Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)

Commission file number: 000-31635

Endwave Corporation

(408) 522-3100

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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 þ          No o

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

      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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. þ

      The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2003 was approximately $14.4 million. Shares of voting common stock held by directors, executive officers, and by each person who beneficially owns 10% or more of the outstanding common stock have been excluded in that 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 $2.64, which was the closing sale price June 30, 2003 as reported by the Nasdaq National Market.

      The number of shares outstanding of the registrant’s common stock as of March 12, 2004 was approximately 9,584,623.

ENDWAVE CORPORATION

FORM 10-K

December 31, 2003

TABLE OF CONTENTS

1

Table of Contents

Forward-Looking Statements

      In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements as defined by federal securities laws. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from what is currently anticipated. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Item 1, “Business,” as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You should carefully review the risks described in this Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission. When used in this report, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

2

Table of Contents

PART I

      We design, manufacture and market RF (radio frequency) subsystems that enable the transmission, reception and processing of high-speed electromagnetic signals in broadband wireless telecommunications systems, cellular telephone infrastructure networks, defense electronics systems and other similar systems requiring RF, microwave and millimeter wave technology.

      We were originally incorporated in California in 1991 and reincorporated in Delaware in 1995. In March 2000, we merged with TRW Milliwave Inc. (“TRW Milliwave”), a RF subsystem supplier that was a wholly-owned subsidiary of TRW Inc., now owned by Northrop Grumman Space & Mission Systems Corp. (“Northrop Grumman”). In connection with the merger, we changed our name from Endgate Corporation to Endwave Corporation. As a result of the merger, we became one of our industry’s largest commercial suppliers of microwave and millimeter wave RF subsystems with a substantially increased customer base and design and manufacturing capacity. On October 17, 2000, we successfully completed the initial public offering of our common stock.

      The largest use of our products is in current and next generation cellular backhaul networks, carrier class trunking networks, point-to-point transmission networks, and point-to-multipoint access networks. Our target customers for these applications are microwave radio manufacturers and wireless systems integrators (collectively referred to as OEMs) that provide the wireless equipment used by communications service providers to deliver voice, data and video services to businesses and consumers. We also supply products to cellular base station subsystem manufacturers. Original equipment manufacturers (OEMs) that use or have used our products include Allgon Microwave, Ceragon, Ericsson, Harris Corporation, Hughes Network Systems, Nera Networks, Nokia, Nortel Networks, P-Com, Powerwave, Siemens AG, Spectrian, Stratex Networks and Witcom Wireless. In addition to these telecommunications applications, our products are also used in various other adjacent market applications. Our target customers in these markets are defense contractors and sub-contractors that design aerospace, defense/weapons, and electronics platforms for various domestic and foreign defense customers. We also supply manufacturers of test and measurement equipment, surveillance equipment and of various other electronic products for commercial and government applications. Adjacent market customers that use or have used our products include Anritsu, Boeing Corporation, Filtronic, Harris Corporation, IDT, L-3 Communications, Lockheed Martin, M/ A-COM/ Tyco, Raytheon, Safeview and various business units of Northrop Grumman.

      We design our products to best satisfy our customers’ technical, inventory, logistical, and cost requirements by using our proprietary technologies, RF design, and manufacturing expertise. We offer a broad range of products at multiple levels of integration that are optimized for a customer’s specific product and performance needs. Our products include RF modules such as power amplifiers, low noise amplifiers, up and down converters, frequency multipliers, oscillators, synthesizers, integrated transceivers, and power amplifier switch combiners used in cellular base stations. Our proprietary circuit and manufacturing technologies enable us to design and manufacture RF subsystems that minimize the use of expensive gallium arsenide and reduce manual labor. We use third-party semiconductor fabrication facilities for the manufacturing of the gallium arsenide and other semiconductor devices, which we design. Designing our own semiconductor devices gives us the flexibility to use technologies best suited for specific applications and eliminates dependence on and limitations of standard, commercially available gallium arsenide devices. We believe our proprietary technologies and processes give us a significant competitive advantage in manufacturing our products in high volume with a path to low per-unit cost.

      We also offer build-to-print (BTP) manufacturing services for customer-designed products such as multi-function modules, transceivers and other key components of outdoor units (ODUs). BTP services enable us to capture new manufacturing volume for customer programs that require no design efforts on the part of Endwave. Although BTP business does not fully utilize all of Endwave’s expertise, particularly RF design, it does allow us to serve the needs of larger customers that have exceeded their internal manufacturing capacities, want to move to an outsourced manufacturing model, or have the need to

3

Table of Contents

      During the telecommunications market downturn that began in late 2000, Endwave initiated a mergers and acquisitions strategy designed to achieve revenue growth and gain market share. As part of our strategy, Endwave has made selected acquisitions of businesses in related or competitive markets.

      Endwave has completed the following asset acquisitions during the past 36 months:

      In April 2001 we completed the acquisition of certain assets from Tyco Electronics related to their M/A-Com broadband wireless business. The assets acquired included product designs and intellectual property, inventory, equipment and customer contracts for YIG oscillators, frequency synthesizers and microwave radio transceivers.

      In September 2002 we acquired the broadband assets of the Fixed Wireless division of Signal Technology Corporation. The acquisition included assets such as customer contracts, equipment, inventory, product designs and other intellectual property, and key personnel needed for the ongoing operation of the business unit. The acquisition added a broad product offering and capability to the Endwave product and technology portfolio. The acquisition both expanded relationships with existing customers such as Stratex Networks, Nera Networks and other major OEMs, and added several significant new customers to Endwave’s customer list.

      In February 2003, we acquired certain assets from the broadband business of Arcom Wireless, Inc., a subsidiary of Dover Corporation. This acquisition was structured as an asset purchase, and included transceiver designs and intellectual property required to manufacture and supply a 58 GHz integrated transceiver product to an existing Endwave customer. No employees from Arcom were retained in connection with this acquisition.

