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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

ý    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission file number 000-31337

WJ COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

(408) 577-6200

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK $0.01 PAR VALUE

(Title of class)

        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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to the Form 10-K. o

        As of March 21, 2003 there were 56,366,851 shares outstanding of the registrant's common stock, $0.01 par value. As of that date, the aggregate market value of voting stock held by non-affiliates of the registrant was approximately $15,484,972.

SPECIAL NOTICE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, the annual report, press releases and certain information provided periodically in writing or orally by the Company's officers, directors or agents contain certain forward-looking statements within the meaning of the federal securities laws that also involve substantial uncertainties and risks. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions. Words such as "may," "will," "anticipates," "expects," "intends," "plans," "believes," "seeks" and "estimates" and variations of these words and similar expressions, are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed, implied or forecasted in the forward-looking statements. In addition, the forward-looking events discussed in this annual report might not occur. These risks and uncertainties included, among others, those described in the section of this report entitled "Risk Factors that May Affect Future Results." Readers should also carefully review the risk factors described in the other documents that we file from time to time with the Securities and Exchange Commission. We assume no obligation to update or revise the forward-looking statements or risks and uncertainties to reflect events of circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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WJ COMMUNICATIONS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

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PART I

Item 1. BUSINESS

Overview

        WJ Communications, Inc. (formerly Watkins-Johnson Company) was founded in 1957 in Palo Alto, California. We were originally incorporated in California and reincorporated in Delaware in August 2000. For more than 30 years, we developed and manufactured microwave devices for government electronics and space communications systems used for intelligence gathering and communication.

        In 1996, we began to develop commercial applications for our military technologies. Today, we design, develop and manufacture innovative, high quality radio frequency (RF) communications products for wireless and wireline communications networks. Our products are comprised of advanced RF semiconductors, integrated assemblies, and highly functional components. The RF equipment in a communications network is used to convert, process, and amplify the high frequency signals that transmit voice, data and images over the network. Our products are installed in wireless and cellular network base stations, and in broadband high speed cable wireline networks. Our products address the radio frequency (RF) challenges faced by these networks and our core expertise in RF design and integration, including RF semiconductor design, coupled with our manufacturing capabilities allows us to compete effectively in our markets.

        We previously operated through other segments and have treated our former Government Electronics, Semiconductor Equipment and Telecommunication segments as discontinued operations. All segments classified as discontinued operations had been divested by March 31, 2000.

        We completed our initial public offering ("IPO") on August 18, 2000. In the IPO we sold an aggregate of 6,210,000 shares of common stock, par value of $0.01 per share. The sale of the shares of common stock generated net proceeds of approximately $88.4 million after deducting offering costs. Our common stock is traded on the Nasdaq National Market under the symbol "WJCI".

Recent Developments

        On March 27, 2003, we announced the withdrawal of the previously announced proposal from an affiliate, Fox Paine & Company LLC ("Fox Paine") to acquire all of the shares of company common stock held by unaffiliated stockholders for $1.10 per share in cash (the "Acquisition Proposal"). Fox Paine and its affiliates currently own approximately 66% of our outstanding shares or approximately 37.0 million shares of a total of approximately 56.5 million shares outstanding.

        During 2002, we began to design and manufacture semiconductors utilizing other manufacturing technologies at third-party foundries. We believe that this approach is required in order to continue to offer competitive products and expect that a greater number of our future products will be developed in this fashion. Over the course of 2003, we will transition to a fully outsourced business model. We believe that this business strategy offers considerable advantages such as allowing us to focus our resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, allowing us to continue to offer competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of our products to new process technologies, which reduce costs and optimize performance. However, there are also significant business risks associated with our dependence upon third parties for our manufacturing needs and there can be no assurance that our outsourcing strategy will be a success.

        During fiscal 2002, we recorded significant restructuring charges representing the direct costs of exiting certain product lines or businesses and the costs of downsizing our business. These charges include further consolidation and abandonment of leased space and associated impairment of tenant improvements, severance costs, an asset impairment charge and the initiation of a program to sell excess manufacturing equipment resulting from the prolonged downturn in the telecommunications industry,

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especially related to our fiber optics products. The 2002 restructuring charge also includes an additional charge for the leased facility we abandoned in 2001 based on our downward revised assumptions regarding sublease occupancy rates and market rates due to an overall deteriorating real estate market and difficulties encountered in subleasing the available space. Also during 2002, we recorded a restructuring charge related to our decision in December 2002 to completely outsource our internal wafer fabrication within one year. As a result of the planned fab closure, we have accrued associated severance expenses, accrued the eventual abandonment of additional excess space for which we will have a remaining two year commitment and recorded an impairment on our internal wafer fabrication equipment and related leasehold improvements. For further discussion, see Note 10 to the consolidated financial statements included elsewhere in this Form 10-K.

