is realized after
all other tax attributes currently available to it have been
utilized. In addition, the Company has elected to account for
the indirect benefits of stock-based compensation on items such
as the alternative minimum tax, the research tax credit or the
domestic manufacturing deduction through the consolidated
statements of operations rather than through paid-in capital.
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, Emerging Issues Task Force Issue
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, and FASB Interpretation No. 28,
Accounting for Stock Appreciation Rights and Other
Variable Stock Option or Award Plans.
Research
and Development Expenses
Research and development expenses are charged to operating
expenses as incurred and consist primarily of salaries and
related expenses for research and development personnel, outside
professional services, prototype materials, supplies and labor,
depreciation for related equipment, allocated facilities costs
and expenses related to stock-based compensation.
Concentration
of Risk
The Company is potentially subject to significant concentrations
of credit risk including cash equivalents, short-term
investment, trade receivables and inventory.
The Company sells its products primarily to telecom OEMs,
defense electronics, homeland security and other systems
integrators. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses and
excess and obsolete inventory. Concentrations of credit risk
with respect to trade accounts receivable and inventory are due
to the few number of entities comprising the Companys
customer base.
Revenue from one customer accounted for 55% of total revenue in
2008. As of December 31, 2008, two customers accounted for
31% and 12%, respectively, of the Companys accounts
receivable. Two customers accounted for 74% of total revenue in
2007. As of December 31, 2007, two customers accounted for
56% and 13%, respectively, of the Companys accounts
receivable. Three customers accounted for 79% of total revenue
in 2006. In addition, the Company has purchased significant
inventory balances to support these customers.
In 2008, 2007, and 2006, 74%, 82% and 84%, respectively, of the
Companys total revenues were derived from sales invoiced
and shipped to customers outside the United States.
The Company designs custom semiconductor devices. However, the
Company does not own or operate a semiconductor fabrication
facility (a foundry) and depends upon a limited
number of third parties to produce these components. The
Companys use of various third-party foundries gives it the
flexibility to use the process technology that is best suited
for each application and eliminates the need for the Company to
invest in and maintain its own foundry. The loss of the
Companys relationship with or access to the foundries it
currently uses, and any resulting delay or reduction in the
supply of semiconductors to the Company, would severely impact
the Companys ability to fulfill customer orders and could
damage its relationships with its customers.
The Company also may not be successful in forming alternative
supply arrangements that provide a sufficient supply of gallium
arsenide devices. Because there are limited numbers of
third-party foundries that use the particular process
technologies the Company selects for its products and have
sufficient capacity to meet its needs,
53
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
using alternative or additional third-party foundries would
require an extensive qualification process that could prevent or
delay product shipments and their associated revenues.
Because the Company does not own or control any of these
third-party semiconductor suppliers, any change in the corporate
structure or ownership of the corporations that own these
foundries, could have a negative effect on future relationships
and the ability to negotiate favorable supply agreements.
The Company outsources the assembly and testing of most of its
telecommunication related products to a Thailand facility of
HANA Microelectronics Co., Ltd., or HANA, a contract
manufacturer. The Company plans to continue this arrangement as
a key element of its operating strategy. If HANA does not
provide the Company with high quality products and services in a
timely manner, or terminates its relationship with the Company,
the Company may be unable to obtain a satisfactory replacement
to fulfill customer orders on a timely basis. In the event of an
interruption of supply from HANA, sales of the Companys
products could be delayed or lost and the Companys
reputation could be harmed. The Companys manufacturing
agreement with HANA currently expires in October 2009 but will
renew automatically for successive one-year periods unless
either party notifies the other of its desire to terminate the
agreement at least one year prior to the expiration of the term.
In addition, either party may terminate the agreement without
cause upon 365 days prior written notice to the other
party, and either party may terminate the agreement if the
non-terminating party is in material breach and does not cure
the breach within 30 days after notice of the breach is
given by the terminating party. There can be no guarantee that
HANA will not seek to terminate its agreement with the Company.
The Company utilizes a number of customized components that need
to be qualified by our customers. This means that components in
our products can not be easily changed without the risks and
delays associated with requalification. Accordingly, while a
number of the components used in the Companys products are
made by multiple suppliers, the Company may effectively have
single source suppliers for some of these components. In
addition, the Company currently purchases a number of components
from single source suppliers. Any delay or interruption in the
supply of these or other components could impair the
Companys ability to manufacture and deliver products, harm
the Companys reputation and cause a reduction in revenues.
Fair
Value of Financial Instruments
The amounts reported as cash and cash equivalents, accounts
receivable, note receivable, accounts payable and accrued
liabilities approximate fair value due to their short-term
maturities. The fair value for the Companys investments in
marketable debt securities is estimated based on quoted market
prices. Based upon borrowing rates currently available to the
Company for capital leases with similar terms, the carrying
value of its capital lease obligations approximates fair value.
The following estimated fair value amounts have been determined
using available market information. However, considerable
judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
1,791
|
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
|
$
|
1,790
|
|
United States government agency
|
|
|
6,690
|
|
|
|
35
|
|
|
|
|
|
|
|
6,725
|
|
Corporate securities
|
|
|
2,827
|
|
|
|
10
|
|
|
|
(2
|
)
|
|
|
2,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,308
|
|
|
$
|
47
|
|
|
$
|
(5
|
)
|
|
$
|
11,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
7,195
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States government agency
|
|
$
|
1,496
|
|
|
$
|
4
|
|
|
$
|
|
|
|
$
|
1,500
|
|
Corporate securities
|
|
|
8,463
|
|
|
|
8
|
|
|
|
(6
|
)
|
|
|
8,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,959
|
|
|
$
|
12
|
|
|
$
|
(6
|
)
|
|
$
|
9,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the Company had $11.4 million of
short-term investments with maturities of less than one year and
no long-term investments.
At December 31, 2008, the Company had unrealized gains of
$47,000 related to $9.6 million of investments in debt
securities and unrealized losses of $5,000 related to
$1.8 million of investments in debt securities. These
securities were in an unrealized loss position for a period of
less than one year. The investments mature through 2009 and the
Company believes that it has the ability to hold these
investments until the maturity date. Realized gains were $57,000
for the years ended December 31, 2008. Realized gains and
losses were insignificant for the years ended December 31,
2007 and 2006.
The Company reviews its investment portfolio to identify and
evaluate investments that have indications of possible
impairment. Factors considered in determining whether a loss is
temporary include the length of time and extent to which fair
value has been less than the cost basis, credit quality and the
Companys ability to hold the investment for a period of
time sufficient to allow for any anticipated recovery in market
value. If the Company believes the carrying value of an
investment is in excess of its fair value, and this difference
is other-than-temporary, it is the Companys policy to
write down the investment to reduce its carrying value to fair
value.
Fair
Value Measurements
On January 1, 2008, the Company adopted
SFAS No. 157, Fair Value Measurements
(SFAS No. 157) which defines fair value,
establishes a framework for using fair value to measure assets
and liabilities and expands disclosures about fair value
measurements. SFAS No. 157 applies whenever other
statements require or permit assets or liabilities to be
measured at fair value. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007, except for
nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a
nonrecurring basis, for which application has been deferred for
one year.
55
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the Companys financial
assets and liabilities measured at fair value on a recurring
basis in accordance with SFAS No. 157 as of
December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
Active Markets of
|
|
|
Significant Other
|
|
|
|
Balance as of
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
|
December 31, 2008
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
33,670
|
|
|
$
|
33,670
|
|
|
$
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
1,790
|
|
|
|
|
|
|
|
1,790
|
|
United States government agency
|
|
|
6,725
|
|
|
|
|
|
|
|
6,725
|
|
Corporate securities
|
|
|
2,835
|
|
|
|
|
|
|
|
2,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,020
|
|
|
$
|
33,670
|
|
|
$
|
11,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The Companys financial assets and liabilities are valued
using market prices on both active markets
(Level 1) and less active markets (Level 2).
Level 1 instrument valuations are obtained from real-time
quotes for transactions in active exchange markets involving
identical assets. Level 2 instrument valuations are
obtained from readily-available pricing sources for comparable
instruments. As of December 31, 2008, the Company did not
have any assets or liabilities without observable market values
that would require a high level of judgment to determine fair
value (Level 3).
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159), which
provides companies an option to report selected financial assets
and liabilities at fair value. SFAS No. 159 requires
companies to provide information helping financial statement
users to understand the effect of a companys choice to use
fair value on its earnings, as well as to display the fair value
of the assets and liabilities a company has chosen to use fair
value for on the face of the balance sheet.
SFAS No. 159 was effective for fiscal years beginning
after November 15, 2007. The Company adopted
SFAS No. 159 in the first quarter of fiscal 2008 and
did not elect the fair value option for any of its financial
assets or liabilities.
Foreign
Currency Transactions
The U.S. dollar is the functional currency for the
Companys foreign operations. In consolidation, monetary
assets and liabilities denominated in
non-U.S. currencies,
such as cash and payables, have been remeasured to the
U.S. dollar using the current exchange rate. Non-monetary
assets and liabilities and capital accounts denominated in
non-U.S. currencies
have been remeasured to the U.S. dollar using the
historical exchange rate. Expense items relating to monetary
assets denominated in
non-U.S. currencies
have been remeasured to the U.S. dollar using the average
exchange rate for the period. Gains and losses from intercompany
transactions and balances for which settlement is not planned or
anticipated in the foreseeable future are accumulated as a
separate component of stockholders equity. All other gains
and losses resulting from foreign currency translation and
transactions denominated in currencies other than the
U.S. dollar are included in operations and have been
immaterial for all periods presented.
Comprehensive
Loss
Comprehensive loss generally represents all changes in
stockholders equity except those resulting from
investments or contributions by stockholders. The Companys
unrealized gains and losses on its available-for-sale
56
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
securities and gains and losses resulting from foreign exchange
translations represent the only components of comprehensive loss
excluded from the reported net loss and are displayed in the
statements of stockholders equity.
The components of accumulated other comprehensive gain (loss)
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accumulated other comprehensive gain (loss):
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
$
|
|
|
|
$
|
(12
|
)
|
Unrealized gain on investments
|
|
|
42
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42
|
|
|
$
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share
Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the
period. Diluted net loss per share is computed by dividing the
net loss for the period by the weighted average number of shares
of common stock and potential common stock equivalents
outstanding during the period, if dilutive. Potential common
stock equivalents include convertible preferred stock, warrants
to purchase convertible preferred stock, stock options to
purchase common stock and shares to be purchased in connection
with the Companys stock purchase plan.
The Companys currently-outstanding 300,000 preferred
shares were convertible into 3,000,000 shares of common
stock as of December 31, 2008. Additionally, as of
December 31, 2008, the Company had a warrant outstanding
that granted the holder the right to purchase 90,000 shares
of Series B preferred stock, which were convertible into
900,000 shares of common stock.
As the Company incurred net losses for all periods presented,
diluted net loss per share is the same as basic net loss per
share for all periods presented. Shares associated with common
stock issuable upon the conversion of the preferred shares or
the exercise of the outstanding warrant were not included in the
calculation of diluted net income per share, as the effect would
be anti-dilutive. Potential dilutive common shares of 3,008,917
in 2008, 2,465,436 in 2007, and 1,732,669 in 2006, from the
assumed exercise of stock options were not included in the net
loss per share calculations as their inclusion would have been
anti-dilutive.
During December 2007, the Company repurchased and retired
2,502,247 shares of its common stock, reducing the number
of outstanding shares of common stock.
Advertising
Costs
The Company expenses all advertising costs as incurred and the
amounts were not material for any of the periods presented.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141,
(revised 2007) (SFAS No. 141R),
Business Combinations establishes principles and
requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS No. 141R also provides
guidance for recognizing and measuring the goodwill acquired in
the business combination and determines what information to
disclose to enable users of the financial statement to evaluate
the nature and financial effects of the business combination.
SFAS No. 141R is effective for financial statements
issued for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the impact of
SFAS No. 141R on its consolidated financial position
and results of operations.
57
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2007, the FASB issued SFAS No. 160
(SFAS No. 160), Noncontrolling
Interests in Consolidated Financial Statements-an amendment of
ARB No. 51 changes the accounting and reporting for
minority interests. Minority interests will be recharacterized
as noncontrolling interests and will be reported as a component
of equity separate from the parents equity, and purchases
or sales of equity interests that do not result in a change in
control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest
will be included in consolidated net income on the face of the
income statement and upon a loss of control, the interest sold,
as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings.
SFAS No. 160 is effective for financial statements
issued for fiscal years beginning after December 15, 2008.
The Company is currently evaluating the impact of
SFAS No. 160 on its consolidated financial position
and results of operations.
In February 2008, the FASB issued FASB Staff Position
No. FAS 157-2
(FAS 157-2),
Effective Date of FASB Statement No. 157 to
partially defer FASB Statement of Financial Accounting Standards
No. 157, Fair Value Measurements, or
SFAS 157.
FSP 157-2
defers the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal
years, and interim periods within those fiscal years, beginning
after November 15, 2008. The Company is currently
evaluating the impact of
FSP 157-2
on its consolidated financial position and results of operations.
In June 2008, the FASB issued FSP
EITF 03-6-1
(FSP
EITF 03-6-1),
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities which
provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method. Upon adoption, a company is required to
retrospectively adjust its earnings per share data (including
any amounts related to interim periods, summaries of earnings
and selected financial data) to conform with the provisions in
FSP
EITF 03-6-1.
Unvested restricted stock is considered a participating
security. FSP
EITF 03-6-1
is effective for fiscal years beginning after December 15,
2008, including interim periods within those fiscal years. The
Company does not expect FSP
EITF 03-6-1
to have a material impact on its consolidated financial
statements.
In August 2008, the U.S. Securities and Exchange
Commission, or SEC, announced that it will issue for comment a
proposed roadmap regarding the potential use by
U.S. issuers of financial statements prepared in accordance
with International Financial Reporting Standards, or IFRS. IFRS
is a comprehensive series of accounting standards published by
the International Accounting Standards Board, or IASB. Under the
proposed roadmap, the Company could be required in fiscal year
2014 to prepare financial statements in accordance with IFRS and
the SEC will make a determination in 2011 regarding mandatory
adoption of IFRS. The Company is currently assessing the impact
that this potential change would have on its consolidated
financial statements and will continue to monitor the
development of the potential implementation of IFRS.
In October 2008, the FASB issued FASB Staff Position
No. FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset is Not Active, or
FSP 157-3.
FSP 157-3
clarifies the application of SFAS No. 157 in a market
that is not active and it is effective upon the issuance date.
The adoption of
FSP 157-3
did not have a material impact on the Companys
consolidated financial statements.
|
|
3.
|
Goodwill
and Other Intangible Assets
|
Goodwill
During the fourth quarter of 2008, the Company determined that
indicators of potential impairment were present based on the
fair value of the Companys common stock relative to its
book value, revised estimates for future revenues and the
continued worsening of the global economy. As a result, the
Company assessed the carrying value of acquired goodwill and
intangible assets with an indefinite life for impairment, in
accordance with
58
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 142. Based on the fair market value of the
business and the Companys discounted future cash flow and
revenue projections, the Company recorded non-cash impairment
charge of $3.0 million for goodwill, $1.6 million
associated with the purchase of JCA Technology, Inc.
(JCA) in July of 2004 and $1.4 million
associated with the purchase of ALC Microwave, Inc.
(ALC) in April of 2007.
Intangible
Assets
In April 2007, as part of the ALC acquisition, the Company
acquired $2.9 million of identifiable intangible assets
including $900,000 for customer relationships, $880,000 for
developed technology, $560,000 for customer backlog, $370,000
for the non-compete agreement and $230,000 for the tradename.
In July 2004, as part of the JCA acquisition, the Company
acquired $4.2 million of identifiable intangible assets,
including $2.3 million for developed technology,
$1.1 million for the tradename, $780,000 for customer
relationships and $140,000 for customer backlog.
During the fourth quarter of 2008, the Company reviewed its
long-lived assets for indicators of impairment in accordance
with SFAS No. 144. Based on reduced estimates of
future revenues and future negative cash flow, the Company
identified potential indicators of impairment. As a result, the
Company compared the fair value of its long-lived assets to
their carrying value. Based on the Companys discounted
future cash flow and revenue projections, the Company recorded
non-cash impairment charges of $2.1 million for intangible
assets with a defined useful life. The impairment charges
represent the excess of the carrying value of these assets over
their fair value.
In addition, the Company assessed the carrying value of
intangible assets with an indefinite life for impairment, in
accordance with SFAS No. 142. Based on the fair market
value of the business and the Companys discounted future
cash flow and revenue projections, the Company recorded non-cash
impairment charges of $1.1 million for the intangible asset
with an indefinite life.
These impairment charges are not expected to result in any
future cash expenditures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Developed technology
|
|
$
|
3,130
|
|
|
$
|
(3130
|
)
|
|
$
|
|
|
Tradename
|
|
|
1,290
|
|
|
|
(1,290
|
)
|
|
|
|
|
Customer relationships
|
|
|
1,680
|
|
|
|
(1,680
|
)
|
|
|
|
|
Customer backlog
|
|
|
700
|
|
|
|
(700
|
)
|
|
|
|
|
Non-compete agreement
|
|
|
370
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
7,170
|
|
|
$
|
(7,170
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Developed technology
|
|
$
|
3,130
|
|
|
$
|
(1,636
|
)
|
|
$
|
1,494
|
|
Tradename
|
|
|
1,290
|
|
|
|
(27
|
)
|
|
|
1,263
|
|
Customer relationships
|
|
|
1,680
|
|
|
|
(633
|
)
|
|
|
1,047
|
|
Customer backlog
|
|
|
700
|
|
|
|
(327
|
)
|
|
|
373
|
|
Non-compete agreement
|
|
|
370
|
|
|
|
(61
|
)
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
7,170
|
|
|
$
|
(2,684
|
)
|
|
$
|
4,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortization of developed technology was a charge to cost of
product revenues and was $596,000, $548,000, and $449,000 in
2008, 2007 and 2006, respectively. Amortization of all other
intangible assets was a charge to operating expenses and was
$716,000, $531,000, and $156,000 in 2008, 2007 and 2006,
respectively.