      In May 2003, we acquired certain assets of Verticom Inc., an independent corporation that produced YIG-based oscillators and frequency synthesizers. At the time, Verticom was anticipating liquidation which subsequently did occur. This acquisition was structured as an asset purchase, and included product designs and intellectual property, inventory, equipment and a contract to supply a customer not previously doing business with Endwave. No employees from Verticom were retained in connection with this acquisition, however some employees were employed on a temporary basis in order to effect a transfer of the production process.

Telecommunications Market Overview

      The telecommunications industry has seen many significant changes and developments over the last few years. The rapid acceptance and broad use of the Internet has created the need for communications networks that are capable of handling large amounts of digital traffic. The widespread use of wireless communications and the desire for mobile, high speed Internet access by consumers and businesses has created needs for communication solutions that have not been met by traditional wire line systems. The continued growth in the use of cellular phones and other wireless communications devices, such as PC and Personal Digital Assistants (PDAs), has created a large market opportunity for broadband wireless infrastructure.

4

Table of Contents

      Developing countries realize that a key requirement for their economic growth is the availability of modern communications systems to provide widely available and reliable phone and data services. Rather than installing the traditional wired networks, they often choose cellular networks as the best solution since they are the easiest and fastest to deploy and provide the mobility that so many desire. In such countries where wired infrastructure is unavailable or expensive, the interconnection of the various cell sites is accomplished by the use of microwave radio links. Developing nations such as China and India have created a significant demand for such microwave radio links.

      In Europe and other developed countries, as new networks are deployed or additional cell sites are installed to handle increased traffic density, these new cell sites are also often connected to the existing networks through the use of microwave radio links. This application, commonly referred to as “cellular backhaul”, has resulted in the installation of hundreds of thousands of radio links over the last decade. As users desire messaging services and internet access from their cellular phones and PDAs, network integrators and service providers are moving to new generations of cellular systems known as 2.5G and 3G (or 3rd Generation) systems. It has been predicted that these new systems will require as much as three times the number of base stations as first generation systems and that each base station will require higher capacity backhaul to the network. Further, because of the high volume of the backhaul traffic and the importance of maintaining a robust backhaul network, it is anticipated that future networks will use a mesh or token ring structure rather than the star architectures employed today. When these next generation systems are deployed, we believe that they will create a demand for a large number of new microwave radios. In addition, as spectrums become crowded and the cost of bandwidth increases, network operators are expected to require higher performance radios that provide higher capacities and greater spectral efficiency.

      Businesses and consumers continue to fuel the need for additional bandwidth in the Internet infrastructure with the growing use of e-mail, audio, and video streaming, corporate data networks, corporate websites, e-commerce, electronic data exchange, customer support, supply chain management and telecommuting. To adequately satisfy these needs, service providers must be able to transport large quantities of data, at high speed, to almost any location, often worldwide. Since not all locations are served by high-speed copper wire or fiber optic cable, there is a growing need for broadband wireless access.

      While over the long term we believe these fundamental forces are creating needs for greater capacity in the telecommunications infrastructure and for wireless access to that network, the last three years have been very challenging for the entire telecommunications industry including service providers, system integrators, OEMs and their suppliers. Service providers have struggled with servicing large debt loads incurred to build out their networks, lower than projected subscription rates for some new services, industry wide overcapacity and fierce price competition. This situation has been further exacerbated by a major slowdown in the U.S. and world economies. This has resulted in several of the CLECs (Competitive Local Exchange Carrier), declaring bankruptcy, delays in the introduction of new 2.5 and 3G networks, and plummeting capital expenditures by the service providers. The drop in capital expenditures has consequently impacted all those who produce telecommunications equipment including system integrators, OEMs and subsystem suppliers such as Endwave. The difficulties of the recent past notwithstanding, current developments suggest that the situation is improving and that a level of stability has returned to the industry. Service providers have significantly improved their cash flow and repaired their balance sheets. Spending for equipment and network systems cannot be expected to return to the inordinately high levels of the late 1990’s, however there are signs that a more sustainable growth rate is emerging.

      Further, new applications for wireless access technologies are developing at both ends of the RF spectrum. On the lower end of the frequency range at 2.4 GHz and 5.8 GHz, the 802.11 specifications commonly referred to as “Wi-Fi” are becoming a de facto standard for short range wireless computing. Business professionals, students, and mobile professionals are embracing the technology as the method of choice for connecting to the Internet and corporate networks in a mobile setting and while moving about in office buildings and campuses. Sales of Wi-Fi enabled devices nearly tripled in 2003 and continued growth is expected in 2004 and 2005. Although Endwave’s core competencies lie at frequency ranges

5

Table of Contents

      At the higher end of the spectrum, newly FCC approved 5 GHz wide bands at 71-76 GHz and 81-86 GHz have commanded the interest of major networking companies such as Cisco. This spectrum is particularly well suited to deliver data rates of 1-10 Gbps over distances of approximately 2 Kilometers. This distance and data rate capability make the technology an ideal candidate to provide high speed internet connectivity to the 75% of the 750,000 business buildings that are within 1 mile of the nearest fiber connection but cannot practically access the fiber. A second application is to use the technology for high speed building-to-building LAN bridging links. This business opportunity is still nascent and its impact unknown, but Endwave is one of a few companies that is capable of designing, developing, testing and manufacturing the RF subsystems for these high frequency wireless systems.