        On October 2, 2002, we sold our cellular and PCS repeater business to Andrew Corporation. The effect of this divestiture on our business and financial position was not material.

        On December 10, 2002, we announced we had entered into an agreement to sell our Thin-Film product line to M/A-COM, a unit of Tyco Electronics. The sale includes equipment, material, intellectual property, training and services. The product line will transfer to M/A-COM and title is expected to pass within our second quarter of 2003. We will operate the product line until that time. During 2002, our Thin Film product line contributed $3.2 million to our sales. We will seek to offset these lost sales in future periods by increasing our sales from our remaining product lines, but there can be no assurance that we will do so.

Industry Background

        Over the last decade, there have been significant developments in the communications industry, including the emergence of the Internet, broad deployment of wireless communications and the deployment of broadband cable networks.

        Since the middle of the 1990's, growing demand for voice, video and data services, as well as high speed Internet access, increased the need for communications networks capable of handling large volumes of traffic. Simultaneously, the deregulation of the communications industry and the licensing of additional radio spectrum for wireless communications increased competition among service providers and forced these service providers to seek to differentiate themselves in an effort to attract and retain subscribers. These service providers began upgrading their systems, as well as deploying next-generation wireless and wireline communications technologies including new generations of cellular and broadband cable technologies. This in turn fueled rapid growth in demand for RF semiconductors, components and integrated assemblies such as those we sell.

        As wireless service providers expand and upgrade their networks, they are driving an important transition from wireless networks that use analog signal modulation techniques to wireless networks that use digital signal modulation techniques. As compared to analog technologies, digital technologies generally provide better signal quality and increase the speed and capacity of the voice and data network by allowing transmission of more information in a smaller amount of radio frequency space. Digital technologies place a premium on linear power amplification and management of multiple transmission channels. These are technical challenges which are typically met using increasingly higher performance RF semiconductors and assemblies.

        Throughout the second half of the 1990's and into calendar 2000 these trends have driven significant increases in demand for wireless and wireline communications products including RF products. However, since the beginning of calendar 2001 we and our industry have experienced a notable downturn. This downturn has been driven by a reduction in capital expenditures and network deployments by the telecommunications carriers and service providers that ultimately consume our products. This decrease in demand from carriers and service providers has been caused by several factors including network overcapacity, generally soft economic conditions worldwide, and capital market constraints currently faced

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by carriers and service providers. The reduction in network deployments and capital expenditures has had a particularly large effect on the long haul fiber optics markets and broadband fixed wireless markets that we competed in, and our financial results suffered accordingly. During the years from 1997 to 2000, our revenues increased from $31.2 million to $115.8 million. However, in 2001 our revenues declined to $62.2 million and decreased further in 2002 to $40.2 million.

        While reductions in demand across our industry have been pronounced, we believe that our industry and our markets will ultimately rebound. We believe there are several reasons for their expected future growth.

        Increasing Demand for Wireless Communications Equipment Will be Driven by the Increase in the Number of Wireless Service Subscribers.    The global wireless communications industry has grown considerably, and in 2002 the number of cellular subscribers has continued to grow, albeit at reduced rates. This growth is driven by the demand for new mobile telephone services, the increase in coverage of mobile networks, and the increase in sales of mobile handsets. Mobile subscribers are increasingly demanding data services in addition to enhanced voice services. Next-generation mobile networks are presently being built to provide enhanced voice and data services. These trends continue to increase the demands placed on communications networks. As a result, communication service providers will continue to focus on implementing system improvements that provide greater capacity and speed.