Inventories are comprised of the following at December 31 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
8,452
|
|
|
$
|
9,630
|
|
Work in process
|
|
|
1,574
|
|
|
|
1,365
|
|
Finished goods
|
|
|
4,428
|
|
|
|
1,439
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,454
|
|
|
$
|
12,434
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2008, the Company set up a note
receivable with one of its customers, Allgon Microwave
Corporation AB (Allgon) who failed to meet the terms
of its accounts receivable. The note was in the amount of
$545,000, with payments of $25,000 due on a weekly basis. The
note was to be paid in full by the end of the first quarter of
2009.
During the third and fourth quarters of 2008, Allgon made the
first five payments under the note. However, during the fourth
quarter of 2008, Allgon went in default on the note and filed
for bankruptcy protection. At the time of default, the note
receivable balance was $420,000. Based on Allgons
bankruptcy filing and current estimates of payments to
Allgons creditors, the Company reserved 75% or $315,000 of
the remaining balance of the note receivable. At
December 31, 2008, the net amount of $105,000 is included
in other current assets on the consolidated balance sheet.
Subsequent to Allgons default on the note receivable, the
Company filed a complaint alleging that Allgons parent
company, Advantech Advanced Microwave Technologies Inc.
(Advantech), had breached its contractual
obligations with the Company, including the terms of the note
receivable. See additional discussion at Note 10,
Commitments and Contingencies.
|
|
6.
|
Property
and Equipment
|
Property and equipment consist of the following at December 31
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Machinery and equipment
|
|
$
|
14,591
|
|
|
$
|
13,048
|
|
Software
|
|
|
1,038
|
|
|
|
941
|
|
Leasehold improvements
|
|
|
1,225
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,854
|
|
|
|
14,511
|
|
Less accumulated depreciation
|
|
|
(12,634
|
)
|
|
|
(11,512
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,220
|
|
|
$
|
2,999
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2008, the Company signed a lease in
Folsom, California in order to consolidate its Northern
California manufacturing facilities. In preparation for the
occupancy of the facility, as of December 31, 2008, the
Company capitalized $597,000 of leasehold improvements that will
be depreciated over the remaining life of the lease ending in
2014.
60
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the third quarter of 2006, the Company moved its
corporate headquarters to San Jose, California. As part of
the move the Company capitalized $326,000 of leasehold
improvements that will be depreciated over the remaining life of
the lease ending in 2011. The Company also recognized a loss of
$77,000 for the retirement of fixed assets related to its
previous corporate headquarters.
During the second quarter of 2004, the Company finalized the
sale of its land and buildings located in Diamond Springs,
California. The Company received $4.3 million for the land
and buildings, net of related closing costs and legal fees. The
net book value of the property on the date of sale was
$3.5 million. At the time of the closing, the Company
entered into a five-year operating lease with the new owner for
one of the buildings. As a result of the sale-leaseback
transaction, the Company will recognize a gain of $770,000 on a
straight-line basis over the term of the lease, which expires in
2009. Deferred gain recognized on the sale-leaseback was
approximately $154,000, $154,000, and $154,000 for the years
ended December 31, 2008, 2007 and 2006, respectively, and
is included in interest and other income, net in the
consolidated statements of operations. At December 31,
2008, the remaining deferred gain is $77,000 and is included in
other current liabilities on the consolidated balance sheet.
At December 31, 2008, the Company had $66,000 of capital
leased equipment with an accumulated depreciation of $32,000
which is included in machinery and equipment.
The Company operates in a single business segment. Although the
Company sells to customers in various geographic regions
throughout the world, the end users may be located elsewhere.
The Companys total revenues by billing location for the
years ended December 31 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
14,990
|
|
|
|
25.7
|
%
|
|
$
|
10,387
|
|
|
|
18.4
|
%
|
|
$
|
9,812
|
|
|
|
15.8
|
%
|
Finland
|
|
|
31,266
|
|
|
|
53.7
|
%
|
|
|
29,573
|
|
|
|
52.4
|
%
|
|
|
26,332
|
|
|
|
42.3
|
%
|
Italy
|
|
|
847
|
|
|
|
1.5
|
%
|
|
|
4,091
|
|
|
|
7.2
|
%
|
|
|
14,074
|
|
|
|
22.6
|
%
|
Norway
|
|
|
111
|
|
|
|
0.2
|
%
|
|
|
3,793
|
|
|
|
6.7
|
%
|
|
|
7,777
|
|
|
|
12.5
|
%
|
Singapore
|
|
|
4,178
|
|
|
|
7.2
|
%
|
|
|
704
|
|
|
|
1.3
|
%
|
|
|
857
|
|
|
|
1.4
|
%
|
Slovakia
|
|
|
3,288
|
|
|
|
5.6
|
%
|
|
|
4,129
|
|
|
|
7.3
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Rest of the world
|
|
|
3,575
|
|
|
|
6.1
|
%
|
|
|
3,799
|
|
|
|
6.7
|
%
|
|
|
3,374
|
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,255
|
|
|
|
100.0
|
%
|
|
$
|
56,476
|
|
|
|
100.0
|
%
|
|
$
|
62,226
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, Nokia Siemens
Networks accounted for 55% of total revenues. For the year ended
December 31, 2007, Nokia Siemens Networks (including Nokia
and Siemens AG revenues for 2007 prior to their merger) and Nera
accounted for 60% and 14% of total revenues, respectively. For
the year ended December 31, 2006, Nokia, Siemens AG and
Nera accounted for 42%, 23% and 14% of total revenues,
respectively.
Substantially all long-lived assets are located in the United
States of America.
|
|
8.
|
Stock-Based
Compensation
|
Stock
Option Exchange
On January 4, 2008, the Company filed a Tender Offer
Statement on Schedule TO (the Exchange Offer)
with the Securities and Exchange Commission. The Exchange Offer
related to an offer by the Company to certain optionholders to
exchange some or all of their outstanding stock option grants
under the Companys 2007 Equity Incentive Plan with an
exercise price per share greater than or equal to $21.47 for new
option grants. The Exchange Offer was made to employees and
directors of the Company who, as of the date the Exchange Offer
commenced, were actively employed by or otherwise providing
services to the Company and held eligible option grants. The
61
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Exchange Offer expired on February 6, 2008. A total of
331,950 stock options were eligible to participate in the
Exchange Offer and a total of 327,921 options were exchanged.
The exercise price of the new option grants was $6.59, the
closing price of Endwaves common stock on February 7,
2008.
The exchange of original options for new options was treated as
a modification of the original options in accordance with
SFAS No. 123(R). As such, the Company will continue to
incur compensation cost for the incremental difference between
the fair value of the new options and the fair value of the
original options immediately before modification, reflecting the
current facts and circumstances on the modification date, over
the expected term of the new options. The incremental expense
related to the Exchange Offer was $607,000 prior to forfeitures.
Stock
Based Compensation
The Company adopted the provisions of SFAS No. 123 (R)
which establishes accounting for stock-based awards exchanged
for employee services. Accordingly, stock-based compensation
cost is measured at the grant date, based on the fair value of
the award, and is recognized as expense over the requisite
service period. All of the Companys stock compensation is
accounted for as an equity instrument.
The effect of recording stock-based compensation for the years
ended December 31 were as follows (in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Stock-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
$
|
3,434
|
|
|
$
|
3,653
|
|
|
$
|
2,900
|
|
Employee stock purchase plan
|
|
|
666
|
|
|
|
488
|
|
|
|
421
|
|
Amounts capitalized into inventory during the year
|
|
|
(65
|
)
|
|
|
(60
|
)
|
|
|
(26
|
)
|
Amounts capitalized as inventory and expensed
|
|
|
60
|
|
|
|
33
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
4,095
|
|
|
|
4,114
|
|
|
|
3,312
|
|
Tax effect on stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
4,095
|
|
|
$
|
4,114
|
|
|
$
|
3,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on basic and diluted net loss per share
|
|
$
|
(0.44
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2006, the Company had an unrecorded
deferred stock-based compensation balance related to stock
options of approximately $2.9 million before estimated
forfeitures. In the Companys pro forma disclosures prior
to the adoption of SFAS No. 123(R), the Company
accounted for forfeitures upon occurrence.
SFAS No. 123(R) requires forfeitures to be estimated
at the time of grant and revised if necessary in subsequent
periods if actual forfeitures differ from those estimates. Based
on the Companys historical experience of option
pre-vesting cancellations and estimates of future forfeiture
rates, the Company has assumed an annualized forfeiture rate of
15% for its options. Accordingly, as of January 1, 2006,
the Company estimated that the stock-based compensation for the
awards not expected to vest was approximately $0.8 million,
and therefore, the unrecorded deferred stock-based compensation
balance related to stock options was adjusted to approximately
$2.1 million after estimated forfeitures.
During the year ended December 31, 2008, the Company
granted options to purchase 1,025,821 shares of common
stock, including 327,921 options granted as part of the Exchange
Offer noted above. The 327,921 options granted as part of the
Exchange Offer had an estimated total grant-date fair value of
$607,000 or $1.85 per option. The remaining 697,900 options had
an estimated total grant-date fair value of $2.2 million or
$3.20 per option. The total estimated grant-date fair value of
all 1,025,821 options granted was $2.8 million. Of this
amount, the Company estimated that the stock-based compensation
expense of the awards not expected to vest was a total of
$810,000.
62
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the year ended December 31, 2006, the Company
granted options to purchase 608,300 shares of its common
stock with an estimated total grant date fair value of
$4.0 million. Of this amount, the Company estimated that
the stock-based compensation for the awards not expected to vest
was $1.1 million.
During the year ended December 31, 2007, the Company
granted options to purchase 796,150 shares of its common
stock with an estimated total grant date fair value of
$5.0 million. Of this amount, the Company estimated that
the stock-based compensation for the awards not expected to vest
was $1.5 million.
As of December 31, 2008, the unrecorded stock-based
compensation balance related to all stock options was
$1.7 million, net of estimated forfeitures, and will be
recognized over an estimated weighted-average employee service
period of 1.3 years. As of December 31, 2008, the
unrecorded deferred stock-based compensation balance related to
the stock purchase plan was $470,000 and will be recognized over
an estimated weighted average employee service period of
0.6 years.
Valuation
Assumptions
The Company estimates the fair value of stock options using a
Black-Scholes option valuation model, consistent with the
provisions of SFAS No. 123 (R) and Securities and
Exchange Commission Staff Accounting Bulletin No. 107.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option valuation model and the
graded-vesting method with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Stock Option Plans
|
|
|
|
|
|
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Expected stock price volatility
|
|
70%
|
|
70%
|
|
79%
|
Risk free interest rate
|
|
1.80 - 3.39%
|
|
3.77 - 4.80%
|
|
4.52 - 5.45%
|
Expected life of options in years
|
|
3.6 years
|
|
4 years
|
|
5 years
|
The fair value of shares under the employee stock purchase plan
is estimated using the Black-Scholes valuation model and the
graded-vesting method with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Expected stock price volatility
|
|
51%
|
|
51%
|
|
51%
|
Risk free interest rate
|
|
1.61 - 4.74%
|
|
3.97 - 4.67%
|
|
4.74 - 5.15%
|
Expected life of options in years
|
|
1.1 - 1.2 years
|
|
1.2 years
|
|
1.3 years
|
The dividend yield of zero is based on the fact that the Company
has never paid cash dividends and has no present intention to
pay cash dividends. Expected volatility is based on the
combination of historical volatility of the Companys
common stock and the expected moderation in future volatility
over the period commensurate with the expected life of the
options and other factors. The risk-free interest rates are
taken from the Daily Federal Yield Curve Rates as of the grant
dates as published by the Federal Reserve and represent the
yields on actively traded Treasury securities for terms equal to
the expected term of the options. The expected term calculation
is based on the Companys observed historical option
exercise behavior and post-vesting forfeitures of options by
employees.
The weighted average grant date fair value for options granted
during 2008, 2007 and 2006 was $2.77, $6.34, and $6.53, per
share, respectively. The total intrinsic value of options
exercised during the years ended December 31, 2008, 2007
and 2006 was $7,000, $152,000, and $1.1 million,
respectively.
63
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average grant date fair value of purchase rights
granted under the employee stock purchase plan during the year
was $1.17, $2.53, and $5.16 for 2008, 2007, and 2006,
respectively.
Preferred
Stock and Warrant Purchase Agreement
The Company had 5,000,000 shares of convertible preferred
stock authorized as of December 31, 2008 and 2007.
Effective April 24, 2006, the Company entered into a
Preferred Stock and Warrant Purchase Agreement (the
purchase agreement) with Oak Investment Partners XI,
Limited Partnership (Oak). Pursuant to the purchase
agreement, Oak purchased 300,000 shares of the
Companys Series B preferred stock, par value $0.001
per share, for $150 per preferred share. The preferred shares
are convertible initially into 3,000,000 shares of common
stock, for an effective purchase price of $15 per common share
equivalent. The preferred shares will be automatically converted
into common stock on the first date after April 24, 2008 on
which the volume weighted average price of the common stock of
the Company for the thirty business days immediately preceding
the date of measurement is above $37.50. The Company also issued
Oak a warrant (the Warrant) granting Oak the right
to purchase an additional 90,000 shares of Series B
preferred stock at an exercise price of $150 per share, which
shares are convertible initially into 900,000 shares of
common stock for an effective exercise price of $15 per common
share equivalent. The Warrant was sold for a purchase price of
$33,750, expires three years from the date of purchase and
includes a cashless exercise feature.
The Company received gross proceeds of $45.0 million from
the sale of the Series B preferred stock and the Warrant
and net proceeds of $43.1 million after the payment of
legal fees and other expenses, including commissions to
Needham & Co., the Companys sole placement agent
and financial advisor for the private placement. The
Series B preferred stock and the Warrant were issued
pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended.
The Company was required to allocate the gross proceeds of the
Oak financing to the shares of Series B preferred stock and
the Warrant, based on the relative fair values of the
securities. The Company determined the relative fair values of
the securities using a valuation analysis. In order to determine
the value of the Companys Series B preferred stock
and related Warrant, an equity allocation model based on the
Black-Scholes valuation model as of the valuation date was
utilized.
The analysis allocated the aggregate equity value to the various
securities in the Companys capital structure in accordance
with each securitys rights and privileges. The
Black-Scholes valuation model is a widely accepted formula used
to estimate the value of options based on variables including
the time to expiration, volatility and prevailing risk-free
interest rate. The analysis used the Black-Scholes valuation
model and included the following variables: 3 years for the
time to expiration, 55% volatility, 0% dividend rate and 4.97%
risk-free interest rate. Through this analysis, the estimated
aggregate value of the Series B preferred stock and the
Warrant on a marketable, minority interest basis was
$40.7 million and $4.3 million, respectively, for an
effective conversion price of the Series B preferred stock
of $13.57 per common share.
The fair value of the common stock on the commitment date was
$13.35 per share. Because the effective conversion price of the
Series B preferred stock was in excess of this amount, the
issuance of the Series B preferred stock and Warrant did
not result in a deemed dividend and beneficial conversion
feature in accordance with Emerging Issues Task Force
No. 00-27,
Application of Issue
No. 98-5
to Certain Convertible Instruments.
The Series B preferred stock ranks senior and prior to the
Companys common stock and all other classes or series of
capital stock with respect to the payment of any dividends,
conversion rights and any payment upon liquidation or
redemption. When and if the Company declares a dividend with
respect to common stock, the holders of the Series B
preferred stock shall be entitled to the amount of dividends per
share in the same form as such
64
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
common stock dividends that would be payable. The Series B
preferred stock is non-cumulative with respect to dividends.
Upon any liquidation, certain mergers, reorganizations
and/or
consolidations of the Company into or with another corporation
or any transaction or series of related transactions in which a
person, entity or group acquires 50% or more of the combined
voting power of the Companys then outstanding securities,
the holders are entitled to receive prior and in preference to
any distribution to holders of the Companys common stock
or any other class or series of stock subordinate in liquidation
preference to the Series B preferred stock, the amount
invested plus all accumulated or accrued and unpaid dividends
thereon. The Company is required to gain the approval of the
holders of the Series B preferred stock prior to amending
its certificate of incorporation, issuing any equity security
that is senior to the Series B preferred stock, or
declaring or paying any distribution to stock junior to the
Series B preferred stock including dividends or repurchase
of the Companys common stock.
The holders of the Series B preferred stock are entitled to
vote on all matters submitted to a vote of the holders of the
Companys common stock on an as if converted to common
stock basis. So long as at least 150,000 shares of
Series B preferred stock are outstanding, the holders of
Series B preferred stock, voting separately as a series,
shall be entitled to elect one member of the Companys
Board of Directors. Additionally, the purchase agreement
specified that the Company was to file a registration statement
to register the shares by March 16, 2007. The Company filed
this registration statement on March 14, 2007.
Common
Stock
On December 21, 2007, the Company, Wood River Partners,
L.P. and Wood River Partners Offshore, Ltd. (the Wood
River Funds) and the court-appointed receiver (the
Receiver) for the Wood River Funds, Wood River
Capital Management, L.L.C. and Wood River Associates, L.L.C.
(together with the Wood River Funds, the Wood River
Entities) entered into the stock purchase agreement (the
Stock Purchase Agreement). Pursuant to the Stock
Purchase Agreement, on December 24, 2007 the Company
repurchased 2,502,247 shares of its common stock held by
the Wood River Funds (the Stock Repurchase). The
remaining 1,600,000 shares of the Companys common
stock owned by the Wood River Funds were sold to certain
institutional investors (the Investors). The price
paid by Endwave and the Investors was $6.83 per share in cash.
On the date of repurchase, Endwave common stock traded at a high
of $6.97 and a low of $6.66.
Upon the consummation of the Stock Repurchase, (a) the Wood
River Entities reimbursed the Company $300,000 for professional
expenses incurred by the Company, (b) the Registration
Rights Agreement, dated as of May 23, 2007, between the
Company and the Receiver terminated, and (c) certain mutual
releases of claims between the Company and the Receiver became
effective. Including the $300,000 reimbursement from the Wood
River Entities, the Company incurred net expenses of $115,000
related to financial advisory fees, legal fees and other
expenses. The total price paid by the Company for the repurchase
of the shares including expenses was $17.2 million.
At December 31, 2008, the Company had reserved
4,892,045 shares of common stock for issuance in connection
with its stock option plans, 360,369 shares in connection
with its employee stock purchase plan and 3,900,000 shares
in connection with the conversion of the outstanding preferred
stock and Warrant.
Shareholder
Rights Plan
On November 30, 2005, the Board of Directors adopted a
Shareholder Rights Plan, providing for the distribution of one
preferred share purchase right (Right) for each
outstanding share of common stock held as of December 12,
2005.