      In the specific telecommunications market segment that Endwave serves, digital microwave radios, current worldwide production volumes we estimate at 250,000 to 300,000 units per year, of which approximately 85% are used for cellular backhaul applications. More than 80% of these were in the 10 to 40 GHz frequency range, where our design and manufacturing processes are focused. The production of these microwave radios is concentrated in a relatively small number of OEMs. Of the approximately 250,000 to 300,000 radios produced last year, the top 10 manufacturers produced more than 90% of the total. The largest OEM producers include Alcatel, Ericsson, Harris, NEC, Nera, Nokia, Siemens and Stratex Networks. These OEMs are in turn supplied key components and sub-assemblies either by captive internal sources, or by merchant suppliers such as Endwave. Of these external merchant suppliers, Endwave has a significant market share. Several of our competitors are financially weak and several have exited the business in the past three years. Some industry observers believe that the component and sub-assembly supplier base will undergo further consolidation, and Endwave in particular has a stated plan to take a leading role in this industry consolidation trend.

Adjacent Market Overview

      Many applications other than terrestrial microwave radios exist for RF subsystems of the type Endwave produces. These include satellite communications systems, defense systems, RF test instruments and various types of security devices. Endwave is actively pursuing all of these applications in an effort to increase our revenues and broaden our market base. In fiscal 2003, this market area represented $3.6 million of our revenues or 11% of our total revenues. The outlook for these market segments is generally positive in the near future.

      Satellite communication systems are of increasing importance in many existing applications, new applications are being proposed and the current satellite infrastructure is aging. The combination of these aging factors could generate significant business opportunities in the future. Several existing satellites will come to the end of their useful lives during the next several years and the replacement systems will utilize frequencies well matched to Endwave capabilities. Both in the past and at present, Endwave has produced equipment utilized in satellite ground terminals.

      Various defense systems utilize wireless communication channels to transmit and receive both voice and data communications. A key driver in this application area is the so called “intelligent battlefield” scenario in which multiple sensors survey the battlefield situation and the data from these sensor systems is then aggregated and provided real time to the battlefield commanders. Such systems require high bandwidth communication capabilities similar to those found in high speed commercial telecommunications systems. Further, new weapons systems will utilize sophisticated radar systems to detect small insurgent force vehicles and personnel. These applications utilize subsystem modules similar to those used in commercial telecommunications systems. Endwave intends to continue to pursue these applications aggressively. Target customers include the key defense prime contractors such as Boeing, Northrop Grumman, Raytheon and Lockheed. Additionally, we will continue to market to major system contractors that supply products to these prime contractors.

6

Table of Contents

The Challenge

      Forecasts for future demand of our products and the products of our customers are uncertain. It is difficult to accurately predict how long the current economic conditions will continue in the United States and other parts of the world, or whether they will improve. In our telecommunications markets, regulatory conditions affecting radio deployments around the world are changing, the impact of the expected consolidation of service providers is unknown, new spectrums are being allocated and new wireless applications are being created. These uncertain and changing conditions make it very hard for our customers to predict their specific future product requirements with certainty. In our adjacent market areas, we face similar uncertainty as to market demands and we are still building our position in these business areas. However, we believe that in order to be successful in the future our customers will need:

	•	Higher performance products;
	•	Lower product costs;
	•	Scalable production with high volume capacity;
	•	Short product design cycles;
	•	Broad product portfolio;
	•	Logistical flexibility; and
	•	High product quality.

Our Solution

      As a provider of RF subsystems, we design and manufacture a broad portfolio of products, from RF modules to fully integrated transceivers, outdoor units and major subsystem assemblies. We strive to provide our customers with the products, resources and services that they need to be successful in this changing environment. We provide:

      Superior performance through technological leadership. Technological leadership begins with the people, their capabilities and their experience. We have a large technical team with broad expertise in device physics, semiconductor device design, circuit design, component and/or subsystem design, test engineering and other critical disciplines. Our technical leadership enables us to optimize our products for critical performance factors that are important to our customers. We provide the technology to optimize such key parameters as spectral efficiency, which is the rate at which data can be transmitted in a given segment of the radio frequency spectrum. We have extensive experience in the design of RF devices based on gallium arsenide, the semiconductor material most widely used in broadband wireless access applications as well as other less commonly used RF semiconductor materials. This design expertise gives us the flexibility to optimize our product designs because we are not limited to standard, commercially available semiconductor devices. We use third-party semiconductor fabrication facilities to manufacture the gallium arsenide and other semiconductor devices we design. Our use of third-party semiconductor facilities gives us the flexibility to use the process technology that is best suited for each application and eliminates the need for us to invest in and maintain our own semiconductor fabrication facilities.

      Path to low cost through multiple circuit technologies. With our proprietary circuit and process technologies, coupled with our advanced manufacturing processes, we believe we are able to provide better solutions related to our customers’ volume and cost requirements. We currently employ three distinct circuit technologies as appropriate to meet the needs of our customers and their specific project, including traditional Hybrid Microwave Integrated Circuits (HMICs), Monolithic Microwave Integrated Circuits (MMICs), and Flip Chip Integrated Circuits (FCICs^TM). HMICs have many bond wires that must be individually tested and adjusted, or tuned, during the manufacturing process. Our MMIC circuits eliminate most of the bond wires used in HMICs, allowing us to produce them using automated assembly techniques. Our internal MMIC design capability allows us to design MMICs that are optimized to the particular circuit application. Our patented FCIC technology enables us to design and manufacture

7

Table of Contents

      Short product design cycle. We have developed an extensive library of RF circuit and device designs that allow us to rapidly and economically combine standard circuits and devices into custom assemblies to quickly satisfy the various performance and frequency requirements of our customers and we have the expertise and facilities to rapidly prototype and test a new design. We believe that this ability to migrate from prototype to volume production in a short period of time is an important competitive advantage.

      Broad product portfolio. We offer a range of products at multiple levels of integration, from single function RF modules to integrated transceivers, to address most any customer need. This allows our customers to select the products that best complement their internal capabilities and manufacturing requirements. Our product design capability supports a broad range of frequencies, from 1 GHz to 100 GHz, and addresses multiple market applications. This enables us to rapidly design products for new frequencies or applications and facilitate our customers’ product introduction plans and schedules.