        Greater Demand for Broadband Access Has Led Service Providers to Develop Next Generation Transport Technologies for both Wireless and Wireline Networks.    Wireless network operators and service providers have begun to announce their plans for deployment of next generation wireless services and networks, referred to in the industry as 2.5G and 3G networks. These networks will offer subscribers increased speeds, additional application capabilities, and broader compatible coverage across geographies. Generally speaking these next generation wireless services require upgrades, additions, or replacement of existing wireless infrastructure equipment and therefore as these new services are deployed, demand for RF products should be impacted favorably. In wireline networks, the traditional copper wire communications infrastructure was originally built for voice traffic. This infrastructure has not been sufficient to meet consumer and business demand for broadband access, which has led to the implementation and deployment of next generation communications networks with greater transmission capacity and speed. As the number of users and the amount of network traffic increases over time, eventually service providers must increase the speed of all parts of the network to keep pace.

The RF Challenge

        RF semiconductor technology presents different engineering challenges than standard semiconductor design. In general, digital semiconductors are created from standard semiconductor circuit designs that have predictable performance. This permits an automated design process. Each RF component, however, has distinctly different characteristics that influence overall system performance in complex ways. Instead of having stable inputs and outputs, the RF circuit characteristics can drift based on process variations, temperature, power supply and other variables. As a result, performance characteristics are unique for each device, and the RF engineer must evaluate and develop new designs on a continuous basis for each system performance level and air interface standard. In addition to being skilled in semiconductor circuit design, the RF circuit designer must have a thorough understanding of signal processing principles, must understand the totality of the system for which the device is intended and must be able to create designs that function within the unique parameters of different wireless system architectures.

        The knowledge and skills required to design and to manufacture RF semiconductors, components and integrated assemblies are unique and can take many years to develop. Communications equipment manufacturers seek companies with the technical skills and engineering resources to design, manufacture and integrate RF semiconductors and the other advanced products required by current and future generations of wireless and wireline infrastructure equipment.

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The WJ Communications Solution

        With the ability to design and manufacture RF semiconductors, components, and higher level RF assemblies, and interface these assemblies with other network elements, we enable advanced wireless and wireline communications networks that satisfy the demand for the rapid transmission of large amounts of data, voice and video. Our core technology lies within our advanced RF semiconductor designs, including gallium arsenide semiconductors. By satisfying the critical need for linearity in wireless networks our solutions improve both network capacity and speed.

        Our RF expertise covers a broad range of frequencies used in advanced communications networks today. Our solution is comprised of the following key elements:

        RF Design Expertise.    We have been designing RF and microwave products for more than 30 years and have developed significant RF design expertise. Our team of over 70 highly qualified and talented engineering and technical employees is capable of applying this expertise to a variety of wireless and wireline communications products. This broad range of RF design expertise allows us to create products from the RF semiconductor level, through the component level to the more complex assembly level. These products are optimized to achieve high performance with minimum cost in wireless and wireline networks. Increasingly, our RF expertise is being applied to the design and delivery of the RF semiconductors and components that our customers require and we expect that over the coming years this will be an increasing area of focus for the company.

        Advanced Device Technology.    We design products using the following core technologies:

•

Semiconductor Technology. We have substantial expertise in designing and manufacturing highly linear semiconductor products that amplify and transform signals with minimal distortion and interference. We believe that our devices are more efficient, consume less power and produce less heat than competitive products, and, consequently, enable RF systems to achieve optimal performance. The processes we are currently designing for or evaluating include gallium arsenide (GaAs), heterojunction bipolar transistor (HBT), GaAs metal semiconductor field effect transistor (MESFET), silicon germanium (SiGe) BiCMOS, silicon bipolar transistor, silicon CMOS and silicon BiCMOS.



•

Thin-Film Substrate Technology. Thin-film substrates are ceramic circuit boards on which thin conductive and resistive films have been deposited. Thin-film substrates conduct signals at high frequencies with less signal loss than printed circuit boards. Our thin-film substrate technology includes several features that enhance performance at high frequencies while reducing the assembly cost of integrated products.

        Manufacturability.    Our ability to rapidly convert new technologies and designs into completed RF semiconductors, integrated assemblies, and highly functional components products results from our flexible manufacturing operations and our manufacturing engineering expertise.