The Rights are not exercisable until the earlier of the date of
a public announcement that a person or entity (together with
such persons or entitys affiliates) beneficially
owns 15% or more of the outstanding shares of common stock of
the Company (such person or entity, an Acquiring Person) or ten
days (or such later date as may be determined by the Board of
Directors) following the announcement of a tender offer which
would result in any
65
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
person or entity becoming an Acquiring Person. The Rights are
initially exercisable for one one-hundredth of a share of
Series A Junior Participating Preferred Stock at a price of
$90 per one one-hundredth of a share, subject to adjustment.
If the Company is acquired in a merger or other business
combination transaction or 50% or more of its assets are sold to
an Acquiring Person, provisions will be made so that each holder
of a Right, upon exercise, will be able to receive common stock
of the acquiring company having a market value of two times the
exercise price of the Right.
The Rights will expire on December 11, 2015 unless the
Rights are redeemed or exchanged by the Company.
Employee
Stock Purchase Plan
In October 2000, the Company established the Endwave Corporation
Employee Stock Purchase Plan (Purchase Plan). All
employees who work a minimum of 20 hours per week and are
customarily employed by the Company (or an affiliate thereof)
for at least five months per calendar year are eligible to
participate. Under this plan, employees may purchase shares of
common stock through payroll deductions of up to 15% of their
earnings with a limit of 3,000 shares per offering period
under the Purchase Plan. The price paid for the Companys
common stock purchased under the Purchase Plan is equal to 85%
of the lower of the fair market value of the Companys
common stock on the date of commencement of participation by an
employee in an offering under the Purchase Plan or the date of
purchase. During 2008, there were 207,222 shares issued
under the Purchase Plan at a weighted average price of $3.82 per
share. During 2007, there were 97,838 shares issued under
the Purchase Plan at a weighted average price of $7.83 per
share. In 2006, there were 77,735 shares issued under the
Purchase Plan at a weighted average price of $9.67 per share.
Stock
Option Plans
The Companys 1992 Stock Option Plan (the 1992
Plan) was adopted in September 1992, amended in April
1999, and terminated in March 2000 such that no further options
could be granted thereunder; however, previously granted and
unexercised options remain outstanding and governed by the terms
of the 1992 Plan. The 1992 Plan provides for the issuance of up
to 3,088 shares of common stock to directors, employees and
consultants upon the exercise of options outstanding under the
1992 Plan as of December 31, 2008.
The Companys 2000 Stock Option Plan (the 2000
Plan) was adopted in March 2000, amended in July 2000, and
in July 2007 was succeeded by the 2007 Equity Incentive Plan.
All shares reserved for issuance under the 2000 Plan were
carried over into the 2007 Plan.
The Companys 2007 Stock Option Plan (the 2007
Plan) was adopted in July 2007 as the successor and
continuation of the 2000 Plan and provides for the issuance of
options to purchase common stock to directors, employees, and
consultants. The 2007 Plan provides for annual reserve increases
to the number of authorized shares beginning January 1,
2008 through January 1, 2012. Under the 2007 Plan,
incentive stock options are granted under the plan at exercise
prices not less than fair value and non-statutory stock options
are granted at an exercise price not less than 85% of the fair
value on the date of grant, as determined by the closing sales
price of the Companys common stock. Options granted under
the 2007 Plan generally have a ten-year term. Options vest and
become exercisable as specified in each individuals option
agreement, generally over a four-year period. Subject to
approval by the Companys board of directors, options may
be exercised early; however, in such event the unvested shares
are subject to a repurchase option by the Company upon
termination of the individuals employment or services. As
of December 31, 2008, the 2007 Plan provides for the
issuance of up to 2,905,682 shares of common stock to
directors, employees and consultants upon the exercise of
options outstanding.
The Companys 2000 Non-Employee Directors Stock
Option Plan (Director Plan) was adopted in October
2000. The Director Plan provides for non-statutory stock option
grants to non-employee directors. New non-employee directors
receive an initial grant of 20,000 shares when an
individual first becomes a non-employee director of the Company
and each non-employee director receives an annual automatic
grant of 10,000 shares
66
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(which will be reduced pro-rata if an individual did not serve
as a director for the full year of the preceding fiscal year).
Options granted under the plan to non-employee directors are
granted at fair market value on the date of grant, provide for
monthly vesting over a one-year period and have a ten-year term.
As of December 31, 2008, the Director Plan provides for the
issuance of up to 100,147 shares of common stock to
non-employee directors upon the exercise of options outstanding.
The Company granted options to non-employee directors to
purchase 60,000 and 30,000 shares of the Companys
common stock under the 2007 Plan for the years ended
December 31, 2008 and 2007, respectively. The Company
granted options to non-employee directors to purchase
44,000 shares of the Companys common stock under the
Director Plan for the year ended December 31, 2006.
The Companys equity incentive program is a broad-based,
long-term retention program designed to align stockholder and
employee interests. Upon exercise of stock options, the Company
issues shares from the shares reserved under the Companys
stock option plans.
The following table summarizes activity under the equity
incentive plans for the indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at December 31, 2005
|
|
|
1,292,877
|
|
|
|
14.19
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
608,300
|
|
|
|
10.25
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(120,395
|
)
|
|
|
3.55
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(48,113
|
)
|
|
|
12.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
1,732,669
|
|
|
|
13.59
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
796,150
|
|
|
|
12.10
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(24,685
|
)
|
|
|
5.88
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(38,698
|
)
|
|
|
13.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
2,465,436
|
|
|
|
1.91
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
1,025,821
|
|
|
|
6.44
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(2,748
|
)
|
|
|
1.90
|
|
|
|
|
|
|
|
|
|
Options cancelled
|
|
|
(479,592
|
)
|
|
|
23.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
3,008,917
|
|
|
$
|
9.23
|
|
|
|
7.63
|
|
|
$
|
123,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable and expected to be exercisable at
December 31, 2008
|
|
|
2,746,911
|
|
|
$
|
9.33
|
|
|
|
7.52
|
|
|
$
|
123,240
|
|
Options vested and exercisable at December 31, 2008
|
|
|
1,585,385
|
|
|
$
|
9.77
|
|
|
|
6.75
|
|
|
$
|
123,240
|
|
At December 31, 2008, the Company had 1,883,128 options
available for grant under its stock option plans. For the year
ended December 31, 2008, zero options expired.
67
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information concerning
outstanding and exercisable options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Vested and
|
|
|
|
|
Exercisable
|
|
|
|
|
At December 31,
|
|
Options Outstanding at December 31, 2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
Range of Exercise Price
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
$ 0.76 - $ 6.37
|
|
|
292,134
|
|
|
$
|
3.30
|
|
|
|
6.36
|
|
|
|
202,424
|
|
|
$
|
2.54
|
|
$ 6.59 - $ 6.59
|
|
|
892,670
|
|
|
$
|
6.59
|
|
|
|
9.09
|
|
|
|
167,870
|
|
|
$
|
6.59
|
|
$ 6.60 - $ 9.75
|
|
|
199,160
|
|
|
$
|
9.07
|
|
|
|
7.21
|
|
|
|
129,672
|
|
|
$
|
9.09
|
|
$ 9.77 - $ 9.77
|
|
|
328,259
|
|
|
$
|
9.77
|
|
|
|
7.08
|
|
|
|
224,335
|
|
|
$
|
9.77
|
|
$ 9.90 - $10.22
|
|
|
441,328
|
|
|
$
|
10.11
|
|
|
|
6.28
|
|
|
|
352,345
|
|
|
$
|
10.16
|
|
$10.23 - $12.90
|
|
|
227,155
|
|
|
$
|
11.97
|
|
|
|
6.91
|
|
|
|
170,930
|
|
|
$
|
11.93
|
|
$13.23 - $13.23
|
|
|
510,436
|
|
|
$
|
13.23
|
|
|
|
8.09
|
|
|
|
224,985
|
|
|
$
|
13.23
|
|
$15.14 - $19.30
|
|
|
113,622
|
|
|
$
|
16.65
|
|
|
|
6.32
|
|
|
|
108,671
|
|
|
$
|
16.64
|
|
$20.32 - $20.32
|
|
|
124
|
|
|
$
|
20.32
|
|
|
|
1.22
|
|
|
|
124
|
|
|
$
|
20.32
|
|
$21.47 - $21.47
|
|
|
4,029
|
|
|
$
|
21.47
|
|
|
|
6.09
|
|
|
|
4,029
|
|
|
$
|
21.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,008,917
|
|
|
$
|
9.23
|
|
|
|
7.63
|
|
|
|
1,585,385
|
|
|
$
|
9.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, options to purchase
1,368,825 and 874,019 shares of common stock were
exercisable at weighted average exercise prices of $14.53 and
$16.62 per share, respectively.
|
|
10.
|
Commitments
and Contingencies
|
Commitments
The Company leases its office, manufacturing and design
facilities in San Jose, California, Diamond Springs,
California, El Dorado Hills, California, Folsom, California,
Chiang Mai, Thailand and Salem, New Hampshire under
non-cancelable lease agreements, which expire in various periods
through May 2014. Rent expense under the operating leases was
approximately $977,000, $963,000, and $730,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
Future annual minimum lease payments under non-cancelable
operating leases with initial terms of one year or more as of
December 31, 2008 are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2009
|
|
$
|
1,035
|
|
2010
|
|
|
989
|
|
2011
|
|
|
871
|
|
2012
|
|
|
625
|
|
2013
|
|
|
638
|
|
Thereafter
|
|
|
231
|
|
|
|
|
|
|
Total
|
|
$
|
4,389
|
|
|
|
|
|
|
68
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future annual minimum lease payments under non-cancelable
capital leases with initial terms of one year or more as of
December 31, 2008 are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2009
|
|
$
|
23
|
|
2010
|
|
|
17
|
|
2011
|
|
|
3
|
|
|
|
|
|
|
|
|
|
43
|
|
Less amount representing interest
|
|
|
4
|
|
|
|
|
|
|
Present value of future minimum lease payments
|
|
|
39
|
|
Less current portion
|
|
|
20
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
19
|
|
|
|
|
|
|
The amounts due under capital leases are included in other
current and long-term liabilities on the consolidated balance
sheet.
Purchase
Obligations
The Company has purchase obligations to certain suppliers. In
some cases the products the Company purchases are unique and
have provisions against cancellation of the order. At
December 31, 2008, the Company had approximately
$3.7 million of purchase obligations which are due within
the following 12 months. This amount does not include
contractual obligations recorded on the consolidated balance
sheets as liabilities.
Contingencies
On Friday, October 31, 2008, the Company filed a complaint
with the Canadian Superior Court in Montreal, Quebec alleging
that Advantech, the parent company of Allgon Microwave
Corporation AB, had breached its contractual obligations with
Endwave and owes the Company $994,500 in a note receivable,
purchased inventory and accepted purchase orders. The Company
cannot predict the outcome of these proceedings. An adverse
decision in these proceedings could harm the Companys
consolidated financial position and results of operations. Other
than the complaint against Advantech, the Company is not
currently a party to any material litigation.
69
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated loss before income tax expense (benefit) includes
non-U.S. loss
of approximately $853,000 and $768,000 for the years ended
December 31, 2008 and 2007, respectively. During 2006,
there was no
non-U.S. income
or loss. The Company recorded a current tax benefit of $66,000
for year ended December 31, 2008 and a current tax expense
of $2,000 and $97,000 for the years ended December 31, 2007
and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(57
|
)
|
|
$
|
|
|
|
$
|
90
|
|
State
|
|
|
(9
|
)
|
|
|
2
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(66
|
)
|
|
$
|
2
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the Company had a federal net
operating loss carryforward of approximately
$217.7 million. The Company also had federal research and
development tax credit carryforwards of approximately
$2.2 million. These net operating loss and credit
carryforwards are currently expiring and will continue to do so
through 2028, if not utilized.
As of December 31, 2008, the Company had a state net
operating loss carryforward of approximately $94.7 million.
The net operating losses will begin expiring in 2012, if not
utilized. The Company also has state research and development
tax credit carryforwards and miscellaneous credit carryforwards
of approximately $2.4 million. The credits will
carryforward indefinitely, if not utilized.
Utilization of the net operating losses and credits may be
subject to a substantial annual limitation due to the ownership
change provisions of the Internal Revenue Code and similar state
provisions. The annual limitation may result in the expiration
of net operating losses and credits before utilization.
Deferred tax assets and liabilities reflect the net tax effects
of net operating loss and credit carryforwards and temporary
differences between the carrying amounts of assets for financial
reporting and the amount used for income tax purposes.
Significant components of the Companys net deferred tax
assets and liabilities for federal and state income taxes are as
follows at December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
72,666
|
|
|
$
|
70,800
|
|
Net research credit
|
|
|
1,650
|
|
|
|
1,800
|
|
Other
|
|
|
8,181
|
|
|
|
6,800
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
82,497
|
|
|
|
79,400
|
|
Valuation allowance for deferred tax assets
|
|
|
(82,497
|
)
|
|
|
(78,600
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
800
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
70
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been offset by a
valuation allowance. The valuation allowance increased by
$3.9 million, $400,000 and $1.2 million during 2008,
2007 and 2006, respectively.
The Company is tracking the portion of its deferred tax assets
attributable to stock option benefits in a separate memo account
pursuant to SFAS No. 123(R). Therefore, these amounts
are no longer included in our gross or net deferred tax assets.
Pursuant to SFAS No. 123(R), the benefit of these
stock options will only be recorded to equity when they reduce
cash taxes payable. As of December 31, 2008, the Company
had federal and state net operating loss carryforwards being
accounted for in this memo account of $22.0 million.
The Companys income tax expense (benefit) differed from
the amount computed by applying the statutory U.S. federal
income tax rate to the loss before income taxes as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Benefit from income taxes at statutory rate
|
|
$
|
(5,186
|
)
|
|
$
|
(1,883
|
)
|
|
$
|
(437
|
)
|
State taxes
|
|
|
(9
|
)
|
|
|
2
|
|
|
|
7
|
|
Losses for which no benefit is taken
|
|
|
3,757
|
|
|
|
1,583
|
|
|
|
70
|
|
Alternative minimum tax
|
|
|
|
|
|
|
|
|
|
|
90
|
|
Non-deductible stock compensation
|
|
|
295
|
|
|
|
272
|
|
|
|
337
|
|
Goodwill impairment
|
|
|
1,045
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
32
|
|
|
|
28
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(66
|
)
|
|
$
|
2
|
|
|
$
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 2, the Company adopted FIN 48, on
January 1, 2007. As a result of the implementation of
FIN 48, the Company did not recognize any adjustment to the
liability for uncertain tax positions and therefore did not
record any adjustment to the beginning balance of accumulated
deficit on the consolidated balance sheet. As of the date of
adoption, the Company recorded a $2.5 million reduction to
deferred tax assets for unrecognized tax benefits, all of which
is currently offset by a full valuation allowance and therefore
did not record any adjustment to the beginning balance of
accumulated deficit on the balance sheet.
The aggregate changes in the balance of gross unrecognized tax
benefits during the year were as follows (in thousands):
|
|
|
|
|
|
|
2008 Total
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
2,617
|
|
Increases related to current year tax positions
|
|
|
54
|
|
Increases related to prior year tax positions
|
|
|
37
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
2,708
|
|
|
|
|
|
|
If the ending balance of $2.7 million of unrecognized tax
benefits at December 31, 2008 were recognized,
approximately $55,000 would affect the effective income tax
rate. In accordance with the Companys accounting policy,
it recognizes interest
and/or
penalties related to income tax matters in income tax expense.
As of December 31, 2008, the Company had no accrued
interest
and/or
penalties. The Company does not anticipate a significant change
to its unrecognized tax benefits over the next twelve months.
The unrecognized tax benefits may change during the next year
for items that arise in the ordinary course of business.
The Company files U.S. federal and state income tax
returns. Tax years 1994 through 2008 remain subject to
examination by the appropriate government agencies due to tax
loss carryovers from those years.
71
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
12. 401(k)
Plan
Substantially all regular employees of the Company meeting
certain service requirements are eligible to participate in the
Companys 401(k) employee retirement plan. Employee
contributions are limited to the maximum amount allowed under
the Internal Revenue Code. The Company may match contributions
based upon a percentage of employee contributions up to a
maximum of 4% of employee compensation. Company contributions
under these plans were $281,000, $233,000 and $182,000 for 2008,
2007 and 2006, respectively.
|
|
13.
|
Business
Combinations
|
On April 19, 2007, the Company purchased all of the
outstanding shares of the capital stock of privately-held ALC, a
provider of logarithmic amplifier subsystems to defense markets,
for approximately $7.0 million. The total purchase price of
$7.0 million consisted of $6.8 million in cash paid or
payable to holders of ALC capital stock and related options and
$103,000 in direct transaction costs. The purchase price was
payable in three installments. The first installment of
$5.7 million was paid at closing. A second installment of
$140,000 was paid on April 30, 2007 and the third
installment of $1.0 million was paid in April 2008. The
acquisition has been accounted for as a purchase in accordance
with SFAS No. 141, Business Combinations.
ALCs products are incorporated in a variety of
applications such as early warning radars, threat detection
equipment, electronic countermeasures and missile guidance
systems. ALC provides microwave and millimeter wave components
and subsystems for defense electronic platforms. This
acquisition is complementary to the Companys existing
portfolio of RF module products, and allows it to expand its
product offerings and presence in the defense, commercial radar
and homeland security markets.
The transaction was accounted for under the purchase method of
accounting and, accordingly, the results of operations of ALC
are included in the accompanying consolidated statement of
operations for all periods or partial periods subsequent to the
acquisition date.
The net tangible assets acquired and liabilities assumed in the
acquisition were recorded at fair value. The Company determined
the valuation of the identifiable intangible assets using future
revenue assumptions in a valuation analysis. The amounts
allocated to the identifiable intangible assets were determined
through established valuation techniques accepted in the
technology industry.
The income approach, which includes an analysis of the cash
flows and risks associated with achieving such cash flows, was
used to value all of the identifiable intangible assets. Key
assumptions used in analyzing the expected cash flows from the
identifiable intangible assets included our estimates of revenue
growth, cost of sales, discount rate, operating expenses and
taxes. The purchase price in excess of the identified tangible
and intangible assets was allocated to goodwill.