      Scalable manufacturing with high volume, low cost production capability. We believe we are one of the largest suppliers of microwave RF subsystems and a market leading supplier in the commercial broadband wireless segment. Our traditional manufacturing approach allows our customers to develop new products in relatively small quantities during the early stages of development. As their design becomes proven and is moved into production, these products can either be maintained with traditional assembly approaches, moved into an automated process where volumes justify this transition, or moved to our offshore manufacturing facility. Our advanced assembly and testing capabilities and multiple production lines allow us to rapidly achieve high volume production to meet our customers’ increasing volume demands. We have a long-term gallium arsenide device supply agreement with Velocium, which is an operating unit of Northrop Grumman, which further enhances our manufacturing capabilities and ensures an adequate supply of gallium arsenide devices.

      Logistical flexibility. We provide our customers with a high degree of logistical flexibility through the use of multi-year frame agreements with logistical plans that are tailored to their individual needs. These frame agreements usually cover a variety of products and frequencies, with varying degrees of flexibility on quantities and delivery rates. Additionally, for some customers we provide enhanced inventory management services by maintaining point of use inventories in their facilities. This allows our customers to rapidly adjust to the changing demands of their market.

      High quality. Our customers, whether focused in telecommunications, defense or other adjacent markets, expend considerable financial and human resources to develop and introduce new products. Understandably, they have high demands for quality and reliability once they’ve completed their development and are preparing to take their product to market. Many customers find it necessary to design their systems so they will operate 99.99% or even 99.999% of the time. Our careful design, advanced manufacturing and ISO 9001-2000 certified facilities are intended to provide the high reliability required for today’s commercial and defense systems.

Our Strategy

      Our objective is to be a leading global supplier of RF subsystems for broadband wireless and other applications. We intend to become the RF subsystem supplier of choice for microwave systems built by

8

Table of Contents

      Maintain and expand our strong position in our core market. The majority of our revenues is derived from production of low and medium data rate radios, in the 10 to 40 GHz frequency range, for use in cellular backhaul systems. Today this represents the largest and one of the most stable portions of the market. We intend to maintain and expand our penetration in these areas, both in terms of current and new customers, customer programs, and frequency ranges.

      Extend our technological leadership. We will continue to invest in “next generation” research and development, maintain our team of talented engineers and scientists, and build on our manufacturing technologies.

      Provide our customers with increased logistical flexibility. In this uncertain market, it is difficult for our customers to predict exact products, frequencies and quantities. By developing broader band circuits and by using multi-product, multi-year supply agreements, flexible logistics plans and short manufacturing cycles, we help our customers to quickly respond to market demands.

      Target new frequencies and emerging applications. We currently offer a wide range of products that support the principal frequency bands currently used for broadband wireless backhaul and access, and defense applications. We intend to offer products for higher data rate radios, new frequency bands and emerging market applications as opportunities arise.

      Provide best-in-class manufacturing capability. Our circuit design, manufacturing and testing processes and continuous improvement programs have helped to bring manufacturing innovations to an industry that has historically utilized labor-intensive manufacturing techniques. We will continue to improve our lean manufacturing methods that have produced significant cost reductions and significantly higher outputs with fewer employed assets.

      Reduce costs through offshore manufacturing. Endwave has responded to customer and market requirements for lower cost solutions with the establishment of a partnership with a major manufacturing subcontractor in Southeast Asia. By the end of 2003, over 70% of our product was manufactured in our subcontractor’s facility. This partnership and the product manufacturing are managed by Endwave’s full-time, in-country management team with extensive experience in process engineering and manufacturing management. We draw on the local economy to obtain lower cost of materials, labor, and facilities than is available in the United States.

      Maintain rapid design and prototyping capability. We intend to maintain our ability to rapidly design and prototype new products that meet our customers’ needs. We believe we can achieve this with our multiple design and manufacturing techniques.

      Leverage strategic relationship with Velocium. Our supply agreement with Velocium provides us with a long-term supply of gallium arsenide devices at a preferred cost. We believe that our supply of these devices from Velocium is a competitive advantage because the supply of gallium arsenide devices may become constrained in the future as the broadband wireless access market grows. In addition, we have access to Velocium’s research and design expertise in the areas of RF and digital circuit design technologies as well as advanced semiconductor materials. We believe this access represents a significant competitive advantage.

      Secure new design wins to expand and diversify our customer base. We intend to use our technology, skilled design teams, short design cycles and manufacturing capability to secure new designs wins with new and existing customers. We will focus our efforts on the top 10 microwave radio suppliers who represent over 90% of the total demand and on key opportunities in adjacent markets that match our capabilities and competitive strengths.

      Use our unique strengths to further penetrate adjacent markets. We have unique technology, experience, and capabilities in the design of high volume microwave modules and subsystems in the 10 to 100 GHz frequency range. These are attributes that are useful in other adjacent markets such as

9

Table of Contents

      Pursue additional acquisitions where appropriate. In order to achieve our goal of being the leading global supplier of RF subsystems, we intend to continue to pursue additional acquisition opportunities that are strategically and financially advantageous.

Products

      Our products include amplifiers, multipliers, frequency converters, oscillators, frequency synthesizers, integrated transceivers and key components of outdoor units (ODUs) that enable the transmission and reception of data signals in communication applications such as cellular backhaul, broadband wireless access, and network trunking; as well as other adjacent markets requiring these technologies and products. In addition to those products designed and developed by Endwave, we also provide build-to-print (BTP) manufacturing services for products that have been designed by our customers. While the majority of our existing customers are wireless systems integrators and original equipment manufacturers serving the broadband wireless market, a portion of our revenues are derived from customers who use our products to satisfy needs for defense, instrumentation, scientific and other adjacent markets.