Business Strategy

        Our objective is to be the leading supplier of innovative, proprietary RF solutions to communications equipment companies and service providers. To meet this goal, we intend to:

        Leverage Our Technology Leadership and Our Design and Integration Expertise to Grow with Growing Markets.    We intend to participate in the rapid growth of the global wireless and wireline communications. We believe that as data throughput requirements expand in wireless networks the ability to solve the RF challenges becomes increasingly important and the market for RF products will grow accordingly. We intend to apply our RF design expertise to develop additional leading-edge products in each of the rapidly growing areas of the communications markets. In the future we expect to focus increasingly on the markets for RF semiconductors and components. Where appropriate we also intend to use our integration

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expertise to design cost-effective, high performance integrated assemblies for our customers. Due to the commonality of the RF challenge in broadband cable and wireless communications networks, we have the flexibility to allocate our design and engineering resources to any or all of these markets and intend to use this flexibility to take advantage of market opportunities as they arise.

        Maintain and Develop Strong Collaborative Customer Relationships with Industry Leaders.    We believe our reputation for product quality, technical performance, customer responsiveness, on-time delivery and cost competitiveness will help us to continue to maintain and develop a loyal customer base. We collaborate with many of our customers to design and develop new products for them as they develop new products. We plan to maintain our current, and develop new customer relationships with industry leaders within wireless and wireline communications markets.

        Leverage the Fabless Semiconductor Model..    We are an ISO 9001 certified manufacturer. We intend to extend our manufacturing capabilities to meet our customers' demand by transitioning to an outsourced business model. During 2002, we began to design and manufacture semiconductors utilizing other manufacturing technologies at third-party foundries. We believe that this approach is required in order to continue to offer competitive products and expect that a greater number of our future products will be developed in this fashion. Over the course of 2003, we will transition to a fully outsourced business model. We believe that this manufacturing strategy offers considerable other business advantages such as allowing us to focus our resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, obtaining competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of our products to new process technologies, which reduce costs and optimize performance. However, there are also significant business risks associated with our dependence upon third parties for our manufacturing needs and there can be no assurance that our outsourcing strategy will be a success. We do not expect to make significant investments in new manufacturing.

        Acquire and Develop New Technologies.    We intend to continue to augment our existing technology base and design capabilities by acquiring complementary technologies, design capabilities, manufacturing processes and product offerings for broadband cable applications. In addition, we intend to continue to focus our research and development efforts on emerging communications and RF technologies.

Products and Technology

        We are committed to being a technology leader and product development innovator within the commercial communications markets. By applying our sophisticated integration expertise to high level assembly design, we are able to develop cost-effective, high performance products suitable for volume manufacturing. Many of our design engineers, because of the breadth of their experience and expertise, are capable of working effectively at both the semiconductor level and the integrated assembly level. As a result, we are able to focus our expertise and resources to quickly address specific market opportunities as they arise. Our product offerings fall into the following categories:

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Semiconductor Products



•

Wireless Communications Products

Semiconductor Products

        Our semiconductor products include a broad array of high performance semiconductors and thin-film substrates that we manufacture for our own use as well as for sale to others. The primary markets for our semiconductor and thin-film substrate products are the wireless and broadband cable infrastructure markets.

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        Semiconductor Products.    Our semiconductor products are comprised primarily of amplifiers, mixers, multi-chip modules ("mcm") and transistors. Amplifiers and transistors increase the level of signals while mixers translate a signal from one frequency to another. The strength of our semiconductor technology lies in our ability to design and in the case of our gallium arsenide semiconductor products, manufacture highly linear products. High linearity is one of the most critical performance parameters for broadband cable and wireless networks. While our semiconductor products form a solid technological foundation for our own integrated product offerings, we sell approximately 90% of these products to customers. The table below illustrates the wide range of applications for which our semiconductor products are used:

        Our products are manufactured using multiple processes. Some of these processes have been built in our own manufacturing operations and in other cases we have our products manufactured for us by an outside foundry. The processes we are currently designing for or evaluating include heterojunction bipolar transistor (HBT), GaAs metal semiconductor field effect transistor (MESFET), silicon germanium (SiGe) BiCMOS, silicon bipolar transistor, silicon CMOS and silicon BiCMOS.

        Thin-Film Substrate Products.    Our semiconductor products also include thin-film substrates designed and manufactured using several advanced processes. Our thin-film substrates incorporate technology that improves the electrical performance of the circuits while enabling increased circuit density. In addition, we use laser machining technology which allows us to cut our products into virtually any shape.

Wireless Communications Products

        Our wireless communications products are primarily used in wireless infrastructure equipment, such as cellular base stations, which provide a combination of voice and data services to mobile users.