72
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate purchase price for the ALC acquisition has been
allocated to the tangible and identifiable intangible assets
acquired and liabilities assumed based on their estimated fair
values at the date of acquisition as follows (in thousands):
|
|
|
|
|
Tangible assets acquired
|
|
$
|
3,092
|
|
Liabilities assumed
|
|
|
(473
|
)
|
Core/developed technology
|
|
|
880
|
|
Tradename
|
|
|
230
|
|
Customer relationships
|
|
|
900
|
|
Customer backlog
|
|
|
560
|
|
Non-compete agreement
|
|
|
370
|
|
Goodwill
|
|
|
1,380
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
6,939
|
|
|
|
|
|
|
In accordance with SFAS No. 109, Accounting for
Income Taxes, deferred taxes were not recorded at the time
of the acquisition for the tax effect of the amortizable
intangible assets because they are deductible.
During the fourth quarter of 2008, the goodwill and intangible
assets were determined to be impaired and were written off in
accordance with SFAS No. 142 and
SFAS No. 144.
Pro
forma financial information
The following table presents the unaudited pro forma financial
information for the combined entity of Endwave and ALC for the
years ended December 31, 2007 and 2006, as if the
acquisition had occurred at the beginning of the periods
presented after giving effect to certain purchase accounting
adjustments (in thousands, except per share amounts). ALC was
acquired on April 19, 2007. ALCs results of
operations for the period from April 1, 2007
April 18, 2007 are excluded as they are considered
immaterial.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total revenues
|
|
$
|
57,731
|
|
|
$
|
67,750
|
|
Net loss
|
|
|
(5,273
|
)
|
|
|
(1,269
|
)
|
Net loss per share basic and diluted
|
|
|
(0.46
|
)
|
|
|
(0.11
|
)
|
These results are presented for illustrative purposes only and
are not necessarily indicative of the actual operating results
that would have occurred if the Company and ALC had been a
consolidated entity during all of 2007 or 2006.
73
ENDWAVE
CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Quarterly
Financial Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
14,181
|
|
|
$
|
17,280
|
|
|
$
|
16,979
|
|
|
$
|
9,815
|
|
Cost of product revenues
|
|
|
10,192
|
|
|
|
11,837
|
|
|
|
11,947
|
|
|
|
8,115
|
|
Net loss(1)
|
|
|
(1,936
|
)
|
|
|
(760
|
)
|
|
|
(999
|
)
|
|
|
(11,056
|
)
|
Basic and diluted net loss per share(1)
|
|
$
|
(0.21
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(1.19
|
)
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
14,751
|
|
|
$
|
13,539
|
|
|
$
|
13,794
|
|
|
$
|
14,392
|
|
Cost of product revenues
|
|
|
10,733
|
|
|
|
10,345
|
|
|
|
10,089
|
|
|
|
10,597
|
|
Net loss
|
|
|
(780
|
)
|
|
|
(1,907
|
)
|
|
|
(1,655
|
)
|
|
|
(1,059
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
(1)
|
|
During the fourth quarter of 2008, the Company determined that
its goodwill and intangible assets were impaired and recorded a
charge of $6.2 million or ($0.67) per share to write off
the remaining value of its goodwill and intangible assets.
|
During the first quarter of 2009, the Company undertook certain
restructuring activities to reduce expenses. The Company has or
is planning to terminate the employment of a total of
34 employees in order to reduce the Companys cost
structure. These terminations will affect all areas of the
Companys operations. The components of the expected
restructuring charge include severance, benefits, payroll taxes
and other costs associated with the termination of the
employees. The charge for these restructuring activities is
expected to be approximately $1.3 million. The severance
payments will be substantially complete by the end of the first
quarter of 2009.
74
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by
this report, our chief executive officer and chief financial
officer have concluded that our disclosure controls and
procedures (as defined in
Rules 13a-15(e)
and
15d-15(e))
under the Exchange Act were effective as of the end of the
period covered by this report to ensure that information that we
are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms.
Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and our
chief executive officer and our chief financial officer have
concluded that these controls and procedures are effective at
the reasonable assurance level. We believe that a
control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting. A
companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
There are inherent limitations in the effectiveness of any
system of internal control, including the possibility of human
error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only
reasonable assurances with respect to financial statement
preparation. Further, because of changes in conditions, the
effectiveness of internal control may vary over time.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2008.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission in Internal Control Integrated
Framework. Based on its assessment using those criteria, our
management concluded that, as of December 31, 2008, our
internal control over financial reporting is effective.
Changes
in Internal Controls Over Financial Reporting
There were no changes in our internal controls over financial
reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
Not applicable
75
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Our directors and executive officers, their ages as of
February 6, 2009 and their positions with us, as well as
certain biographical information of these individuals, are as
follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Edward A. Keible, Jr.
|
|
|
65
|
|
|
Chief Executive Officer, President and Director
|
John J. Mikulsky
|
|
|
63
|
|
|
Chief Operating Officer and Executive Vice President
|
Brett W. Wallace
|
|
|
44
|
|
|
Chief Financial Officer, Executive Vice President and Secretary
|
David M. Hall
|
|
|
60
|
|
|
Senior Vice President and General Manager, Defense and Security
|
Steven F. Layton
|
|
|
54
|
|
|
Senior Vice President and General Manager, Telecom
|
Daniel P. Teuthorn
|
|
|
45
|
|
|
Senior Vice President and General Manager, Technology
|
Edward C.V. Winn(1)(2)(3)
|
|
|
70
|
|
|
Chairman of the Board of Directors
|
Joseph J. Lazzara(1)(2)(3)
|
|
|
57
|
|
|
Director
|
John F. McGrath, Jr.(1)
|
|
|
44
|
|
|
Director
|
Wade Meyercord(2)(3)
|
|
|
68
|
|
|
Director
|
Eric Stonestrom(2)(3)
|
|
|
47
|
|
|
Director
|
|
|
|
(1)
|
|
Member of the Audit Committee
|
|
(2)
|
|
Member of the Nominating and Governance Committee
|
|
(3)
|
|
Member of the Compensation 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, a materials science company,
culminating in the position of Senior Vice President with
specific oversight of Raychems International and
Electronics Groups. 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.
John J. Mikulsky
has served as our Chief Operating
Officer and Executive Vice President since August 2005. From May
2001 until August 2005, Mr. Mikulsky served as our Chief
Marketing Officer and Executive Vice President, Marketing and
Business Development. From May 1996 until April 2001,
Mr. Mikulsky served as our Vice President of Product
Development. 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 its
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 S.M. in
Management from the Sloan School at the Massachusetts Institute
of Technology.
Brett W. Wallace
has served as Executive Vice President
since March 2006 and as our Chief Financial Officer and
Secretary since April 2006. From November 2004 until February
2006, Mr. Wallace was a Managing Director in investment
banking with Raymond James & Associates. From June
1999 until October 2004, Mr. Wallace was a Managing
Director in investment banking with Piper Jaffray &
Co. Prior to 1999, Mr. Wallace worked with C.E. Unterberg,
Towbin, most recently as a Managing Director in investment
banking. Mr. Wallace holds a B.A. in economics from the
University of California, Berkeley and an M.B.A. from
UCLAs Anderson School of Management.
David M. Hall
serves as Senior Vice President and General
Manager, Defense and Security, reporting to John Mikulsky, COO.
Mr. Hall is a senior executive with over 30 years of
experience in the high-technology sector. As President and CEO
of Proto Engineering he reengineered a printed circuit board
manufacturer into a profitable
76
enterprise that he then sold. As co-founder of BridgeFront, LLC
he was instrumental in assisting technology
start-up
companies to commercialize their technologies. Prior to
Mr. Halls employment at Endwave, he held multiple
responsibilities at Trimble Navigation including the handling of
Mergers and Acquisitions and Divestitures, corporate marketing,
and the managing of four of Trimbles seven operating
divisions. Mr. Hall began his career at Raychem
Corporation, serving for 21 years in a variety of
management positions including sales, marketing, distribution
management, product management and operations. He is past
chairman of the American Electronics Association (AeA)
International Committee, and member of the Executive Committee
for the National Board of Directors. He was also chairman
of the AeA Bay Area Council. Mr. Hall holds a B.S. in
Industrial Technology and an M.B.A with honors from California
Polytechnic State University.
Steven F. Layton
serves as Senior Vice President and
General Manager, Telecom, reporting to John Mikulsky, COO.
Mr. Layton is responsible for the management of
Endwaves telecommunications business. Prior to this new
assignment, Mr. Layton served as Vice President of Sales
for Endwave from 2003 to 2005. He joined Endwave in 1998 as
Director of Sales with over 20 years of engineering sales
experience in the microwave/millimeter wave telecommunications
industry. Prior to Endwave, Mr. Layton was the Director of
Sales for VertiCom, Inc. from 1995 to 1998 where he was
responsible for establishing sales channels and launching
products for the SatCOM and terrestrial communications markets.
Mr. Layton holds a B.S. degree in engineering from the
University of Hawaii and a B.S. degree in business from the
University of Maryland. Mr. Layton is a graduate of the
Stanford Executive Institute and Harvard General Management
Program.
Daniel P. Teuthorn
serves as Senior Vice President and
General Manager, Technology, reporting to John Mikulsky, COO.
Mr. Teuthorn is responsible for setting the technology
strategy and overall management of the Endwave product
development and advanced device design teams. Additionally,
Mr. Teuthorn is responsible for Endwaves Supply Chain
Management and Quality Assurance departments. Since joining
Endwave in 1994, Mr. Teuthorn has progressed in his
responsibilities during his tenure at Endwave, holding
Engineering Manager, Director of Engineering and Vice President
of Engineering positions. Prior to Endwave, from 1989 to 1994,
Mr. Teuthorn was the Sr. Microwave Engineer responsible for
the YIG oscillator product line at Ferretec Inc.
Mr. Teuthorn began his career at Litton Solid State in the
position of Microwave Engineer from 1986 to 1989.
Mr. Teuthorn holds a B.S.E.E. from the University of
California at Davis, M.S.E.E. from Santa Clara University,
and M.B.A. degrees from Haas School of Business, University of
California Berkeley, and Columbia Business School, Columbia
University.
Edward C.V. Winn
has served as director of Endwave since
July 2000. From March 1992 to January 2000, Mr. Winn served
in various capacities with TriQuint Semiconductor, Inc., 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, Inc., a microwave component and subsystem
manufacturer, 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 on the Board of
Directors of Volterra Semiconductor Corporation.
Joseph J. Lazzara
has served as a director of Endwave
since February 2004. From September 2006 to March 2008,
Mr. Lazzara served as the Vice Chairman and a director of
Omron Scientific Technologies, Inc. (formerly known as
Scientific Technologies, Inc. (NASDAQ: STIZ)), a manufacturer of
machine safeguarding products and automation sensors acquired by
Omron Corporation, a publicly traded Japanese corporation in
September 2006. Prior to the acquisition of Scientific
Technologies, Mr. Lazzara served as the Chief Executive
Officer between June 1993 and September 2006, as the President
of Scientific Technologies between 1989 and 2006 and as the
Treasurer and a director of Scientific Technologies between 1984
and 2006. From 2006, Mr. Lazzara also serves as the Vice
Chairman and Director of Automation Products Group, Inc., a
privately held manufacturer of automation sensors.
Mr. Lazzara served as a Vice President of Scientific
Technologies between September 1984 and June 1989. He also
served as Treasurer and a director of Scientific
Technologies parent company, Scientific Technology
Incorporation, from 1981 and 2006. Prior to 1981,
Mr. Lazzara was employed by Hewlett-Packard Company, a
global technology solutions provider, in Process and Engineering
Management. Mr. Lazzara received a B.S. in Engineering from
Purdue University and an M.B.A. from Santa Clara University.
77
John F. McGrath, Jr.
has served as a director of
Endwave since January 2005. Mr. McGrath is currently the
Vice President and Chief Financial Officer for Network Equipment
Technologies, a manufacturer of data networking equipment for
government and enterprise applications, a position he has held
since 2001. Prior to joining Network Equipment Technologies,
Mr. McGrath was an independent consultant to enterprise
software firm Niku Corporation. From 1997 to 2000,
Mr. McGrath served in various financial capacities at
Aspect Communications, including as Vice President of Finance
and Director of Finance for Europe, Middle East and Africa.
Prior to that, he was Director of Finance for TCSI Corporation.
From 1986 to 1991, Mr. McGrath worked as a Manager in the
High Technology/Manufacturing Group at Ernst & Young
LLP. Mr. McGrath holds a B.S. in Accounting from the
University of Wyoming and an M.B.A. from the Stanford Graduate
School of Business and is a registered C.P.A. in the state of
California. Mr. McGrath is also on the board of Actel
Corporation and the Presidio Fund, a publicly traded mutual fund.
Wade Meyercord
has served as a director of Endwave since
March 2004. From 1987 to present, Mr. Meyercord has served
as President of Meyercord and Associates, a consulting firm
specializing in board of directors and executive compensation.
From 1999 to 2002, Mr. Meyercord served as Senior Vice
President and Chief Financial Officer of RioPort.com, Inc., a
company that delivers an integrated, secure platform for
acquiring, managing and experiencing music and spoken audio
programming from the Internet. From 1998 to 1999,
Mr. Meyercord Served as Senior Vice President,
e-commerce
of Diamond Multimedia. Prior to 1998, Mr. Meyercord held
various management
and/or
executive level positions with Read-Rite Corporation, Memorex
Corporation and IBM Corporation. Mr. Meyercord received a
B.S. in mechanical engineering from Purdue University and an
M.B.A. in engineering administration from Syracuse University.
Mr. Meyercord serves as a member on the Board of Directors
of Microchip and California Micro Devices.
Eric D. Stonestrom
has served as a director of Endwave
since July 2006. Mr. Stonestrom is currently President and
Chief Executive Officer of Airspan Networks, a supplier of
broadband wireless equipment. Mr. Stonestrom joined Airspan
at its inception in January 1998 as Executive Vice President and
Chief Operating Officer. In May 1998, he was named
Airspans President and Chief Executive Officer as well as
a member of the Board of Directors. From 1995 to January 1998,
Mr. Stonestrom was employed by DSC Communications
Corporation as a Vice President of operating divisions,
including the Airspan product line. From 1984 until 1995,
Mr. Stonestrom worked at Bell Laboratories and AT&T in
a variety of positions. He received B.S., M.S. and M. Eng.
degrees in 1982, 1983 and 1984, respectively, from the College
of Engineering at the University of California at Berkeley.
Executive officers serve at the discretion of our Board of
Directors. There are no family relationships between any of our
executive officers and members of our Board of Directors. No
director has a contractual right to serve as a member of our
Board of Directors. Other than Mr. Keible, all of our
directors are independent within the meaning of the
NASDAQ Stock Market listing requirements and the requirements of
the Securities and Exchange Commission.
We have a staggered Board of Directors, which may have the
effect of deterring hostile takeovers or delaying changes in
control of our management. For purposes of determining their
term of office, directors are divided into three classes, with
the term of office of the Class I directors to expire at
our 2010 annual meeting of stockholders, the term of office of
the Class II directors to expire at our 2008 annual meeting
of stockholders and the term of office of the Class III
directors to expire at our 2009 annual meeting of stockholders.
Class I consists of Messrs. Lazzara and Stonestrom;
Class II consists of Messrs. Meyercord and McGrath;
and Class III consists of Messrs. Keible and Winn.
Directors elected to succeed those directors whose terms expire
will be elected to a three-year term of office. All directors
hold office until the next annual meeting of stockholders in the
year in which their terms expire and until their successors have
been duly elected and qualified. Executive officers serve at the
discretion of our Board of Directors. There are no family
relationships between any of our officers and directors.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors
and executive officers, and persons who own more than ten
percent of our common stock, to file with the Commission initial
reports of ownership and reports of changes in ownership of our
common stock. Officers, directors and greater than ten percent
stockholders are required by the Commissions regulations
to furnish us with copies of all Section 16(a) forms they
file.
78
To our knowledge, based solely on a review of the copies of such
reports furnished to us and written representations that no
other reports were required, during the fiscal year ended
December 31, 2008, our officers, directors and greater than
ten percent beneficial owners complied with all applicable
Section 16(a) filing requirements except that one report,
covering four transactions, was filed late by Potomac Capital
Management, LLC and four reports, covering 33 transactions were
filed late by EagleRock Capital Management, LLC.
Committees
of the Board of Directors
Our Board of Directors has three committees: an Audit Committee,
a Compensation Committee and a Nominating and Governance
Committee. Below is a description of each committee of our Board
of Directors. Each of the committees has authority to engage
legal counsel or other experts or consultants, as it deems
appropriate, to carry out its responsibilities. Our Board of
Directors has determined that each member of each committee
meets the applicable rules and regulations regarding
independence and that each member is free of any
relationship that would interfere with his or her individual
exercise of independent judgment with regard to Endwave.
Audit
Committee
The Audit Committee of the Board of Directors was established by
the Board in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934 to oversee our corporate
accounting and financial reporting processes and audits of our
financial statements. For this purpose, the Audit Committee
performs several functions. The Audit Committee evaluates the
performance of and assesses the qualifications of our
independent registered public accounting firm; determines and
approves the engagement of our independent registered public
accounting firm; determines whether to retain or terminate our
existing independent registered public accounting firm or to
appoint and engage a new independent registered public
accounting firm; reviews and approves the retention of our
independent registered public accounting firm to perform any
proposed permissible non-audit services; monitors the rotation
of partners of our independent registered public accounting firm
on our audit engagement team as required by law; confers with
management and our independent registered public accounting firm
regarding the effectiveness of internal controls over financial
reporting; establishes procedures, as required under applicable
law, for the receipt, retention and treatment of complaints
received by us regarding accounting, internal accounting
controls or auditing matters and the confidential and anonymous
submission by employees of concerns regarding questionable
accounting or auditing matters; and meets to review our annual
audited financial statements and quarterly financial statements
with management and our independent registered public accounting
firm, including reviewing our disclosures under
Managements Discussion and Analysis of Financial
Condition and Results of Operations. The Audit Committee
is composed of three non-employee directors:
Messrs. Lazzara, McGrath (Chairman) and Winn. The Audit
Committee has adopted a written charter that is available to
stockholders on our website at www.endwave.com.