      Microwave radio transceivers are our core product offering, representing approximately 75% of our net revenues for 2003. Transceivers are a critical subsystem found in microwave and millimeter wave radios. These subsystems function as the heart of the wireless system by combining transmit and receive functions in a single package, which gets built into the overall radio system. Endwave specializes in high frequency transceivers in the range of 10 GHz to 60 GHz, for point-to-point and point-to-multipoint communications applications.

Customers

      We sell our products primarily to global wireless systems integrators and original equipment manufacturers. During 2003 we shipped products to more than 61 different customers. The ten customers that attributed the greatest proportion of our revenues in the year ended December 31, 2003, were:

      A relatively limited number of customers have historically accounted for a substantial portion of our sales. For the years ending December 31, 2003, 2002 and 2001, sales to our largest customer, Nokia, accounted for 59%, 71% and 67% of our total revenues, respectively. In 2003, Stratex Networks also accounted for more than 10% of our revenues. Looking forward, we cannot predict whether any significant customer in prior periods will continue to be a significant customer in future periods. Further, we expect that a high percentage of our product sales will continue to be to a rather limited number of customers in the foreseeable future.

Sales

      Product and development fee revenues were $33.8 million, $22.6 million and $34.1 million for 2003, 2002 and 2001, respectively. Shipments to international customers accounted for 75%, 77% and 73% of

10

Table of Contents

Competition

      Competition in the market for RF subsystems for broadband wireless access systems is intense. In the markets for RF modules, transceivers and outdoor units, we primarily compete with, among others, the following merchant suppliers:

      In addition to those companies listed above with whom we may compete directly, there are OEMs, for example, Ericsson, that design and manufacture their own RF subsystems for use in their products. To the extent that OEMs presently, or may in the future, produce their own RF subsystems, we lose the opportunity to gain a customer and the related sales opportunities. Conversely, if they should decide to outsource their requirements, this may significantly expand the market available to Endwave.

      We are committed to providing superior product performance, logistical flexibility and manufacturing excellence, as we believe these factors are critical to our customers’ decision to purchase our products. We believe that the cost structure of our products is competitive in each of our target markets. Many factors contribute to the final pricing of our products, including the costs for customer specific designs, the scale of production, and the logistical arrangements.

      While we believe we are well positioned to compete effectively in our chosen markets, some of our current and potential competitors are substantially larger than us and have greater financial, technical, manufacturing and marketing resources. If we were unable to compete successfully, our future operations and financial results would be harmed.

Backlog

      Our order backlog consists of a combination of standard purchase orders, annual purchase agreements and multi-year frame agreements. The large majority of our orders are pursuant to multi-year frame agreements with major commercial OEMs. These frame agreements usually include an estimate of the expected annual quantities during the contract and include a logistics plan that provides for a monthly rolling forecast of usage from the customer. These forecasts, however, are primarily for material and capacity planning purposes and are subject to significant changes from month to month and quarter to quarter. The logistics plans generally allow the customers a high degree of flexibility in changing, rescheduling or canceling forecasted requirements. Because these customers are only required to take delivery of the “firm” portion of the forecasts, which is usually approximately a month. They have the ability to significantly change forecasted delivery dates and quantities. For these reasons we believe that backlog is not a reliable indicator of future revenues.

      Backlog includes all purchase orders and contracts for products with expected delivery dates through December 31, 2004. Our backlog at March 15, 2004 was approximately $20.6 million as compared to a backlog of $19.2 million as of March 19, 2003. There can be no assurance that the current backlog will necessarily lead to actual sales in any future period. Of our current backlog, approximately 70% is

11

Table of Contents

Governmental Regulations

      Our products are incorporated into wireless communications systems that are subject to various United States regulations and similar laws and regulations adopted by regulatory authorities in other countries. Regulatory changes, including changes in allocation of available frequency spectrum, could significantly impact our operations by restricting development efforts by our customers, making obsolete current products or increasing the opportunity for additional competition. Changes in, or failure to comply with, applicable domestic and international regulations could have an adverse effect on our business, operating results and financial condition. In addition, the increasing demand for wireless communication has exerted pressure on regulatory bodies worldwide to adopt new standards for these products and services, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this governmental approval process have caused in the past, and may cause in the future, the cancellation, postponement or rescheduling of installation of communications systems by our customers, which in turn may negatively affect the sale of our products to those customers.

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. Nevertheless, these measures may not be adequate to safeguard the proprietary technology underlying our products. As of December 31, 2003, we had 39 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 proprietary FCIC^TM circuit technology and various circuit and system designs. In addition, we jointly hold two patents with AT&T pertaining to sectorized communications systems and jointly hold one patent with Superconducting Supertechnologies, Inc. relating to satellite communications. Our issued patents expire between 2007 and 2020. Of all our patents, we consider two patents relating to our FCIC^TM circuit technology and a patent relating to our YIG oscillator technology to be the most valuable. With regard to our pending patent applications, no patents may be issued as a result of these or any future applications. If they are issued, any patent claims allowed may not be sufficiently broad to protect our technology. In addition, any existing or future patents may be challenged, invalidated or circumvented, and any right granted hereunder may not provide meaningful protection to us. The failure of any patents to provide protection to our technology might make it easier for our competitors to offer similar products and use similar manufacturing techniques.

      We generally enter into confidentiality and assignment of rights to inventions agreements with our employees, and confidentiality and non-disclosure agreements with our strategic partners, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited outside of the United States, Europe and Japan. We may not be able to obtain any meaningful intellectual property protection in other countries and territories. Additionally, we may, for a variety of reasons, decide not to file for patent, copyright, or trademark protection outside of the United States. We occasionally agree to incorporate a customer’s or supplier’s intellectual property into our designs, in which cases we have obligations with respect to the non-use and non-disclosure of that intellectual property. We also license technology from Velocium, which is an operating unit of Northrop Grumman. There are no limitations on our rights to make, use or sell products we may develop in the future utilizing the technology licensed to us by Velocium, provided that the products are for commercial customers and non-satellite applications.