        Mobile Wireless Infrastructure Equipment.    We have an extensive array of integrated products for the mobile wireless infrastructure market. These products include base station RF front ends, diagnostic and support equipment and repeaters. Base station RF front ends consist of filters and frequency converters, and are used in virtually every communications system to translate signals from one frequency to another.

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Base Station RF Front Ends and Converters. Our base station RF front ends and converters incorporate our highly linear amplifiers and mixers to receive signals from and transmit signals to mobile subscribers. The resulting frequency can either be higher than the original frequency, which is called up-conversion, or lower, which is called down-conversion. These conversions are required by systems because the parts of the system that encode and decode the signals cannot operate at the high frequencies used to carry information over the air or through the network.



•

Diagnostic and Support Equipment. Our diagnostic and support equipment is used within base stations to distribute signals and to determine the health and status of the base station. These are custom-designed products and rely heavily on our RF integration expertise to prevent various signals from interfering with each other.

Customers

        We sell our semiconductor and wireless communications components and subassemblies principally to original equipment manufacturers, including their manufacturing subcontractors, that, in turn, integrate our products into network infrastructure equipment solutions. We believe that we have strong relationships

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with market leaders in the wireless and wireline markets. A sample of our revenue-producing customers include:

        During the year ended December 31, 2002, we had three customers which each accounted for more than 10% of our sales and in aggregate accounted for 62% of our sales. During the year ended December 31, 2001, we had four customers which each accounted for more than 10% of our sales and in aggregate accounted for 71% of our sales. During the year ended December 31, 2000, we had two customers which each accounted for more than 10% of our sales and in aggregate accounted for approximately 72% of our sales. Our sales have historically been concentrated with several key communications equipment manufacturers.

Sales and Marketing

        We sell and market our products primarily through the following three sales channels:

        Direct Sales    We have a dedicated team of direct sales people who are responsible for maintaining relationships with our key customers and generating new business with both existing and potential customers. We cultivate strong, direct relationships with our key customers through major account teams that are led by our sales professionals and are comprised of engineers and product managers. These teams are designed to address the specific product needs of our key customers.

        Manufacturer Sales Representatives    Manufacturer sales representatives are responsible for calling on potential customers as well as maintaining relationships with non-major accounts. We use manufacturer sales representatives to augment our own direct sales force.

        Distributor    On June 5, 2002, we announced we had entered into a sole worldwide distributorship agreement with Richardson Electronics, Ltd. expanding our previous relationship to resell our RF semiconductor products through catalog, e-commerce and direct channels. This agreement also includes provisions for joint marketing and promotional activities.

        International Sales    Our sales outside the United States were 34%, 42% and 53% of our total sales, in 2002, 2001 and 2000, respectively. For more detailed disclosure on our foreign sales, see Note 12 to the consolidated financial statements included elsewhere in this Form 10-K.

Manufacturing

        We have two leased manufacturing sites: a building in Milpitas, California with over 35,000 square feet and two buildings in San Jose, California totaling over 124,000 square feet. The San Jose facility consists of two buildings: a larger building of approximately 82,000 square feet and a smaller building of approximately 42,000 square feet. In September 2001, we decided to abandon the smaller building at our San Jose facility based on revised anticipated demand for our products and market conditions. As of December 31, 2002, we have signed three tenants to cover approximately 76% of the excess leased space. In September 2002, we decided to abandon a portion of the larger building at our San Jose facility based on revised anticipated demand for our products and market conditions. This excess space is located on the first floor of our current corporate headquarters and originally housed a portion of our optics and integrated assemblies manufacturing operations. We are actively seeking tenants to occupy the excess leased space. In December 2002, we decided to abandon the Milpitas facility within one year based on our decision to

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completely outsource our internal wafer fabrication. At that time, we will have a remaining two year commitment for this excess space. For further discussion, see Note 10 to the consolidated financial statements included elsewhere in this Form 10-K.

        Our Milpitas facility produces gallium arsenide semiconductor and thin-film. Considerable manufacturing capacity exists for gallium arsenide semiconductor. Our gallium arsenide products are packaged in Singapore, The Philippines, Malaysia, Taiwan and France at vendor facilities. The thin-film manufacturing lines are capable of processing three-inch, four-inch and six-inch substrate squares.