The Board of Directors annually reviews the NASDAQ listing
standards definition of independence for Audit Committee members
and has determined that all members of our Audit Committee are
independent (as independence is currently defined in
Rule 4350(d)(2)(A)(i) and (ii) of the NASDAQ listing
standards). The Board of Directors has also determined that each
of Messrs. McGrath and Winn qualifies as an audit
committee financial expert, as defined in applicable rules
promulgated by the Securities and Exchange Commission, or the
SEC. The Board made a qualitative assessment of each of
Messrs. McGraths and Winns level of knowledge
and experience based on a number of factors, including their
respective formal education and experience as chief financial
officers for public reporting companies.
Compensation
Committee
The Compensation Committee of our Board of Directors reviews and
approves our overall compensation strategy and policies. The
Compensation Committee reviews and approves corporate
performance goals and objectives relevant to the compensation of
our executive officers and other senior management; reviews and
approves the compensation and other terms of employment of our
Chief Executive Officer; reviews and approves the compensation
and other terms of employment of our other officers; and
administers our stock option and purchase plans, pension and
profit sharing plans, stock bonus plans, deferred compensation
plans and other similar programs. The Compensation Committee is
composed of four non-employee directors: Messrs. Lazzara,
79
Meyercord (Chairman), Stonestrom and Winn. All current members
of our Compensation Committee are independent within the meaning
of Rule 4200(a)(15) of the NASDAQ listing standards. The
Compensation Committee has adopted a written charter that is
available to stockholders on our website at www.endwave.com.
The responsibilities of the Compensation Committee, as stated in
its charter, include the following:
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developing compensation policies that will attract and retain
the highest quality executives, that will clearly articulate the
relationship of corporate performance to executive compensation
and will reward executives for Endwaves progress;
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proposing to the Board of Directors the adoption, amendment and
termination of stock option plans, stock appreciation rights
plans, pension and profit sharing plan, stock bonus plans, stock
purchase plans, bonus plans, deferred compensation plans and
other similar plans;
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granting rights, participation and interests in such plans to
eligible participants, subject in certain cases to ratification
by the Board;
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reviewing and approving such other compensation matters as may
be necessary or appropriate in view of the Compensation
Committees overall responsibility; and
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reviewing with management our Compensation Discussion and
Analysis and considering whether to recommend that it be
included in proxy statements and other filings.
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Our Compensation Committee plays an integral role in setting
executive officer compensation each year. In the first quarter
of each year, our Compensation Committee holds a regular meeting
in which our Chief Executive Officer and Chief Financial Officer
review with the Compensation Committee Endwaves financial
and business performance for the previous year and
managements business outlook and operating plan for the
current year. In reviewing the prior years performance,
the Compensation Committee compares our performance to the
financial and operational goals set for such year and the bonus
targets. In this meeting, the Chief Executive Officer also
reviews with the Compensation Committee his assessment of the
individual performance of each executive officer, including his
own performance, according to a variety of qualitative
performance criteria and salary and bonus trends. In addition,
during the fourth quarter of each year, the Chairman of the
Compensation Committee discusses with the full Board, recent
data and current trends in equity ownership programs for
comparable companies. Taking into account the information
conveyed and discussed at these meetings and the recommendations
of our Chief Executive Officer, the Compensation Committee then
determines, subject in some cases to ratification by the full
Board of Directors:
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the amount of bonus to be awarded to each executive officer in
respect of the prior years performance;
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whether to raise, lower or maintain the executive officers
base salary for the current year;
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the bonus targets to be set for the executive officers for the
current year; and
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option grants, if any, to be awarded to each executive officer.
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Nominating
and Governance Committee
The Nominating and Governance Committee of our Board of
Directors is responsible for: identifying, reviewing and
evaluating candidates to serve as members of our Board of
Directors, consistent with criteria approved by our Board of
Directors; reviewing and evaluating incumbent directors and
recommending candidates for election to our Board of Directors;
making recommendations to our Board of Directors regarding the
membership of the committees of our Board of Directors; and
assessing the performance of management and our Board of
Directors. The Nominating and Governance Committee is composed
of four non-employee directors: Messrs. Lazzara (Chairman),
Meyercord, Stonestrom and Winn. All members of the Nominating
and Governance Committee are independent (as independence is
currently defined in Rule 4200(a)(15) of the NASDAQ listing
standards). The Nominating and Governance Committee has adopted
a written charter that is available to stockholders on our
website and www.endwave.com.
80
Code of
Business Conduct and Ethics
We have adopted the Endwave Corporation Code of Business Conduct
and Ethics that applies to all officers, directors and
employees. The Endwave Corporation Code of Business Conduct and
Ethics is available on our website at www.endwave.com. We will
post on our website any amendments to this code or any waivers
of this code that apply to directors or executive officers. A
copy of this code may be obtained without charge by making a
written request to:
Endwave Corporation
Attention: Investor Relations
130 Baytech Drive
San Jose, CA 95134
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Item 11.
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Executive
Compensation
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COMPENSATION
OF EXECUTIVE OFFICERS
COMPENSATION
DISCUSSION AND ANALYSIS
Overview
Our primary objectives with respect to executive compensation
are to attract and retain the best possible executive talent, to
link annual cash compensation and long-term stock-based
compensation to achievement of measurable corporate goals and
individual performance, and to align executives incentives
with stockholder value creation. To achieve these objectives, we
have implemented and maintain compensation plans that tie a
substantial portion of executives overall compensation to
our financial performance and common stock price. Overall, the
total compensation opportunity is intended to create an
executive compensation program that is competitive with
comparably-sized companies, as it is these companies with whom
we compete most vigorously for executive and technical talent.
We refer to these companies in this compensation discussion and
analysis as comparable companies.
Role
of Compensation Committee and Chief Executive
Officer
Our Compensation Committee approves, administers and interprets
our executive compensation and benefit policies and plans. Our
Compensation Committee is appointed by our Board of Directors,
and consists entirely of directors who are outside
directors for purposes of Section 162(m) of the
Internal Revenue Code and non-employee directors for
purposes of
Rule 16b-3
under the Exchange Act. Our Compensation Committee is comprised
of Mr. Wade Meyercord, Mr. Joseph J. Lazzara,
Mr. Eric D. Stonestrom and Mr. Edward C.V. Winn. Our
Compensation Committee is chaired by Mr. Meyercord,
President of Meyercord and Associates, a consulting firm
specializing in executive compensation.
Our Compensation Committee has primary responsibility for
ensuring that our executive compensation and benefit program is
consistent with our compensation philosophy and corporate
governance guidelines and is responsible for determining the
executive compensation packages offered to our executive
officers. The responsibilities of the Compensation Committee, as
stated in its charter, include the following:
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Developing compensation policies that will attract and retain
the highest quality executives, will clearly articulate the
relationship of corporate performance to executive compensation
and will reward executives for Endwaves progress;
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Proposing to the Board of Directors the adoption, amendment and
termination of stock option plans, stock appreciation rights
plans, pension and profit sharing plan, stock bonus plans, stock
purchase plans, bonus plans, deferred compensation plans and
other similar plans;
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Granting rights, participation and interests in such plans to
eligible participants, subject in certain cases to ratification
by the Board of Directors; and
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Reviewing and approving such other compensation matters as may
be necessary or appropriate in view of the Compensation
Committees overall responsibility.
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81
Our Compensation Committee plays an integral role in setting
executive officer compensation each year. During the fourth
quarter of each year, the Chairman of the Compensation Committee
discusses with the full Board recent data and current trends in
equity ownership programs for comparable companies. In the first
quarter of the following year, our Compensation Committee holds
a regular meeting in which our Chief Executive Officer and Chief
Financial Officer review with the Compensation Committee
Endwaves financial and business performance for the prior
year and managements business outlook and operating plan
for the current year. In reviewing the prior years
performance, the Compensation Committee compares our performance
to the financial and operational goals set for such year and the
bonus targets set for such year. In this meeting, the Chief
Executive Officer also reviews with the Compensation Committee
his assessment of the individual performance of each executive
officer, including his own performance, according to a variety
of qualitative performance criteria and salary and bonus trends.
Taking into account the information conveyed and discussed at
these meetings and the recommendations of our Chief Executive
Officer, the Compensation Committee then determines, subject in
some cases to ratification by the full Board of Directors:
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The amount of bonus to be awarded to each executive officer in
respect of the prior years performance;
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Whether to raise, lower or maintain the executive officers
base salary for the current year;
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The bonus targets to be set for the executive officers for the
current year; and
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Option grants, if any, to be awarded to each executive officer.
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Each element of our executive compensation system is described
in more detail below.
Comparable
Company Comparisons
Each year, the Compensation Committee reviews the executive
compensation programs and amounts at comparable companies.
Endwaves total cash compensation packages, based on
achievement of target bonuses at the 100% level, are designed to
be at the median of total target cash compensation among
comparable companies for median performance by comparable
executives. Our equity compensation program is designed to
provide a percentage ownership of Endwave that is comparable to
the median percentage ownership among these comparable
companies. However, the individual elements of our executive
program (base salary, annual incentive compensation, equity
compensation and benefits) may vary from group medians as the
Compensation Committee or the Board of Directors deems
appropriate.
Since our initial public offering in 2000, the Compensation
Committee has studied comparable companies to calibrate
executive compensation. For this purpose, for 2008, the
Compensation Committee looked at companies with more than
$50 million but less than $200 million in annual
revenues as described in the quarterly executive salary survey
published by Radford Surveys + Consulting, a unit of Aon
Consulting (Radford). We believe this survey is
appropriate for benchmarking executive compensation because: the
companies surveyed are similar in size, both in terms of
revenues and market capitalization, to Endwave; Endwave competes
with many of the surveyed companies for executive and technical
talent; and companies in the indices are selected independently
by Radford. We do not benchmark our executive compensation
solely against companies in our industry because few of our
competitors are close to our size. Most of our competitors are
very large, diversified companies or very small, privately-held
companies. Rather, we focus on the companies with whom we
compete most vigorously for executive and technical talent.
Elements
of Executive Compensation
Our executive compensation consists of base salary, annual cash
incentive, equity plan participation and customary broad-based
employee benefits. Consistent with our pay for performance
philosophy, the Compensation Committee believes that we can
better motivate executive officers to enhance stockholder return
if a relatively large portion of their compensation is at
risk that is, contingent upon the achievement
of performance objectives and overall strong company
performance. The mix of base salary, annual cash bonus
opportunity based on achievement of objectives and anticipated
long-term stock-based compensation incentive (in the form of
appreciation in shares underlying stock options) varies
depending on the officers position level, but is always
heavily weighted toward annual bonus and long-term stock-based
compensation, as we believe that best aligns our executive
officers
82
interests with that of our stockholders. The Compensation
Committee believes that the compensation of executives who set
the overall strategy for the business and have the greatest
ability to execute that strategy should be largely
performance-based. Consequently, at least 50% of the target cash
compensation of our Chief Executive Officer, 42.9% of the target
cash compensation of our Executive Vice Presidents and 33.3% of
the target cash compensation of our Senior Vice Presidents is
based on overall company performance. These percentages are
derived from industry data provided by Radford.
Base Salary:
Base salaries for our executives
are established based on the scope of their responsibilities,
taking into account market compensation paid by comparable
companies for equivalent positions. Base salaries are reviewed
on an annual basis and any increases are similar in scope to our
overall corporate salary increase. For comparison purposes, we
have utilized compensation survey data from Radford. Our
philosophy is to target executive base salaries near the median
range of salaries for executives in equivalent positions at
comparable companies. We believe targeting executive salaries at
the median relative to comparable companies reflects our best
efforts to ensure we are neither overpaying nor underpaying our
executives.
Annual Cash Incentive:
Our executive cash
incentive compensation plan typically provides for a cash bonus
award, payable once per year, that is dependent, in part, upon
attaining stated corporate objectives for the prior fiscal year.
The goal of our executive cash incentive compensation plan is to
reward executives in a manner that is commensurate with the
level of achievement of certain financial and strategic goals
that we believe, if attained, result in greater long-term
shareholder value. The Compensation Committee approves these
financial and strategic goals on an annual basis. These
financial and strategic goals typically have a one-year time
horizon. During 2008, the relevant performance goals were based
on revenues, gross margin percentage, profit margin and asset
utilization. The Compensation Committee and management use these
factors because they are easy to measure and compare to
comparable companies and because they are reflective of success
and growth in our business and the creation of long-term
stockholder value.
For each performance factor, the Compensation Committee assigns
four different percentage payout levels (in 2008, 0%, 10%, 25%
or 35%), depending on Endwaves financial performance.
Therefore, the performance factor multiplier can range from 0%
if Endwave does not attain any of its performance goals to 140%
if Endwave achieves its highest targets on all four performance
goals. This performance multiplier is then multiplied by the
executive officers target (100% of base salary for our
Chief Executive Officer, 75% of base salary for our Executive
Vice Presidents and 50% for Senior Vice Presidents), deriving
the maximum bonus awards achievable of 140% of base salary for
our Chief Executive Officer, 105% of base salary for our
Executive Vice Presidents and 70% of base salary for Senior Vice
Presidents. An officers bonus may be increased or
decreased in the discretion of the Compensation Committee, to
take into account any factors the Compensation Committee deems
relevant, such as superior or sub-par performance by a
particular executive officer or to take into account particular
factors affecting Endwaves business for the year that
distorted the Companys financial performance.
As discussed above, each executive officers annual cash
incentive payment is dependent on the degree of achievement with
regard to each performance goal and is subject to discretionary
adjustment by the Compensation Committee. These performance
goals are established so that target attainment is not assured
and the attainment of payment for performance requires
significant effort on the part of our executives. Our
Compensation Committee establishes relevant performance metrics
under the Executive Incentive Plan that it believes range from
realistic to very difficult in terms of managements
ability to achieve the corresponding payout levels. Typically,
the relevant performance metrics for the current year are based
on significant improvement in performance over the prior
years actual results.
Based on Endwaves financial performance and an analysis of
each executive officers contributions in 2008, the
Compensation Committee determined payment of 2008 annual bonuses
of 20% of base salary for our Chief Executive Officer, 15% of
base salary for our Executive Vice Presidents and 10% of base
salary for our Senior Vice Presidents. The value of the annual
bonuses paid to our named executive officers is reflected in the
Summary Compensation Table below. For 2009, the Compensation
Committee has recommended that no bonuses be paid to named
executive officers.
Stock Options:
We believe that stock ownership
is an important factor in aligning corporate and individual
goals. Therefore, we utilize stock options to encourage
long-term performance, with excellent corporate
83
performance (as manifested in our common stock price) and
extended officer tenure producing potentially significant value.
Upon joining Endwave, executive officers receive an initial
stock option grant. This grant is based on relevant industry
comparisons including data from Radford and is intended to be
commensurate with the experience level and scope of
responsibilities of the incoming executive officer. In addition,
all executive officers receive annual option grants. On an
annual basis, the Compensation Committee reviews with the Board
the percentage ownership of Endwave held by employees and
compares that to the employee ownership of comparable companies.
The Compensation Committee uses this metric because it is easy
to measure and compare to comparable companies. Based on its
review, the Compensation Committee approves an annual grant. For
2008, the aggregate annual grant to all employees was
approximately 4% of fully-diluted shares.
All option grants are approved by the Compensation Committee at
Endwaves regular quarterly Board of Directors meeting. The
options are approved so that the grant date is three days after
the release of our financial results for the preceding quarter.
The exercise price for option awards is determined as the
closing price on the day prior to grant. As permitted under
U.S. generally accepted accounting principles, Endwave has
historically determined fair market value under its stock option
plans based upon the closing market price as reported by the
NASDAQ Global Market for the day preceding the date of grant.
Other Benefits:
Executive officers are
eligible to participate in all of our employee benefit plans,
such as medical, dental, group life, disability, and accidental
death and dismemberment insurance, our 401(k) plan and our
Employee Stock Purchase Plan (ESPP). During 2008, we
made group life insurance payments as reflected in the Summary
Compensation Table below. We do not maintain any pension plan,
retirement benefit or deferred compensation arrangements other
than our 401(k) plan. Endwave currently has a program applicable
to all of its 401(k) plan participants under which it matches
50% of employee contributions up to a maximum of 4% of base
salary.
Chief
Executive Officer Compensation
In general, the factors utilized in determining
Mr. Keibles compensation were similar to those
applied to the other executive officers in the manner described
in the preceding paragraphs. A significant percentage of his
potential compensation was, and continues to be, subject to
consistent, positive, long-term company performance. Based on a
review of the above mix of factors, for 2008, the Compensation
Committee granted to Mr. Keible compensation as detailed in
the Summary Compensation Table below. Based on these figures,
over 70% of Mr. Keibles total compensation (measured
according to the Summary Compensation Table and reflecting the
Estimated Possible Target Payout as discussed in the Grants of
Plan-Based Awards Table) was based on variable components such
as performance-based cash bonus and stock options.
Employment,
Severance and Change in Control Agreements
We believe that the retention of our executive officers is
critical to our business. Given the competitive nature of the
technology industry, the demand for experienced executives is
high. Moreover, the level of involuntary terminations of
executives in the technology industry is high. In order to
encourage our key employees to remain with Endwave, our board of
directors has established and maintains our Executive Officer
Severance and Retention Plan. Our Chief Executive Officer,
Executive Vice Presidents and Senior Vice Presidents participate
in the Executive Officer and Retention Plan.
Executive Officer Severance and Retention Plan Assuming No
Change of Control:
Under the Executive Officer
Severance and Retention Plan, if a participating executive
officer is terminated without cause, or resigns for certain
specified reasons constituting constructive termination, the
executive officer will receive (i) salary and benefits
continuation based on the executive officers position and
length of service with us and (ii) acceleration of vesting
on the unvested portion of some of the executive officers
stock options, based on the officers position and length
of service with us. In the case of the Chief Executive Officer,
the salary and benefits continuation period will be equal to the
greater of two months for every year of service to us, or a
total of 12 months, if the termination of employment does
not occur in connection with, or within six months after, a
change in control transaction. In the case of an Executive Vice
President, the salary and benefits continuation will be equal to
the greater of 1.5 months for every year of service to us,
or a total of nine months, if the termination of employment does
not occur in
84
connection with, or within six months after, a change in control
transaction. The Executive Officer Severance and Retention Plan
does not provide for any benefits for Senior Vice Presidents in
the absence of a change of control.