12

Table of Contents

      Steps taken by us to prevent misappropriation or infringement of our intellectual property or the intellectual property of our customers may not be successful. Moreover, litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. Litigation of this type could result in substantial costs and diversion of our resources.

      The wireless access industry is characterized by vigorous protection and pursuit of intellectual property rights. We have received, and may receive in the future, notices of claims of infringement of other parties’ proprietary rights. In addition, the invalidity of our patents may be asserted or prosecuted against us. Furthermore, in a patent or trade secret action, we could be required to withdraw the product or products as to which infringement was claimed from the market or redesign products offered for sale or under development. We have also at times agreed to indemnification obligations in favor of our customers and strategic partners that could be triggered upon an allegation or finding of our infringement of other parties’ proprietary rights. These indemnification obligations would be triggered for reasons including our sale or supply to a customer or strategic partner of a product which was later discovered to infringe upon another party’s proprietary rights. Irrespective of the validity or successful assertion of such claims we would likely incur significant costs and diversion of our resources with respect to the defense of such claims. To address any potential claims or actions asserted against us, we may seek to obtain a license under a third party’s intellectual property rights. However, in such an instance, a license may not be available on commercially reasonable terms, if at all.

Research and Development

      The goal of our research and development efforts are to reduce the cost and increase the functionality and performance of our products, while adapting them to the specifications required of our customers and of new markets for our products. In addition, substantial efforts have been devoted to the development of efficient manufacturing methods necessary for competitive pricing and improved gross margins of our products, while maintaining high quality standards required by our customers. Other development efforts include expansion of existing product families and initiatives to combine products from our various complementary product lines to create additional functionality.

      We believe that our future success will depend on our ability to continue to enhance and cost reduce our existing products, and to develop and introduce new products to maintain our technological leadership and meet a wider range of customer needs. However, as a business we recognize the need to balance research and development spending with running a profitable business and have reduced our research effort accordingly. Our research and development and related engineering expenses were approximately $4.5 million, $9.2 million and $14.2 million, in each of 2003, 2002, and 2001, respectively. The decrease in 2003 spending was primarily the result of staff reductions associated with matching our research and development spending to the current needs of the industry and our increasing engineering efficiency that required less resources to execute on our R & D program.

Employees

      As of December 31, 2003, we had 108 full-time employees, including 59 in manufacturing, 25 in product and process engineering, 11 in sales and marketing and 13 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 990 Almanor Avenue, Sunnyvale, California 94085, and our main telephone number is (408) 522-3100. The public may read and copy any material we file

13

Table of Contents

Risk Factors

      Stockholders or potential investors considering the purchase of shares of our common stock should carefully consider the following risk factors, in addition to other information contained in this Annual Report on Form 10-K. Additional risks and uncertainties not presently known to us or that we currently deem immaterial could also impair our business operations.

We expect to operate near our break even point and may not be profitable in the future.

      We have had a history of losses. We had net losses of $7.9 million, $31.0 million, $156.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. While we have taken ongoing restructuring actions, there is no guarantee that these restructuring actions will enable the Company to achieve consistent profitability in the future. Our failure to attain consistent profitability may cause the market price of our common stock to decline in the future.

We depend upon a small number of customers, and the loss of any of them, or their failure to sell their systems, would limit our ability to generate revenues.

      We depend, and expect to remain dependent, on a relatively small number of customers for sales of our products. If our customers reduce orders for our products, we could lose revenues and suffer damage to our reputation in the industry. For the year ended December 31, 2003, sales to Nokia, Stratex Networks, and Siemens accounted for 78% of total revenues. For the years ended December 31, 2003, 2002 and 2001, sales to Nokia accounted for 59%, 71% and 67%, respectively, of total revenues.

      The loss of, or significant reduction in demand from any one of our major customers, particularly Nokia, would have a material adverse effect on our business, financial condition and results of operations.

      Most of our customers are not under any commitment to purchase products from us, except on a purchase order basis. Under our contract with Nokia, Nokia is required to provide us with a weekly rolling forecast for the upcoming 52-week period and we are obligated to provide products to them in a consignment stock location. The amount and type of product shipped to the consignment location is based upon Nokia’s estimate of need and RF frequency. Revenues are recognized at the time product is withdrawn by Nokia from the consignment location, or at the latest, after four months have passed since the date of receipt. As a result, there could be up to a four-month period whereby we would not recognize revenues for product previously shipped. Deliveries are based on forecast but there is no guarantee that the forecast will be fulfilled. Forecasts may vary greatly and can be changed without notice.

      Our customers may not have or use the financial, marketing, technological and other resources necessary to ensure that their solutions will succeed in a marketplace characterized by rapid technological changes and intense competition. For example, communications service providers may insist that wireless systems integrators provide extensive financing for the deployment of large broadband wireless access networks, and our customers may be unwilling or unable to provide the necessary financial resources. If the wireless systems integrators, particularly Nokia, that we supply were not successful in selling their broadband wireless access systems for any reason, our operating results would be harmed.

Until recently, our cost of product revenues has exceeded our product revenues, and because we expect competitive conditions will force us to reduce prices in the future, we must achieve further cost reductions in order to maintain sufficient positive gross margins to remain profitable.

      We have reported negative gross margins from inception until the fourth quarter of 2002. If we are not able to continue to reduce our per-unit cost of product revenues to a sufficient degree, we may not be

14

Table of Contents

Our operating results have historically fluctuated significantly and are likely to continue to do so in future periods. These results may fail to meet the expectations of securities analysts or investors, causing our stock price to fall.