        During 2002, we began to design and manufacture semiconductors utilizing other manufacturing technologies at third-party foundries. We believe that this approach is required in order to continue to offer competitive products and expect that a greater number of our future products will be developed in this fashion. Over the course of 2003, we will transition to a fully outsourced business model. We believe that this business strategy offers considerable advantages such as allowing us to focus our resources on product development and marketing, minimizing capital expenditures, reducing operating expenses, allowing us to continue to offer competitive pricing, reducing time to market, reducing technology and product risks and facilitating the migration of our products to new process technologies, which reduce costs and optimize performance. However, there are also significant business risks associated with our dependence upon third parties for our manufacturing needs and there can be no assurance that our outsourcing strategy will be a success.

        The San Jose facility produces our wireless communications products. These products are assembled using surface mount technology which is generally used for products operating at frequencies below 10 gigahertz. We contract with external surface mount manufacturers for high volume manufacturing, using both turnkey and consignment material arrangements with these surface mount contract manufacturers depending on the characteristics of the assembly. We have used a number of capable surface mount manufacturers. Once the surface mount assembly operations are completed, the products are shipped to our facilities for testing and final configuration.

        We depend on single or limited source suppliers for the components and materials used in many of our products, including our thin-film products, substrates, gallium arsenide wafers, packaging, electronic components and antennas. A significant portion of the raw material used to manufacture our thin-film products is sole sourced from Coors Ceramics, and there are very limited alternative sources for this material. Although we rely on limited or sole source suppliers for other components and materials, there are typically alternative sources of supply available for them. If in the future we face difficulties obtaining these components and materials from any of our limited or sole source suppliers, we may face a delay in the shipment of products which are manufactured using these components and materials while we identify and qualify an alternative source of supply if available. As a result of these delays, we may fail to satisfy customer orders and our sales may decline while we look for a suitable alternative supplier.

Research and Development

        Our future success depends on our ability to develop new designs, technologies and product enhancements. We have assembled a core team of experienced engineers and technologists to accomplish these objectives. These employees are involved in advancing our core technologies, as well as applying these core technologies to our product development activities in our target markets. We have made, and will continue to make, a substantial investment in research and development activities. Research and development costs, which are expensed when incurred, were approximately $18 million, $17 million and $19 million for the years 2002, 2001 and 2000, respectively.

Intellectual Property

        We rely on patent, copyright, trademark and trade secret laws, as well as confidentiality procedures and contractual provisions, to protect our proprietary rights. We believe that one of our competitive

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strengths is our core competence in engineering, manufacturing and understanding our customers and markets, and we take aggressive steps to protect that knowledge. We have been active in securing patents and entering into non-disclosure and confidentiality agreements to protect our proprietary technologies and know-how resulting from our ongoing research and development.

        We seek patent protection for our unique developments in circuit designs, processes and algorithms. We have 24 United States patents and four foreign patents. We currently have several patent applications pending in the United States Patent and Trademark Office including one we filed in 2002. Our existing United States patents will expire between June 2007 and August 2019. We have chosen to pursue foreign patent protection only in selected foreign countries. Our failure to pursue foreign protection in these countries and the fact that patent rights may be unavailable or limited in some foreign countries could make it easier for our competitors to utilize our intellectual property. We cannot assure you that any patent will be issued as a result of our pending applications or any future applications or that, if issued, these patents will be sufficient to protect our technology. In addition, we cannot assure you that any existing or future United States or foreign patents will not be challenged, invalidated or circumvented, or that any patent granted will provide us with adequate protection or any competitive advantages.

        We license various technologies from third parties that we have integrated into our products. We have a non-exclusive, non-transferable license to use particular thin-film technology and transferable, non-exclusive licenses to use particular gallium arsenide technology, and technology used in the field of commercial, or non-military, RF communications, all of which are perpetual licenses. Our failure to maintain these licenses could harm our business.

        We generally enter into non-disclosure agreements with our vendors, customers and licensees. Our employees are generally required to enter into agreements providing for the maintenance of confidentiality and the assignment of rights to inventions made by them while in our employ. We generally control access to the distribution of documentation and other information concerning our intellectual property. We also have entered into non-disclosure agreements to protect our confidential information delivered to third parties, in connection with possible strategic partnerships and for other purposes.

        We have entered into license agreements in connection with some of our recent business dispositions with respect to some of our intellectual property used in these sold businesses. We cannot assure you that the other parties to these license agreements will honor the terms of the agreements or aggressively prevent the misappropriation or infringement of our intellectual property. Further, under these license agreements, some of our intellectual property may be licensed to one or more of our competitors.