Potential
2008 Severance and Retention Benefits Assuming No Change of
Control
The following table shows the potential payout to our Chief
Executive Officer and Executive Vice Presidents assuming
termination does not occur in connection with, or within six
months after, a change of control. The analysis assumes the
employees were terminated without cause on December 31,
2008:
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COBRA
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Option
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Total
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Name
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Salary(1)
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Benefits(2)
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Awards(3)
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Benefit
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Edward A. Keible, Jr.
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$
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900,667
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$
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31,769
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$
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0
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$
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932,436
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John J. Mikulsky
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$
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423,000
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$
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29,269
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$
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0
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$
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452,269
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Brett W. Wallace
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$
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188,250
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$
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14,635
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$
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0
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$
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202,885
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(1)
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Reflects 2 months salary for each full year of employment
for Mr. Keible (28 months total), 1.5 months
salary for each full year of employment for Mr. Mikulsky
(18 months total) and 9 months salary for
Mr. Wallace.
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(2)
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Reflects 2 months coverage for each full year of employment
for Mr. Keible (28 months total), 1.5 months
coverage for each full year of employment for Mr. Mikulsky
(18 months total) and 9 months coverage for
Mr. Wallace.
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(3)
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Reflects value of options accelerated in the event of
termination without cause without a change of control. Since the
closing price of Endwaves common stock on
December 31, 2008, was less than the exercise price of the
options that would have been accelerated under the Severance and
Retention Plan, the value of shares as to which vesting would
have been accelerated is assumed to be zero.
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Executive Officer Severance and Retention Plan Assuming a
Change of Control:
Under the Executive Officer
Severance and Retention Plan, if an executive officer is
terminated without cause, or resigns for certain specified
reasons constituting constructive termination, the executive
officer will receive (i) salary and benefits continuation
based on the executive officers position and length of
service with us and (ii) acceleration of vesting on the
unvested portion of some of the executive officers stock
options, based on the officers position and length of
service with us. The Compensation Committee believes that it is
in the best interests of stockholders if our executive officers
are able to focus on our business during both strong and weak
business cycles without being distracted by the near-term
financial impact that a potential termination of employment
might have on them personally. Under the circumstances set forth
above, subject to certain exceptions, an executive officer will
vest as if the executive officer had remained employed by
Endwave for twice the salary continuation period described
above. Upon the closing of a change in control transaction, each
executive officer will receive this same amount of acceleration
of vesting even if his or her employment is not terminated.
However, if an executive officers employment is terminated
by us without cause or by the executive officer for certain
specified reasons in connection with, or within six months
after, the change in control transaction, the executive officer
will receive salary continuation for twice the period that would
have applied had such termination not occurred in connection
with a change in control, and additional accelerated vesting in
the same amount as provided when termination does not occur in
connection with a change in control transaction. The
Compensation Committee believes it is in the best interests of
stockholders if our executive officers are able to evaluate the
potential merits of a change-of-control transaction objectively
without being distracted by the potentially adverse personal
impact on themselves. The Compensation Committee believes that
the total potential value of all change of control agreements
with our executive officers is not disproportionate to the
overall market value of Endwave.
85
Potential
2008 Severance and Retention Benefits Assuming a Change of
Control
The following table shows the potential payout to named
executive officers under our Executive Officer Severance and
Retention Plan assuming termination occurs in connection with,
or within six months after, a change of control. The analysis
assumes the employees were terminated without cause on
December 31, 2008:
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COBRA
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Option
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Total
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Name
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Salary(1)
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Benefits(2)
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Awards(3)
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Benefit
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Edward A. Keible, Jr.
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$
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1,801,333
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$
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31,769
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$
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0
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$
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1,833,102
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John J. Mikulsky
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$
|
846,000
|
|
|
$
|
29,269
|
|
|
$
|
0
|
|
|
$
|
875,269
|
|
Brett W. Wallace
|
|
$
|
376,500
|
|
|
$
|
14,635
|
|
|
$
|
0
|
|
|
$
|
391,135
|
|
David M. Hall
|
|
$
|
90,769
|
|
|
$
|
4,813
|
|
|
$
|
0
|
|
|
$
|
95,582
|
|
Steven F. Layton
|
|
$
|
132,308
|
|
|
$
|
13,008
|
|
|
$
|
0
|
|
|
$
|
145,316
|
|
Daniel P. Teuthorn
|
|
$
|
140,923
|
|
|
$
|
11,086
|
|
|
$
|
0
|
|
|
$
|
152,009
|
|
|
|
|
(1)
|
|
Reflects 4 months salary for each full year of employment
for Mr. Keible (56 months total), 3.0 months
salary for each full year of employment for Mr. Mikulsky
(36 months total), 18 months salary for
Mr. Wallace, 20 weeks salary for Mr. Hall, and
32 weeks salary for Messrs. Layton and Teuthorn.
|
|
(2)
|
|
Reflects 2 months coverage for each full year of employment
for Mr. Keible (28 months total), 1.5 months
coverage for each full year of employment for Mr. Mikulsky
(18 months total), 9 months coverage for
Mr. Wallace, 20 weeks for Mr. Hall, and
32 weeks for Messrs. Layton and Teuthorn.
|
|
(3)
|
|
Reflects value of options accelerated in the event of
termination without cause in connection with a change of
control. Since the closing price of Endwaves common stock
on December 31, 2008, was less than the exercise price of
the options that would have been accelerated under the Severance
and Retention Plan, the value of shares as to which vesting
would have been accelerated is assumed to be zero.
|
Named
Executive Officer Compensation
The following table provides information regarding all plan and
non-plan compensation awarded to, earned by or paid to our chief
executive officer, our chief financial officer, each of our
other executive officers serving as such at the end of 2008 for
all services rendered in all capacities to us during 2006, 2007
and 2008. We refer to these executive officers as our named
executive officers.
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
Incentive Plan
|
|
|
All Other
|
|
|
Total
|
|
Name and Principal Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
|
Compensation
|
|
|
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
(4)
|
|
|
(5)
|
|
|
(6)
|
|
|
(7)
|
|
|
Edward A. Keible, Jr.
|
|
|
2008
|
|
|
$
|
384,615
|
|
|
|
|
|
|
$
|
533,938
|
|
|
$
|
77,200
|
|
|
$
|
9,492
|
|
|
$
|
1,005,245
|
|
President and Chief
|
|
|
2007
|
|
|
$
|
371,923
|
|
|
$
|
1,741
|
|
|
$
|
570,948
|
|
|
$
|
0
|
|
|
$
|
11,827
|
|
|
$
|
956,439
|
|
Executive Officer
|
|
|
2006
|
|
|
$
|
325,631
|
|
|
|
|
|
|
$
|
431,546
|
|
|
$
|
178,000
|
|
|
$
|
10,089
|
|
|
$
|
945,266
|
|
John J. Mikulsky
|
|
|
2008
|
|
|
$
|
280,385
|
|
|
|
|
|
|
$
|
232,252
|
|
|
$
|
42,300
|
|
|
$
|
7,287
|
|
|
$
|
562,224
|
|
Chief Operating Officer
|
|
|
2007
|
|
|
$
|
266,154
|
|
|
|
|
|
|
$
|
234,746
|
|
|
$
|
0
|
|
|
$
|
5,773
|
|
|
$
|
506,673
|
|
and Executive Vice President
|
|
|
2006
|
|
|
$
|
250,846
|
|
|
|
|
|
|
$
|
190,347
|
|
|
$
|
94,500
|
|
|
$
|
7,267
|
|
|
$
|
542,960
|
|
Brett W. Wallace(8)
|
|
|
2008
|
|
|
$
|
249,269
|
|
|
|
|
|
|
$
|
261,438
|
|
|
$
|
37,600
|
|
|
$
|
6,324
|
|
|
$
|
554,631
|
|
Chief Financial Officer,
|
|
|
2007
|
|
|
$
|
233,000
|
|
|
|
|
|
|
$
|
351,127
|
|
|
$
|
0
|
|
|
$
|
2,785
|
|
|
$
|
586,912
|
|
Executive Vice President
and Corporate Secretary
|
|
|
2006
|
|
|
$
|
170,038
|
|
|
|
|
|
|
$
|
349,168
|
|
|
$
|
65,625
|
|
|
$
|
315
|
|
|
$
|
585,146
|
|
David M. Hall
|
|
|
2008
|
|
|
$
|
235,192
|
|
|
|
|
|
|
$
|
185,441
|
|
|
$
|
23,600
|
|
|
$
|
6,384
|
|
|
$
|
450,617
|
|
Senior Vice President
General Manager,
Defense and Security
|
|
|
2007
|
|
|
$
|
227,961
|
|
|
|
|
|
|
$
|
272,262
|
|
|
$
|
0
|
|
|
$
|
4,971
|
|
|
$
|
505,194
|
|
Steven F. Layton
|
|
|
2008
|
|
|
$
|
213,731
|
|
|
|
|
|
|
$
|
116,318
|
|
|
$
|
21,500
|
|
|
$
|
5,492
|
|
|
$
|
357,041
|
|
Senior Vice President
General Manager, Telecom
|
|
|
2007
|
|
|
$
|
201,808
|
|
|
|
|
|
|
$
|
119,767
|
|
|
$
|
0
|
|
|
$
|
55,903
|
|
|
$
|
377,478
|
|
Daniel F. Teuthorn
|
|
|
2008
|
|
|
$
|
227,731
|
|
|
|
|
|
|
$
|
106,878
|
|
|
$
|
22,900
|
|
|
$
|
86,921
|
|
|
$
|
444,430
|
|
Senior Vice President
General Manager, Technology
|
|
|
2007
|
|
|
$
|
216,039
|
|
|
|
|
|
|
$
|
119,715
|
|
|
$
|
0
|
|
|
$
|
57,172
|
|
|
$
|
392,926
|
|
86
|
|
|
(1)
|
|
Messrs. Hall, Layton and Teuthorn were promoted to
executive officer positions in February 2007; therefore, data
for 2006 is not reported.
|
|
(2)
|
|
The amounts in this column include any salary contributed by the
named executive officer to our 401(k) plan.
|
|
(3)
|
|
Reflects cash bonus paid to Mr. Keible for the award of a
patent. Any bonus amounts paid under our non-equity incentive
plan are included in the Non-Equity Incentive Plan
Compensation column.
|
|
(4)
|
|
The amounts included in the Option Awards column
represent the compensation cost recognized by Endwave related to
stock option awards to named executive officers, computed in
accordance with SFAS No. 123(R). For purposes of this
table, the value excludes the impact of estimated forfeitures.
For a discussion of other valuation assumptions, see Note 7
to our consolidated financial statements included elsewhere in
this report.
|
|
(5)
|
|
The amounts in this column represent total performance-based
bonuses earned for services rendered during the fiscal year.
|
|
(6)
|
|
All Other Compensation represents group insurance payments,
401(k) employer matching contributions and educational
reimbursement payments made by Endwave. Other Compensation for
Mr. Teuthorn included educational reimbursement of $81,123
in 2008 and $52,459 in 2007.
|
|
(7)
|
|
The dollar value in this column for each named executive officer
represents the sum of all compensation reflected in the
preceding columns.
|
|
(8)
|
|
Mr. Wallace joined Endwave on March 1, 2006, as
Executive Vice President. He was promoted to Chief Financial
Officer on April 25, 2006. Mr. Wallaces annual
salary for 2006 was $210,000.
|
87
The following table provides information with regard to
potential cash bonuses paid or payable in 2008 under our
performance-based, non-equity incentive plan, and with regard to
stock options granted to each named executive officer during
2008. During 2008, Endwave offered to exchange certain
fully-vested out-of-the-money options for new options with a
four-year vesting period and an exercise price based on the
prevailing per share price of our common stock. All Endwave
employees including executive officers and non-executive
directors were offered the opportunity to exchange options with
exercise prices at or above $21.47 per share for these
newly-issued options. The Compensation Committee took this
action with the intent of aligning our employees interests
with our stockholders interests and fostering employee
retention. Believing that these out-of-the-money options no
longer provided the long-term incentive and retention objectives
that they were intended to provide, the exchange offer addressed
this situation by providing employees with an opportunity to
exchange eligible option grants for new option grants. This
exchange offer was completed on February 6, 2008. The table
below reflects options that were granted as part of this
exchange offer as well as annual options grants for 2008. Other
than the options awards noted below, there were no other stock
awards granted during 2008.
Grants of
Plan-Based Awards in Fiscal 2008 (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
Closing
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
Exercise
|
|
|
Market
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
or Base
|
|
|
Price of
|
|
|
Value of
|
|
|
|
|
|
|
Estimated Possible Payouts
|
|
|
Securities
|
|
|
Price of
|
|
|
Securities
|
|
|
Stock and
|
|
|
|
|
|
|
Under Non-Equity Incentive Plan Awards
|
|
|
Underlying
|
|
|
Option
|
|
|
Underlying
|
|
|
Option
|
|
|
|
Grant
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
|
Options
|
|
|
Awards
|
|
|
Option
|
|
|
Awards
|
|
Name
|
|
Date
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
(#)
|
|
|
($/Sh)
|
|
|
($/Sh)(1)
|
|
|
($)(2)
|
|
|
Edward A. Keible, Jr.
|
|
|
2/8/08
|
|
|
$
|
0
|
|
|
$
|
386,000
|
|
|
$
|
540,400
|
|
|
|
170,313
|
|
|
$
|
6.59
|
|
|
$
|
6.62
|
|
|
$
|
468,699
|
|
John J. Mikulsky
|
|
|
2/8/08
|
|
|
$
|
0
|
|
|
$
|
211,500
|
|
|
$
|
296,100
|
|
|
|
85,000
|
|
|
$
|
6.59
|
|
|
$
|
6.62
|
|
|
$
|
222,316
|
|
Brett W. Wallace
|
|
|
2/8/08
|
|
|
$
|
0
|
|
|
$
|
188,250
|
|
|
$
|
263,550
|
|
|
|
40,000
|
|
|
$
|
6.59
|
|
|
$
|
6.62
|
|
|
$
|
134,128
|
|
David M. Hall
|
|
|
2/8/08
|
|
|
$
|
0
|
|
|
$
|
118,000
|
|
|
$
|
165,200
|
|
|
|
20,000
|
|
|
$
|
6.59
|
|
|
$
|
6.62
|
|
|
$
|
67,064
|
|
Steven F. Layton
|
|
|
2/8/08
|
|
|
$
|
0
|
|
|
$
|
107,500
|
|
|
$
|
150,500
|
|
|
|
42,500
|
|
|
$
|
6.59
|
|
|
$
|
6.62
|
|
|
$
|
111,158
|
|
Daniel P. Teuthorn
|
|
|
2/8/08
|
|
|
$
|
0
|
|
|
$
|
114,500
|
|
|
$
|
160,300
|
|
|
|
34,063
|
|
|
$
|
6.59
|
|
|
$
|
6.62
|
|
|
$
|
93,540
|
|
|
|
|
(1)
|
|
The exercise price for option awards is determined as the
closing price on the day prior to grant. Therefore, the grant
date closing price of the security underlying the option can
differ materially, positively or negatively, from the exercise
price of the option award.
|
|
(2)
|
|
Each option vests as to
1
/
8
of the shares of common stock underlying it on the six month
anniversary of the grant date, with the remaining seven-eighths
of the grant vesting in equal quarterly installments over the
remaining four-year vesting period. For the purposes of this
table, the value excludes the impact of estimated forfeitures.
For a discussion of other valuation assumptions, see Note 8
to our consolidated financial statements.
|
88
The following table provides information regarding each
unexercised stock option held by each of our named executive
officers as of December 31, 2008. Other than stock options
as noted, there were no other stock awards outstanding at
December 31, 2008.
Outstanding
Equity Awards at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities Underlying
|
|
|
Option
|
|
|
Option
|
|
|
|
Unexercised Options(1)(2)
|
|
|
Exercise
|
|
|
Expiration
|
|
Name and Principal Position
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
Edward A. Keible, Jr.
|
|
|
75,000
|
|
|
|
0
|
|
|
$
|
9.77
|
|
|
|
2/6/2016
|
|
|
|
|
37,500
|
|
|
|
0
|
|
|
$
|
10.20
|
|
|
|
8/2/2014
|
|
|
|
|
42,500
|
|
|
|
0
|
|
|
$
|
10.22
|
|
|
|
2/2/2014
|
|
|
|
|
32,813
|
(3)
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
|
|
|
37,500
|
(3)
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
|
|
|
100,000
|
|
|
|
0
|
|
|
$
|
13.23
|
|
|
|
2/11/2017
|
|
|
|
|
1,000
|
|
|
|
0
|
|
|
$
|
13.23
|
|
|
|
2/11/2017
|
|
|
|
|
100,000
|
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
John J. Mikulsky
|
|
|
5,860
|
|
|
|
0
|
|
|
$
|
1.17
|
|
|
|
1/30/2013
|
|
|
|
|
13,894
|
|
|
|
0
|
|
|
$
|
1.93
|
|
|
|
6/5/2013
|
|
|
|
|
30,000
|
|
|
|
0
|
|
|
$
|
9.77
|
|
|
|
2/6/2016
|
|
|
|
|
15,000
|
|
|
|
0
|
|
|
$
|
10.20
|
|
|
|
8/2/2014
|
|
|
|
|
25,000
|
|
|
|
0
|
|
|
$
|
10.22
|
|
|
|
2/2/2014
|
|
|
|
|
4,923
|
|
|
|
0
|
|
|
$
|
11.75
|
|
|
|
1/5/2011
|
|
|
|
|
15,000
|
(3)
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
|
|
|
30,000
|
(3)
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
|
|
|
40,000
|
|
|
|
0
|
|
|
$
|
13.23
|
|
|
|
2/11/2017
|
|
|
|
|
40,000
|
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
Brett W. Wallace
|
|
|
120,000
|
|
|
|
0
|
|
|
$
|
9.32
|
|
|
|
2/29/2016
|
|
|
|
|
40,000
|
|
|
|
0
|
|
|
$
|
13.23
|
|
|
|
2/11/2017
|
|
|
|
|
40,000
|
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
David M. Hall
|
|
|
80,000
|
|
|
|
0
|
|
|
$
|
12.90
|
|
|
|
10/19/2015
|
|
|
|
|
15,000
|
|
|
|
0
|
|
|
$
|
9.77
|
|
|
|
2/6/2016
|
|
|
|
|
20,000
|
|
|
|
0
|
|
|
$
|
13.23
|
|
|
|
2/11/2017
|
|
|
|
|
20,000
|
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
Steven F. Layton
|
|
|
1,351
|
|
|
|
0
|
|
|
$
|
1.17
|
|
|
|
1/30/2013
|
|
|
|
|
11,723
|
|
|
|
0
|
|
|
$
|
1.93
|
|
|
|
6/5/2013
|
|
|
|
|
15,000
|
|
|
|
0
|
|
|
$
|
9.77
|
|
|
|
2/6/2016
|
|
|
|
|
15,000
|
(3)
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
|
|
|
8,750
|
|
|
|
0
|
|
|
$
|
10.20
|
|
|
|
8/2/2014
|
|
|
|
|
18,000
|
|
|
|
0
|
|
|
$
|
10.22
|
|
|
|
2/2/2014
|
|
|
|
|
7,500
|
(3)
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
|
|
|
20,000
|
|
|
|
0
|
|
|
$
|
13.23
|
|
|
|
2/11/2017
|
|
|
|
|
20,000
|
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
Daniel P. Teuthorn
|
|
|
938
|
|
|
|
0
|
|
|
$
|
1.17
|
|
|
|
1/30/2013
|
|
|
|
|
15,000
|
|
|
|
0
|
|
|
$
|
9.77
|
|
|
|
2/6/2016
|
|
|
|
|
7,500
|
|
|
|
0
|
|
|
$
|
10.20
|
|
|
|
8/2/2014
|
|
|
|
|
15,000
|
|
|
|
0
|
|
|
$
|
10.22
|
|
|
|
2/2/2014
|
|
|
|
|
6,563
|
(3)
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
|
|
|
7,500
|
(3)
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
|
|
|
20,000
|
|
|
|
0
|
|
|
$
|
13.23
|
|
|
|
2/11/2017
|
|
|
|
|
20,000
|
|
|
|
0
|
|
|
$
|
6.59
|
|
|
|
2/7/2018
|
|
|
|
|
(1)
|
|
Each option vests as to 1/8 of the shares of common stock
underlying it on the six month anniversary of the grant date,
with the remaining seven-eighths of the grant vesting in equal
quarterly installments over the remaining four-year vesting
period. Each option expires ten years after the date of grant
or, if earlier, three months after termination of employment in
most cases.