      Our quarterly and annual operating results are difficult to predict and are likely to continue to fluctuate significantly from period to period. It is likely that our operating results in one or more future quarters may be below the expectation of security analysts and investors. In that event, the trading price of our common stock almost certainly would decline. Our operating results may fluctuate for many reasons, including but may not limited to:

	•	variations in the timing and size of, or cancellations or reductions of, customer orders and shipments;
	•	variations in the availability, cost and quality of components from our suppliers, particularly from our single source suppliers and suppliers of scarce components;
	•	competitive factors, including pricing, availability and demand for competing products;
	•	constraints on our manufacturing capacity;
	•	variability of the product development and sales cycle with our customers;
	•	variations in our manufacturing yields and other factors affecting our manufacturing costs;
	•	changes in our sales prices;
	•	changes in the mix of products with different gross margins;
	•	failure to meet milestones under any significant development contracts;
	•	obsolescence of our component inventories;
	•	hiring and loss of personnel, particularly in manufacturing, research and development and sales and marketing; and
	•	product defect claims and associated warranty expenses.

We have a lengthy product development and sales cycle. As a result, we must invest substantial financial and technical resources in a potential sale before we know whether the sale will occur. If the sale does not occur, we may not have the opportunity to sell products to that customer until another generation of its system is developed.

      Our products are highly technical and accordingly our sales efforts involve a collaborative and iterative process with our customers to determine their specific requirements and design an appropriate solution. Depending on the product, the typical product development and sales cycle can take anywhere from three to twelve months, and we incur significant expenses as part of this process without any assurance of resulting revenues. During the product development phase, our engineers typically work with the customer to define the product and design a prototype product for the customer to evaluate. We generate revenues only if our product is selected for incorporation into a customer’s system 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. 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

15

Table of Contents

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 customer’s project and the availability of professionals with the requisite level of expertise is limited.

      Each of our products is designed for a specific range of frequencies. Because different national governments license different portions of the frequency spectrum for the broadband wireless access market, and because communications service providers that use broadband wireless access systems license specific frequencies as they become available, we must adapt our products rapidly to use a wide range of different frequencies in order to remain competitive. 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 affect the timing of our revenues.

We may not be able to manufacture and deliver our products as quickly as our customers require, which could cause us to lose sales or incur penalties and would harm our reputation.

      At times in the past, we have not produced products in the volume requested by our customers. In the future, we may not be able to manufacture products and deliver them to our customers at the times, and in the volumes they require. If we fail to manufacture and deliver products in a timely fashion, our reputation may be harmed, we may jeopardize existing orders and lose potential future sales and we may be forced to pay penalties to our customers. Manufacturing delays and interruptions can occur for many reasons including but not limited to:

	•	lack of sufficient capacity;
	•	the failure of a supplier to deliver needed components on a timely basis, or with acceptable quality;
	•	poor manufacturing yields;
	•	labor disputes;
	•	manufacturing personnel shortages;
	•	equipment failures;
	•	natural disasters;
	•	transportation disruptions;
	•	acts of terrorism;
	•	changes in import/export regulations;
	•	infrastructure failures; and
	•	political instability.

      The manufacturing of our products is complex. The yield, or percentage of products manufactured that conform to required specifications, can decrease for many reasons, including materials containing impurities, equipment not functioning in accordance with requirements or human error. If our yield is lower than we expect, we may not be able to deliver products on time.

16

Table of Contents

We rely heavily on our Southeast Asia offshore manufacturing partners to produce product for us. If our partners are unable to produce product in sufficient quantities or with adequate quality or they choose to terminate our partnership arrangements, we may not be able to fulfill our production commitments to our customers, which could cause us to lose sales or incur penalties and would harm our reputation.

      As part of our operating strategy, we partially or wholly outsource the assembly and test of some of our subassemblies and finished products to offshore partners located in Southeast Asia. We plan to continue this arrangement as a key element of our operating strategy. If these vendors do not provide us with high quality products and services in a timely manner, or if one or more of these vendors terminates its relationship with us, we may be unable to obtain satisfactory replacements to fulfill customer orders on a timely basis. Factors that could result in an interruption of supply from our offshore partners include, but may not be limited to:

	•	changes in local regulations and government policy;
	•	currency fluctuations;
	•	lack of sufficient capacity;
	•	the failure of a supplier to deliver needed components on a timely basis, or with acceptable quality;
	•	poor manufacturing yields;
	•	labor disputes;
	•	manufacturing personnel shortages;
	•	equipment failures;
	•	natural disasters;
	•	transportation disruptions;
	•	acts of terrorism;
	•	changes in import/export regulations;
	•	infrastructure failures; and
	•	political instability.

      In the event of an interruption of supply from our offshore partners, our reputation may be harmed and we may lose potential future sales.

Our reliance on Velocium and other third-party semiconductor providers to manufacture our gallium arsenide devices may cause a significant delay in our ability to fill orders and limit our ability to assure product quality and control costs.

      We do not own or operate a semiconductor fabrication facility. We currently rely on the semiconductor fabrication facilities of Velocium, an operating unit of Northrop Grumman, and other third parties to manufacture substantially all of the gallium arsenide and other semiconductor devices incorporated in our products. The loss of our relationship with any of these third parties or our use of their semiconductor fabrication facilities, particularly Velocium’s facility, and any resulting delay or reduction in the supply of gallium arsenide devices to us, will impact our ability to fulfill customer orders and could damage our relationships with our customers. Our current supply agreement with Velocium expires in December of 2005.

      We may not be able to negotiate an extension to this agreement on favorable terms, if at all. We also may not be successful in forming alternative supply arrangements that provide us with a sufficient supply of gallium arsenide devices. Because there are limited numbers of third-party semiconductor fabrication facilities that use the particular process technologies we select for our products and have sufficient capacity

17

Table of Contents

      Since we do 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 or future relations and ability to negotiate favorable supply agreements.