        The telecommunications industry is characterized by the vigorous protection and pursuit of intellectual property rights. We cannot assure you that actions alleging infringement by us of third-party intellectual property, misappropriation or misuse by us of third-party trade secrets or the invalidity of the patents held by us will not be asserted or prosecuted against us, or that any assertions of infringement, misappropriation or misuse or prosecutions seeking to establish the invalidity of our patents will not harm our competitive position or reputation or result in significant monetary expenditures.

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Employees

        One of our most important assets is our base of well-trained and experienced employees. As of December 31, 2002, we had 180 employees, none of whom were represented by a collective bargaining agreement and consisted of:

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19 executive and administrative employees;



•

15 sales and marketing employees;



•

74 manufacturing, facilities and operations employees; and



•

72 engineering and technical employees.

        We have historically experienced relatively low turnover. However, since January 1, 2002 we have reduced our workforce by approximately 26% due to the recent economic downturn and weakness in demand resulting in approximately $943,000 of employee severance costs of which $507,000 was included in our 2002 restructuring charge (see Note 10 to the consolidated financial statements included elsewhere in this annual report). In addition, we will reduce our workforce by an additional 10% related to our plan to completely outsource our semiconductor manufacturing by the end of 2003. As such, we have accrued approximately $280,000 for employee severance. If demand increases in the future, we expect to correspondingly increase our workforce and there can be no assurance that we will be able to hire qualified employees. Our employees have an average of over five years tenure with us. Many of our engineering and technical staff have been with us for even longer. We believe that many of our engineers, as a result of their tenure and their defense electronics background, are among the most experienced high frequency engineers in the United States.

Backlog

        Our backlog is comprised of standard purchase orders and multi-year contracts for the delivery of products. For our multi-year contracts, our major customers provide us with twelve month rolling sales forecasts on at least a monthly basis. These forecasts are subject to changes, including changes as a result of changes in market conditions, and could fluctuate significantly from quarter to quarter. Due to industry practice which allows customers to cancel or change orders with limited advance notice prior to shipment, we believe that backlog is not a reliable indicator of future revenue levels.

Competition

        The markets for our products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. We compete primarily on the basis of product performance and design, reliability, quality, delivery, price and the availability and breadth of product offerings. We face competition from other component manufacturers, as well as companies with product integration capabilities. We compete primarily with other suppliers of high performance RF components used in the infrastructure of communications networks. We also compete with current and potential communications equipment manufacturers who manufacture RF components internally such as Ericsson, Lucent, Motorola and Nortel Networks. We expect increased competition from existing competitors and from a number of companies that may enter the RF component market, as well as future competition from companies that may offer new or emerging technologies. Some of our competitors are large public companies that have significantly greater financial, technical, marketing and other resources than us. As a result, these competitors may be able to devote greater resources to the development, promotion, sale and support of their products. Furthermore, those of our competitors that have large market capitalization or cash reserves may be better positioned than we are to acquire other companies in order to gain new technologies or products that may displace our product lines.

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Environmental Matters

        Our operations are subject to federal, state and local laws and regulations governing the use, storage, disposal of and exposure to hazardous materials, the release of pollutants into the environment and the remediation of contamination. Our former Scotts Valley and Palo Alto sites have significant environmental liabilities for which we have entered into and funded fixed price remediation contracts and obtained cost-overrun and unknown pollution conditions insurance coverage.

        The Scotts Valley site is a federal Superfund site. Chlorinated solvent and other contamination was identified at the site in the early 1980s, and by the late 1980s we had installed a groundwater extraction and treatment system. In 1991, we entered into a consent decree with the United States Environmental Protection Agency providing for remediation of the site. In July 1999, we signed a remediation agreement with an environmental consulting firm, ARCADIS Geraghty & Miller. Pursuant to this remediation agreement, we paid approximately $3.0 million in exchange for which ARCADIS agreed to perform the work necessary to assure satisfactory completion of our obligations under the consent decree. The agreement also contains a cost overrun guaranty from ARCADIS up to a total project cost of $15.0 million. In addition, the agreement included procurement of a ten-year, claims-made insurance policy to cover overruns of up to $10.0 million from Reliance Insurance Company, along with a ten-year, claims made $10-million policy to cover various unknown pollution conditions at the site.