|
|
(2)
|
|
All options described in the above table are reflected as
exercisable because all options granted to our executive
officers have an early exercise feature that allows
optionees to exercise unvested options, subject to our right to
repurchase the unvested shares at cost upon the optionees
termination of employment. Options unvested as of
December 31, 2008 are as follows: Keible, 218,633;
Mikulsky, 100,939; Wallace, 92,500; Hall, 52,189; Layton,
50,471; and Teuthorn, 43,617.
|
89
|
|
|
(3)
|
|
This option was replaced in our 2008 option exchange program for
an option exercisable for the same number of shares but with an
exercise price per share of $6.59. As required by such program,
the new option vests over four years beginning in February 2008.
|
2008
Option Exercises
There were no stock options exercised by our named executive
officers during 2008.
Compensation
of Non-Employee Directors
The following table provides information regarding compensation
paid to our non-employee directors who served on our board as of
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Paid
|
|
|
Option
|
|
|
Total
|
|
Name
|
|
in Cash
|
|
|
Awards(1)
|
|
|
Compensation
|
|
|
Edward C.V. Winn, Chairman
|
|
$
|
44,000
|
|
|
$
|
48,065
|
|
|
$
|
92,065
|
|
Joseph J. Lazzara
|
|
$
|
34,000
|
|
|
$
|
34,664
|
|
|
$
|
68,664
|
|
John F. McGrath
|
|
$
|
41,000
|
|
|
$
|
51,573
|
|
|
$
|
92,573
|
|
Wade Meyercord
|
|
$
|
33,000
|
|
|
$
|
35,704
|
|
|
$
|
68,704
|
|
Eric D. Stonestrom
|
|
$
|
28,000
|
|
|
$
|
60,313
|
|
|
$
|
88,313
|
|
|
|
|
(1)
|
|
The amounts included in the Option Awards column
represent the compensation cost recognized by Endwave in 2008
related to stock option awards to each member of our Board of
Directors, computed in accordance with
SFAS No. 123(R). For purposes of this table, the value
excludes the impact of estimated forfeitures. For a discussion
of other valuation assumptions, see Note 7 to our
consolidated financial statements.
|
At its January 2009 meeting, the Compensation Committee
completed its annual review of cash and equity compensation of
the board. The Compensation Committee reviewed the cash and
equity board compensation paid by a set of technology companies
with revenues and market capitalization similar to those of
Endwave. The Compensation Committee recommended to the full
Board of Directors that cash compensation remain unchanged from
2008 and the Board of Directors approved. The levels of cash
compensation shown below were reviewed and approved based on
projected current median pay levels of the peer group. The
members of the Board of Directors are also eligible for
reimbursement for travel expenses incurred in connection with
attendance at Board of Directors and committee meetings in
accordance with Endwave company policy.
Board
Membership Fees Payable to Non-Employee Directors
|
|
|
|
|
Non-Employee Director Annual Retainer
|
|
$
|
25,000
|
|
Board Chair Annual Retainer
|
|
$
|
10,000
|
|
Audit Committee Chair Annual Retainer
|
|
$
|
16,000
|
|
Audit Committee Member Annual Retainer
|
|
$
|
6,000
|
|
Compensation Committee Chair Annual Retainer
|
|
$
|
8,000
|
|
Compensation Committee Member Annual Retainer
|
|
$
|
3,000
|
|
Nominating and Governance Committee Chair Annual Retainer
|
|
$
|
3,000
|
|
Nominating and Governance Committee Member Annual Retainer
|
|
$
|
0
|
|
Board Meeting Fee
|
|
$
|
0
|
|
Committee Meeting Fee
|
|
$
|
0
|
|
Non-employee directors are eligible to receive automatic option
grants made under our Companys 2000 Non-Employee Director
Plan and our Companys 2007 Equity Incentive Plan. Pursuant
to these plans, each non-employee director is granted an option,
referred to as an initial option, to purchase 20,000 shares
of common stock automatically upon his or her initial election
or appointment to the Board of Directors. Each non-employee
director is also granted an option, referred to as an annual
option, to purchase an additional 10,000 shares of common
stock
90
each year after his or her election or appointment to the Board
of Directors. Such annual option is granted on May 1. In
either case, if any non-employee director has not served in that
capacity for the entire period since the preceding grant date,
then the number of shares subject to the annual grant will be
reduced, pro rata, for each full quarter the director did not
serve during the previous period. All such options expire after
ten years and have an exercise price equal to the fair market
value on the date of grant. All initial options vest over four
years at the rate of
1
/
48
of the total option shares per month. Annual options granted
after February 2008 vest over one year at the rate of
1
/
12
of the total option shares per month. Our Companys
non-employee directors are also eligible to participate in our
Companys 2007 Equity Incentive Plan on a discretionary
basis. No discretionary awards were made to non-employee
directors during 2008.
Report of
the Compensation
Committee
1
The Compensation Committee has reviewed and discussed with
management the Compensation Discussion and Analysis, or
CD&A, contained in this report. Based on this review and
discussion, the Compensation Committee has recommended to our
board of directors that the CD&A be included in this report
as well as our proxy statement for our 2009 annual meeting of
stockholders.
Wade Meyercord
Joseph Lazzara
Eric Stonestrom
Edward Winn
1
The
material in this report is not soliciting material,
is not deemed filed with the Securities and Exchange
Commission and is not to be incorporated by reference in any of
our filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, whether made before
or after the date hereof and irrespective of any general
incorporation language in any such filing.
91
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The following table sets forth certain information regarding the
ownership of our common stock as of February 6, 2009 by:
(i) each of our named executive officers; (ii) each
director; (iii) our executive officers and directors as a
group; and (iv) all those known by us to be beneficial
owners of more than five percent of our common stock. Except as
otherwise indicated, the address of each of the persons set
forth below is
c/o Endwave
Corporation, 130 Baytech Drive, San Jose, California 95134.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned(1)
|
|
|
|
|
|
|
Series B Preferred
|
|
|
|
Common Stock
|
|
|
Stock
|
|
Name and Address
|
|
Number
|
|
|
Percent(2)
|
|
|
Number
|
|
|
Percent(2)
|
|
|
Entities affiliated with Oak Management
|
|
|
3,900,000
|
|
|
|
29.44
|
%
|
|
|
390,000
|
|
|
|
100.00
|
%
|
Corporation, XI, LLC(3)
One Gorham Island
Westport, CT 06880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities affiliated with Potomac Capital
|
|
|
1,552,486
|
|
|
|
16.61
|
|
|
|
|
|
|
|
|
|
Management(4)
825 Third Avenue
New York, NY 10022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities affiliated with EagleRock
|
|
|
1,233,845
|
|
|
|
13.20
|
|
|
|
|
|
|
|
|
|
Capital Management(5)
551 Fifth Avenue, 34th Floor
New York, NY 10176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pate Capital Partners, LP(6)
|
|
|
700,000
|
|
|
|
7.49
|
|
|
|
|
|
|
|
|
|
555 Montgomery Street, Ste. 603
San Francisco, CA 94111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities affiliated with Dimensional
|
|
|
699,645
|
|
|
|
7.49
|
|
|
|
|
|
|
|
|
|
Fund Advisors LP(7)
1299 Ocean Ave.
Santa Monica, CA 90401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities affiliated with Portolan Capital Management, LLC(8)
|
|
|
516,329
|
|
|
|
5.52
|
|
|
|
|
|
|
|
|
|
George McCabe
2 International Place, FL 26
Boston, MA 02110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward A. Keible, Jr.(9)
|
|
|
665,911
|
|
|
|
7.13
|
|
|
|
|
|
|
|
|
|
John J. Mikulsky(10)
|
|
|
325,182
|
|
|
|
3.48
|
|
|
|
|
|
|
|
|
|
Brett W. Wallace(11)
|
|
|
246,081
|
|
|
|
2.63
|
|
|
|
|
|
|
|
|
|
Daniel P. Teuthorn(12)
|
|
|
136,145
|
|
|
|
1.46
|
|
|
|
|
|
|
|
|
|
Steven F. Layton(13)
|
|
|
139,710
|
|
|
|
1.49
|
|
|
|
|
|
|
|
|
|
David M. Hall(14)
|
|
|
164,833
|
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
Edward C.V. Winn(15)
|
|
|
33,989
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Joseph J. Lazzara(16)
|
|
|
40,966
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
John F. McGrath, Jr.(15)
|
|
|
41,216
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Wade Meyercord(15)
|
|
|
40,266
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
Eric Stonestrom(15)
|
|
|
28,249
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group
(11 persons)(17)
|
|
|
1,862,548
|
|
|
|
19.93
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Less than one percent.
|
|
(1)
|
|
This table is based upon information supplied to us by our
officers, directors and principal stockholders and upon any
Schedules 13D or 13G filed with the Securities and Exchange.
Unless otherwise indicated in the footnotes to this table, and
subject to community property laws where applicable, we believe
that each of the stockholders named in this table has sole
voting and investment power with respect to the shares indicated
as beneficially owned.
|
92
|
|
|
(2)
|
|
Applicable percentages are based on 9,345,442 shares
outstanding on February 6, 2009, adjusted as required by
rules promulgated by the Securities and Exchange Commission.
|
|
(3)
|
|
300,000 shares of Series B Stock are held of record by
Oak Investment Partners XI, Limited Partnership, a Delaware
limited partnership (Oak Investment Partners XI,).
Oak Associates XI LLC, a Delaware limited liability company
(Oak Associates XI), is the general partner of Oak
Investment Partners XI and as such may be deemed to beneficially
own the shares held by Oak Investment XI. Oak Management
Corporation, a Delaware corporation (Oak
Management), is the investment advisor to Oak Investment
Partners XI and as such may be deemed to beneficially own the
shares held by Oak Investment XI. Bandel L. Carano, Gerald R.
Gallagher, Edward F. Glassmeyer, Fredric W. Harman, Ann H.
Lamont and David B. Walrod are general partners, managing
members, shareholders, directors and/or officers of Oak
Investment XI and as such may be deemed to beneficially own the
shares held by Oak Investment XI. The number of shares of
Series B Stock beneficially owned by Oak Investment XI
includes 90,000 shares of Series B Stock issuable
within 60 days of the date of this table upon exercise of a
warrant held by Oak Investment XI. The number of shares of
common stock beneficially owned by Oak Investment XI includes
3,900,000 shares of common issuable within 60 days of
the date of this table upon conversion of 390,000 shares of
Series B Stock beneficially owned by Oak Investment XI.
|
|
(4)
|
|
Potomac Capital Partners LP is a private investment partnership
formed under the laws of the State of Delaware. Potomac Capital
Management LLC is the General Partner of Potomac Capital
Partners LP. Mr. Paul J. Solit is the Managing Member of
Potomac Capital Management LLC.
|
|
(5)
|
|
The shares are held by EagleRock Master Fund, L.P.
(ERMF) and EagleRock Institutional Partners LP
(ERIP). EagleRock Capital Management, LLC
(EagleRock) is the investment manager of ERMF and
ERIP and has sole power to vote and dispose of the shares held
by ERMF and ERIP and may be deemed to beneficially own such
shares. Nader Tavakoli is the Manager of EagleRock and may
direct the voting and disposition of the shares held by ERMF and
ERIP and may be deemed to beneficially own such shares.
|
|
(6)
|
|
The shares are beneficially held by Pate Capital Partners, LP .
Bruce A. Pate, General Partner has the sole power to vote or
direct the vote of said shares. In addition, Mr. Bruce A.
Pate has the sole power to dispose or to direct the disposition
of said shares.
|
|
(7)
|
|
Dimensional Fund Advisors LP (formerly, Dimensional
Fund Advisors, Inc.) (Dimensional), an
investment advisor registered under Section 203 of the
Investment Advisors Act of 1940, furnishes investment advice to
four investment companies registered under the Investment
Company Act of 1940, and serves as investment manager to certain
other commingled group trusts and separate accounts. These
investment companies, trusts and accounts are the
Funds. In its role as investment advisor or manager,
Dimensional possesses investment and/or voting power over the
securities of the Issuer described in this schedule that are
owned by the Funds, and may be deemed to be the beneficial owner
of the shares of the Issuer held by the Funds. However, all
securities reported are owned by the Funds. Dimensional
disclaims beneficial ownership of such securities.
Mr. Christopher Crossan, Global Chief Compliance Officer,
is a General Partner of Dimensional Holdings Inc.
|
|
(8)
|
|
Portolan Capital Management, LLC, an unregistered investment
adviser beneficially own directly shares of common stock of the
Issuer in its capacity as investment manager for various
clients, and indirectly by George McCabe, the Manager of
Portolan Capital Management, LLC. Portolan Capital Management,
LLC and Mr. McCabe are sometimes individually referred to
herein as a Reporting Person and collectively as the
Reporting Persons.
|
|
(9)
|
|
Includes 526,313 shares issuable upon exercise of options
exercisable within 60 days of the date of this table. If
exercised in full within 60 days of the date of this table,
296,987 shares would be subject to repurchase by us. Also
includes 139,598 shares held by the Keible Family Trust, of
which Mr. Keible is co-trustee.
|
|
(10)
|
|
Includes 259,677 shares issuable upon exercise of options
exercisable within 60 days of the date of this table. If
exercised in full within 60 days of the date of this table,
131,251 shares would be subject to repurchase by us. Also
includes 600 shares owned by Mr. Mikulskys
daughter.
|
|
(11)
|
|
Includes 240,000 shares issuable upon exercise of options
exercisable within 60 days of the date of this table. If
exercised in full within 60 days of the date of this table,
120,000 shares would be subject to repurchase by us.
|
93
|
|
|
(12)
|
|
Includes 112,501 shares issuable upon exercise of options
exercisable within 60 days of the date of this table. If
exercised in full within 60 days of the date of this table,
59,299 shares would be subject to repurchase by us.
|
|
(13)
|
|
Includes 137,324 shares issuable upon exercise of options
exercisable within 60 days of the date of this table. If
exercised in full within 60 days of the date of this table,
65,626 shares would be subject to repurchase by us.
|
|
(14)
|
|
Includes 155,000 shares issuable upon exercise of options
exercisable within 60 days of the date of this table. If
exercised in full within 60 days of the date of this table,
63,751 shares would be subject to repurchase by us.
|
|
(15)
|
|
Represents shares issuable upon exercise of options exercisable
within 60 days of the date of this table.
|
|
(16)
|
|
Includes 39,966 shares issuable upon exercise of options
exercisable within 60 days of the date of this table. Also
includes 1,000 shares held by the Joseph J. and Nancy B.
Lazzara Family Trust, of which Mr. Lazzara is co-trustee.
|
|
(17)
|
|
See footnotes 9 through 16 above, as applicable. Includes
1,614,501 shares issuable upon exercise of options
exercisable within 60 days of the date of this table. If
exercised in full within 60 days of the date of this table,
736,914 shares would be subject to a repurchase right by us.
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
Indemnification
Our Bylaws provide that we will indemnify our directors and
executive officers and may indemnify our other officers,
employees and other agents to the extent not prohibited by
Delaware law. The Bylaws also require us to advance litigation
expenses in the case of stockholder derivative actions or other
actions. The indemnified party must repay such advances if it is
ultimately determined that the indemnified party is not entitled
to indemnification.
Transactions
with Wood River
On May 23, 2007, we executed a settlement agreement with
the court-appointed receiver for Wood River Partners, L.P. and
Wood River Partners Offshore, Ltd., collectively the Wood River
Funds, and Wood River Capital Management, L.L.C. and Wood River
Associates, L.L.C., together with the Wood River Funds, the Wood
River Entities, pursuant to which we agreed to settle our claims
against the Wood River Entities arising out of the Wood River
Entities accumulation of our common stock. In connection
with the settlement agreement, we also entered into a
registration rights agreement with the receiver, pursuant to
which we agreed to file with the SEC a shelf registration
statement covering the resale of the shares of our common stock
held by the Wood River Entities and to cooperate with the
receiver, upon the receivers request, in an underwritten
offering or registered direct offering of the shares of our
common stock held by the Wood River Entities.