      Our reliance on these third-party suppliers involves several additional risks, including reduced control over manufacturing costs, delivery times, reliability and quality of the products incorporating these devices. The fabrication of semiconductor devices is a complex and precise process. There are many factors that can cause a substantial percentage of wafers to be rejected or numerous devices on a wafer to be nonfunctional including, but not limited to:

	•	minute impurities;
	•	difficulties or inconsistencies in the fabrication process;
	•	defects in the masks used to print circuits on a semiconductor wafer; and
	•	wafer breakage.

      We expect that our customers will continue to establish demanding specifications for quality, performance and reliability that must be met by our products. Our third-party semiconductor fabrication facilities may not be able to achieve and maintain acceptable production yields in the future. In the past, we have experienced delays in product shipments from our third-party semiconductor fabrication facilities, which in turn delayed product shipments to our customers. To the extent these suppliers suffer failures or defects, or delay deliveries to us, we could experience lost revenues, increased costs and delays in, cancellations or rescheduling of orders or shipments, any of which would harm our business.

Because of the scarcity of some components and our dependence on single suppliers for some other components, we may be unable to obtain an adequate supply of components, or we may be required to pay higher prices or to purchase components of lesser quality.

      We currently purchase a number of components, some from single source suppliers for which alternative sources may not be readily available, including, but not limited to:

	•	electronic filters;
	•	circuit carrier assemblies;
	•	voltage controlled oscillators;
	•	semiconductor devices;
	•	yttrium iron garnet components;
	•	magnetic components; and
	•	frequency references.

      Any delay or interruption in the supply of these or other components could impair our ability to manufacture and deliver our products, harm our reputation and cause a reduction in our revenues. In addition, any increase in the cost of the components that we use in our products could make our products less competitive and lower our margins. Our single source suppliers could enter into exclusive agreements with or be acquired by one of our competitors, increase their prices, refuse to sell their products to us, discontinue products or go out of business. Even to the extent alternative suppliers are available to us, identifying them and entering into arrangements with them is difficult and time consuming, and they may not meet our quality standards. We may not be able to obtain sufficient quantities of required components on the same or substantially the same terms. Additionally, consolidations among our suppliers could result in other sole source suppliers for us in the future.

18

Table of Contents

Because we do not have long-term commitments from many of our customers, we must estimate customer demand, and errors in our estimates would have negative effects on our inventory levels and revenues.

      Our primary market, the telecommunications industry, has been characterized in recent years by severe demand fluctuations and down turns. Further, the overall economic slow down in the U.S. and other economies has exacerbated these difficulties. This has led to fluctuating order forecasts from some of our customers. There can be no certainty as to the degree of the severity or duration of these fluctuations in demand. We also cannot predict the extent and timing, of the impact of the economic downturn in the United States and the worldwide downturn for the telecommunications industry on economies in Europe and other countries and geographic regions.

      Our sales are generally made on the basis of formal agreements and purchase orders, which may be later modified or canceled by the customer, rather than firm long term purchase commitments. We have historically been required 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, causing excess inventory to accrue or a lack of manufacturing capacity when needed. If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect or at all. As a result, we would have excess inventory, which would harm our financial results. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity were available, we would lose revenue opportunities, lose market share and damage our customer relationships. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders and were unable to benefit from this increased demand.

Because we may expand our manufacturing capacity in advance of demand, our manufacturing facilities may continue to be underutilized, which may harm our operating results.

      As part of our strategy, we may expand our manufacturing capacity beyond the level required for our current sales. As a result, our manufacturing facilities in the future may continue to be underutilized from time to time. We expand our manufacturing capacity based on industry projections for future growth. Even if the broadband wireless industry experiences significant growth, we could still be unsuccessful in selling our products and growing along with the industry. If demand for our products does not increase significantly, underutilization of our manufacturing facilities will likely continue and could harm our profitability and other operating results. Conversely, if we do not maintain adequate manufacturing capacity to meet demand for our products, we will lose opportunities for additional sales. Any failure to have sufficient manufacturing capacity to meet demand would harm our market share and operating results.

Our products may contain component, manufacturing or design defects or may not meet our customers’ performance criteria, which could harm our customer relationships, industry reputation, revenues and profitability.

      We have experienced manufacturing quality problems with our products in the past and may have similar problems in the future. As a result of these problems, we have replaced components in some products, or replaced the product, in accordance with our product warranties. Our product warranties typically last one to three years. 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. Further, our customers may discover latent defects in our products that were not apparent when the warranty period expired. These defects may cause repair or replacement expenses beyond the normal warranty, the loss of customers or damage to our reputation. We have experienced this type of failure in the past and have had to provide reserves for repairing the affected units. We cannot guarantee that similar failures will not occur in the future resulting in significant expenses and charges in future periods.

19

Table of Contents

Some of the contracts that we have entered into or assumed during acquisitions may contain clauses making Endwave liable for consequential damages or other indirect costs that customers may incur. These indirect costs may be significantly higher than the cost of repair or replacement of the Endwave product.

      We typically warrant our products for a period of one to three years, during which time we have the option to repair or replace any faulty products that are returned to us during the warranty period. In addition, some contracts require that if there are hidden or latent defects, or defects that appear after the warranty period which could not be detected during normal inspection, we shall undertake any and all necessary corrective actions, including but not limited to redesigning the parts and replacing defective parts in the field. If mutually agreed, repair or replacement of defective units can be undertaken by the customer, who we shall compensate for actual costs.

      Some radios incorporating our transceivers and manufactured and shipped by one of our customers are experiencing degraded performance after installation in the field. The cause of the degradation has been identified to be a faulty electronic component supplied by one of our vendors. We believe the cause of the component’s out of specification performance has been identified and corrected. Although the transceiver products were delivered under a contract