Pursuant to the settlement agreement, upon the earliest of
(i) the sale by the Wood River Entities of a number of
shares of our common stock such that after giving effect to the
sale they hold in the aggregate less than 10% of the
then-outstanding shares of our common stock, (ii) promptly
after the receivers termination of an underwritten
offering or registered direct offering commenced pursuant to the
registration rights agreement or (iii) the consummation of
an underwritten offering or registered direct offering commenced
pursuant to the registration rights agreement pursuant to which,
at the receivers election, the Wood River Entities sell a
number of shares such that after giving effect to such offering
they continue to own more than 10% of the then-outstanding
shares of our common stock, the receiver would have been
required to pay us $425,000 for out-of-pocket expenses incurred
by us arising out of the Wood River Entities accumulation
of our common stock. The settlement agreement also included
mutual releases by both us and the receiver that would have
become effective upon the date of such payment.
The registration rights granted under the registration rights
agreement terminated upon the earlier of the date that is one
year after the effective date of the shelf registration
statement filed pursuant to the registration rights agreement
(subject to extension and suspension under certain
circumstances) or the earliest date when the Wood River Entities
held in the aggregate less than 10% of the then-outstanding
shares of our common stock. The registration rights agreement
provided that the Wood River Entities would pay all discounts
and commissions or placement agent fees in connection with an
offering pursuant to the registration rights agreement. The
registration rights agreement further provided that the Wood
River Entities would pay all other expenses incident to our
performance of the registration rights agreement, subject to a
cap of $750,000 of expenses related to an underwritten
94
offering or $550,000 of expenses related to a registered direct
offering, in either case, such expenses to be payable in cash
or, if mutually agreed by the receiver and us, in our common
stock or a combination of cash and our common stock.
The registration rights agreement also provided that the Wood
River Entities could not dispose of any shares of our common
stock held by them, except in compliance with Rule 144 of
the Securities Act of 1933, as amended, or dispositions where a
Wood River Entity transfers shares to another Wood River Entity,
until the consummation of an underwritten offering or registered
direct offering pursuant to which the Wood River Entities sold a
number of shares such that they own less than 10% of the
then-outstanding shares of our common stock.
On December 20, 2007, we executed an amended and restated
settlement agreement the court-appointed receiver for the Wood
River Entities, pursuant to which we and the receiver agreed to
a revised settlement of our claims against the Wood River
Entities arising out of the Wood River Entities
accumulation of our common stock.
On December 21, 2007, pursuant to the terms of the amended
and restated settlement agreement, we entered into a stock
purchase agreement with the Wood River Entities and the
receiver. Pursuant to the stock purchase agreement, on
December 24, 2007, we repurchased 2,502,247 shares of
our common stock held by the Wood River Funds. The remaining
1,600,000 shares of our common stock owned by the Wood
River Funds were sold to certain institutional investors. The
price paid by us and the institutional investors was $6.83 per
share in cash.
Upon the consummation of the stock repurchase, pursuant to the
terms of the amended and restated settlement agreement,
(a) the Wood River Entities reimbursed us $300,000 for
professional expenses incurred by us, (b) the Registration
Rights Agreement, dated as of May 23, 2007, between us and
the Receiver terminated, and (c) a mutual release of claims
between us and the receiver for the Wood River Funds included in
the amended and restated settlement agreement became effective.
Related-Person
Transactions Policy and Procedures
We have a corporate policy with regard to our policies and
procedures for the identification, review, consideration and
approval or ratification of related-person
transactions. For purposes of our policy only, a
related-person transaction is a transaction,
arrangement or relationship (or any series of similar
transactions, arrangements or relationships) in which Endwave
and any related person are participants involving an
amount that exceeds $5,000. Transactions involving compensation
for services provided to Endwave as an employee, director,
consultant or similar capacity by a related person are not
covered by this policy. A related person is any executive
officer, director, or more than 5% stockholder of the Company,
including any of their immediate family members, and any entity
owned or controlled by such persons.
In the event any transaction in which Endwave proposes to engage
is a related-person transaction, our management must present
information regarding the proposed related-person transaction to
the disinterested non-employee members of our board of directors
for consideration and approval or ratification. The presentation
must include a description of, among other things, the material
facts, the interests, direct and indirect, of the related
persons, the benefits to Endwave of the transaction and whether
any alternative transactions were available. To identify
related-person transactions in advance, we rely on information
supplied by our executive officers, directors and significant
stockholders. In considering related-person transactions, the
disinterested non-employee members of the board take into
account the relevant available facts and circumstances
including, but not limited to (a) the risks, costs and
benefits to Endwave, (b) the impact on a directors
independence in the event the related person is a director,
immediate family member of a director or an entity with which a
director is affiliated, (c) the terms of the transaction,
(d) the availability of other sources for comparable
services or products and (e) the terms available to or
from, as the case may be, unrelated third parties or to or from
employees generally. In the event a director has an interest in
the proposed transaction, the director must recuse himself or
herself form the deliberations and approval. The policy requires
that, in determining whether to approve, ratify or reject a
related-person transaction, the disinterested non-employee
members of the board look at, in light of known circumstances,
whether the transaction is in, or is not inconsistent with, the
best interests of Endwave and its stockholders, as determined in
the good faith exercise of such directors discretion.
95
Independence
of the Board of Directors
As required under the NASDAQ Stock Market, or Nasdaq, listing
standards, a majority of the members of our Board of Directors
must qualify as independent, as affirmatively
determined by our board of directors. Our board of directors
consults with our counsel to ensure that the boards
determinations are consistent with relevant securities and other
laws and regulations regarding the definition of
independent, including those set forth in pertinent
listing standards of the NASDAQ, as in effect time to time.
Consistent with these considerations, after review of all
relevant transactions or relationships between each director, or
any of his or her family members, and Endwave, its senior
management and its independent registered public accounting
firm, our board of directors has affirmatively determined that
the following five directors are independent directors within
the meaning of the applicable NASDAQ listing standards:
Mr. Winn, Mr. Meyercord, Mr. Lazzara,
Mr. McGrath and Mr. Stonestrom. In making this
determination, the board found that none of these directors had
a material or other disqualifying relationship with Endwave.
Mr. Keible, our President and Chief Executive Officer, is
not an independent director by virtue of his employment with
Endwave.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The following table shows the fees paid or accrued by Endwave
for the audit and other services provided by our independent
registered public accounting firm Burr, Pilger & Mayer
LLP, or BPM, for fiscal 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Audit Fees(1)
|
|
$
|
382
|
|
|
$
|
543
|
|
Audit-related Fees(2)
|
|
|
|
|
|
|
13
|
|
Tax Fees
|
|
|
|
|
|
|
|
|
All Other Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
382
|
|
|
$
|
556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Audit fees represent fees for professional services provided in
connection with the audit of our annual consolidated financial
statements, review of our quarterly condensed consolidated
financial statements and services that are normally provided by
BPM in connection with statutory and regulatory filings or
engagements.
|
|
(2)
|
|
Audit-related fees consist of assurance and related services
that are reasonably related to the performance of the audit or
review of our consolidated financial statements and are not
reported above under audit fees. The services provided for the
fees disclosed under this category include due diligence and
accounting consultations in connection with acquisitions.
|
Independence
of Independent Registered Public Accounting Firm and
Pre-Approval Policy
Our Audit Committee has determined that the provision by BPM of
non-audit services is compatible with maintaining the
independence of BPM. The Audit Committee has adopted a policy
for the pre-approval of audit and non-audit services rendered by
our independent registered public accounting firm. The policy
generally pre-approves specified services in the defined
categories of audit services, audit-related services and tax
services for up to $5,000. Pre-approval may also be given as
part of the Audit Committees approval of the scope of the
engagement of the independent registered public accounting firm
or on an individual explicit
case-by-case
basis before the independent registered public accounting firm
is engaged to provide each service. The pre-approval of services
may be delegated to one or more of the Audit Committees
members, but the decision must be reported to the full Audit
Committee at its next scheduled meeting. During fiscal 2008, all
services provided by BPM were pre-approved by the Audit
Committee.
96
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)
Financial Statements Schedules and
Exhibits.
(1) The following consolidated financial statements are
included in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) The following financial statement schedule is included
in Item 15(d): Schedule II Valuation and
Qualifying Accounts.
All other schedules not listed above have been omitted because
they are inapplicable or are not required.
(3)
Listing of Exhibits:
(b)
Intentionally omitted
(c)
Exhibits
INDEX TO
EXHIBITS
|
|
|
|
|
Number
|
|
Description
|
|
|
2
|
.1(1)
|
|
Stock Purchase Agreement among the Registrant and the
stockholders and option holders of ALC Microwave, Inc. dated
April 19, 2007.
|
|
3
|
.1(2)
|
|
Amended and Restated Certificate of Incorporation effective
October 20, 2000.
|
|
3
|
.2(3)
|
|
Certificate of Amendment of Amended and Restated Certificate of
Incorporation effective June 28, 2002.
|
|
3
|
.3(4)
|
|
Certificate of Designation for Series A Junior Participating
Preferred Stock.
|
|
3
|
.4(5)
|
|
Certificate of Designation for Series B Preferred Stock.
|
|
3
|
.5(6)
|
|
Certificate of Amendment of Amended and Restated Certificate of
Incorporation effective July 26, 2007.
|
|
3
|
.6(7)
|
|
Amended and Restated Bylaws.
|
|
4
|
.1(2)
|
|
Form of specimen Common Stock Certificate.
|
|
4
|
.2(4)
|
|
Rights Agreement dated as of December 1, 2005 between the
Registrant and Computershare Trust Company, Inc.
|
|
4
|
.3(4)
|
|
Form of Rights Certificate
|
|
4
|
.4(5)
|
|
Preferred Stock and Warrant Purchase Agreement by and between
Oak Investment Partners XI, Limited Partnership and the
Registrant dated April 24, 2006.
|
|
4
|
.5(5)
|
|
Warrant issued to Oak Investment Partners XI, Limited
Partnership.
|
|
4
|
.6(8)
|
|
Amendment No. 1 to Rights Agreement, dated as of December 21,
2007, between the Registrant and ComputerShare Trust Company,
Inc.
|
|
10
|
.1(2)
|
|
Form of Indemnity Agreement entered into by the Registrant with
each of its directors and officers.
|
|
10
|
.2(2)*
|
|
1992 Stock Option Plan.
|
|
10
|
.3(2)*
|
|
Form of Incentive Stock Option under 1992 Stock Option Plan.
|
|
10
|
.4(2)*
|
|
Form of Nonstatutory Stock Option under 1992 Stock Option Plan.
|
97
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.5(9)*
|
|
2007 Equity Incentive Plan.
|
|
10
|
.6(10)*
|
|
Form of Stock Option Agreement under 2007 Equity Incentive Plan.
|
|
10
|
.7(10)*
|
|
Form of Stock Option Agreement for Non-Employee Directors under
the 2007 Equity Incentive Plan.
|
|
10
|
.8(2)*
|
|
2000 Employee Stock Purchase Plan.
|
|
10
|
.9(2)*
|
|
Form of 2000 Employee Stock Purchase Plan Offering.
|
|
10
|
.10(11)*
|
|
2000 Non-Employee Directors Stock Option Plan, as amended.
|
|
10
|
.11(2)*
|
|
Form of Nonstatutory Stock Option Agreement under the 2000
Non-Employee Director Plan.
|
|
10
|
.12(12)*
|
|
Description of Compensation Payable to Non-Employee Directors.
|
|
10
|
.13(12)*
|
|
2008 Base Salaries for Named Executive Officers.
|
|
10
|
.14(12)*
|
|
2008 Executive Incentive Compensation Plan.
|
|
10
|
.15(13)*
|
|
Executive Officer Severance and Retention Plan.
|
|
10
|
.16(2)
|
|
License Agreement by and between TRW Inc. and TRW Milliwave Inc.
dated February 28, 2000.
|
|
10
|
.17(14)
|
|
Purchase Agreement between Nokia and the Registrant dated
January 1, 2006.
|
|
10
|
.18(14)
|
|
Frame Purchase Agreement by and between the Registrant and
Siemens Mobile Communications Spa dated January 16, 2006.
|
|
10
|
.19(15)
|
|
Lease Agreement by and between Legacy Partners I San Jose,
LLC and the Registrant dated May 24, 2006.
|
|
10
|
.20(16)
|
|
Amended and Restated Supply Agreement by and between Northrop
Grumman Space and Mission Systems Corp. and the Registrant dated
May 12, 2008.
|
|
10
|
.21(17)
|
|
Services Agreement by and between Hana Microelectronics Co.,
Ltd. and the Registrant dated October 15, 2006.
|
|
10
|
.22(18)
|
|
Amended and Restated Settlement Agreement by and between the
Registrant and Arthur Steinberg, as receiver for Wood River
Capital Management, L.L.C., Wood River Associates, L.L.C., Wood
River Partners, L.P. and Wood River Partners Offshore, Ltd.,
dated December 20, 2007.
|
|
10
|
.23(8)
|
|
Stock Purchase Agreement, dated December 21, 2007, entered into
between the Registrant, Wood River Partners, L.P., Wood River
Partners Offshore, Ltd. and, for the limited purpose set forth
therein, Arthur J. Steinberg, solely in his capacity as Receiver
for Wood River Capital Management, L.L.C., Wood River
Associates, L.L.C., Wood River Partners, L.P. and Wood River
Partners Offshore, Ltd. and not in his individual capacity.
|
|
10
|
.24(16)
|
|
Lease Agreement by and between 8812, a California limited
partnership, and the Registrant dated May 20, 2008.
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Burr, Pilger & Mayer LLP, independent registered
public accounting firm.
|
|
31
|
.1
|
|
Certification by Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification by Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
(1)
|
|
Previously filed as an exhibit to the Registrants Current
Report on
Form 8-K
filed on April 24, 2007 and incorporated herein by
reference.
|
|
(2)
|
|
Previously filed as an exhibit to the Registrants
Registration Statement on
Form S-1
(Registration
No. 333-41302)
and incorporated herein by reference.
|
|
(3)
|
|
Previously filed as an exhibit to the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004 and incorporated
herein by reference.
|
|
(4)
|
|
Previously filed as an exhibit to the Registrants Current
Report on
Form 8-K
filed on December 5, 2005 and incorporated herein by
reference.
|
98
|
|
|
(5)
|
|
Previously filed as an exhibit to the Registrants Current
Report on
Form 8-K
filed on April 26, 2006 and incorporated herein by
reference.
|
|
(6)
|
|
Previously filed as an exhibit to the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 and incorporated
herein by reference.
|
|
(7)
|
|
Previously filed as an exhibit to the Registrants Current
Report on
Form 8-K
filed on July 28, 2008 and incorporated herein by reference.
|
|
(8)
|
|
Previously filed as an exhibit to the Registrants Current
Report on
Form 8-K
filed on December 21, 2007 and incorporated herein by
reference.
|
|
(9)
|
|
Previously filed as an appendix to the Registrants
Definitive Proxy Statement on Schedule 14A filed on
June 13, 2007 and incorporated herein by reference.
|
|
(10)
|
|
Previously filed as an exhibit to the Registrants
Registration Statement on
Form S-8
(Registration
No. 333-144851)
and incorporated herein by reference.
|
|
(11)
|
|
Previously filed as an exhibit to the Registrants Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2005 and
incorporated herein by reference.
|
|
(12)
|
|
Previously filed as an exhibit to the Registrants Current
Report on
Form 8-K
filed on February 1, 2008 and incorporated herein by
reference.
|
|
(13)
|
|
Previously filed as an exhibit to the Registrants Annual
Report on
Form 10-K
filed for the fiscal year ended December 31, 2007 and
incorporated herein by reference.
|
|
(14)
|
|
Previously filed as an exhibit to the Registrants
Registration Statement on
Form S-3
(Registration
No. 333-144054)
and incorporated herein by reference.
|
|
(15)
|
|
Previously filed as an exhibit to the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2006 and incorporated herein
by reference.
|
|
(16)
|
|
Previously filed as an exhibit to the Registrants
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2008 and incorporated herein
by reference.
|
|
(17)
|
|
Previously filed as an exhibit to the Registrants Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2006 and
incorporated herein by reference.
|
|
(18)
|
|
Previously filed as an exhibit to the Registrants Current
Report on
Form 8-K
filed on December 20, 2007 and incorporated herein by
reference.
|
|
*
|
|
Indicates a management contract or compensatory plan or
arrangement.
|
|
|
|
Confidential treatment has been requested for a portion of this
exhibit.
|
(d)
Financial Statement Schedule
99
ENDWAVE
CORPORATION
SCHEDULE II
VALUATION
AND QUALIFYING ACCOUNTS
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
(Reductions)
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Deductions
|
|
|
Balances at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
and
|
|
|
End of
|
|
|
|
Period
|
|
|
Expense
|
|
|
Write-offs
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2008
|
|
$
|
67
|
|
|
$
|
(3
|
)
|
|
$
|
|
|
|
$
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2007
|
|
$
|
131
|
|
|
$
|
(5
|
)
|
|
$
|
(59
|
)
|
|
$
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
$
|
296
|
|
|
$
|
(124
|
)
|
|
$
|
(41
|
)
|
|
$
|
131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ENDWAVE CORPORATION
Brett W. Wallace
Executive Vice President and
Chief Financial Officer
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS,
that each person
whose signature appears below constitutes and appoints each of
Edward A. Keible, Jr. and Brett W. Wallace, his
attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report
on
Form 10-K,
and to file the same, with exhibits thereto and other documents
in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact, or substitute or substitutes may do or
cause to be done by virtue hereof. Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
EDWARD
A. KEIBLE, JR.
Edward
A. Keible, Jr.
|
|
President, Chief Executive Officer
and Director
(Principal Executive Officer)
|
|
March 19, 2009
|
|
|
|
|
|
/s/
BRETT
W. WALLACE
Brett
W. Wallace
|
|
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
|
|
March 19, 2009
|
|
|
|
|
|
/s/
EDWARD
C.V. WINN
Edward
C.V. Winn
|
|
Chairman of the Board of Directors
|
|
March 19, 2009
|
|
|
|
|
|
/s/
JOSEPH
J. LAZZARA
Joseph
J. Lazzara
|
|
Director
|
|
March 19, 2009
|
|
|
|
|
|
/s/
JOHN
F. MCGRATH, JR.
John
F. McGrath, Jr.
|
|
Director
|
|
March 19, 2009
|
|
|
|
|
|
/s/
WADE
MEYERCORD
Wade
Meyercord
|
|
Director
|
|
March 19, 2009
|
|
|
|
|
|
/s/
ERIC
STONESTROM
Eric
Stonestrom
|
|
Director
|
|
March 19, 2009
|
101
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