        The Palo Alto site is a state Superfund site and is within a larger, regional state Superfund site. As with the Scotts Valley site, contamination was discovered in the 1980s, and groundwater extraction and treatment systems have been operating for several years at both the site and the regional site. In July 1999, we entered into a remediation agreement with an environmental consulting firm, SECOR. Pursuant to this remediation agreement, we paid approximately $2.4 million in exchange for which SECOR agreed to perform the work necessary to assure satisfactory completion of our obligations under the applicable remediation orders. The payment included the premium for a 30-year, claims-made insurance policy to cover cost overruns up to $10.0 million from AIG, along with a ten-year claims-made $10.0 million insurance policy to cover various unknown pollution conditions at the site.

        With respect to our remaining current or former production facilities, to date either no contamination of significance has been identified or reported to us or the regulatory agency involved has granted closure with respect to the identified contamination. Nevertheless, we may face environmental liabilities related to these sites in the future.

Recapitalization Merger

        On October 25, 1999, an affiliate of Fox Paine agreed to enter into a recapitalization merger transaction with us. The recapitalization merger transaction was the culmination of a strategy implemented by the predecessor Board of Directors in February 1999 to seek to maximize shareholder value by pursuing the sale of the company in its entirety or as separate business groups. For a number of years prior to that time, difficult market conditions, including decreased Federal defense spending, affected some of our business groups. The predecessor Board determined that these conditions, as well as the difficulty that the public capital markets had in categorizing our business and identifying comparable companies, given our several disparate businesses, resulted in our public stock price being undervalued. As a result, the predecessor Board decided to divest the microwave products group in 1997, the semiconductor products group in 1999 and the telecommunications group in early 2000, in some cases along with associated real estate assets. We replaced the majority of our senior management and our entire Board of Directors upon the closing of the recapitalization merger on January 31, 2000. From January 1, 1998 until January 31, 2000, our stock price ranged from $0.55 to $1.37 per share, adjusted for subsequent stock splits. The price per share paid in the recapitalization merger was $1.37, which was the price Fox Paine paid for its shares. Since our recapitalization merger, we have been focused exclusively on providing product solutions that enable and facilitate the development of fiber optic, broadband cable and wireless network infrastructure.

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In April 2000, we changed our name from Watkins-Johnson Company to WJ Communications, Inc. to highlight our focus on the commercial communications markets. We reincorporated in Delaware and effected a 3-for-2 stock split on August 15, 2000. At the end of 2002, we exited our fiber optics business due to the prolonged downturn in that market.

        In the recapitalization merger, FP-WJ Acquisition Corp., a newly-formed corporation wholly-owned by Fox Paine, merged into us. All of our pre-recapitalization shareholders except, with respect to a portion of its shares, a family trust of which Dean A. Watkins is a co-trustee and beneficiary, became entitled to receive cash in exchange for their shares of the pre-recapitalization common stock. Dr. Watkins is our co-founder and was the Chairman of our Board of Directors at the time of the recapitalization merger. As a result of the rollover of a portion of the interest in our equity in us held by Dr. Watkins' trust pursuant to an agreement entered into with the trust at the time we entered into the merger agreement, we were able to account for the merger as a recapitalization for financial accounting purposes. In addition, the rollover provided the trust with a tax benefit, in that the rollover shares were not retired for cash or otherwise.

        Our statement of operations includes the costs of the recapitalization merger as an expense. In addition, as a result of the continuing significant ownership interest of the pre-recapitalization stockholders, no adjustments have been made to the historical carrying amounts of our assets and liabilities as a result of the recapitalization merger. Furthermore, the premium paid in cash to stockholders in excess of that historical cost is shown as a reduction of stockholders' equity.

Seasonality and Cyclicality

        It has been our experience that telecommunication equipment spending is typically lower in the first quarter of the calendar year and higher during the fourth quarter of the calendar year. Our semiconductor business is cyclical and has been effected by the overall downturn in the semiconductor market.

Item 2. PROPERTIES

        We have two leased manufacturing sites: a building in Milpitas, California with over 35,000 square feet and two buildings in San Jose, California totaling over 124,000 square feet. The San Jose facility consists of two buildings: a larger building of approximately 82,000 square feet and a smaller building of approximately 42,000 square foot. Both buildings are leased for ten years. The larger building has a beginning base monthly rent of $158,340 for the first twelve months, which increases by 4% over each succeeding twelve month period. The smaller building has a beginning base monthly rent of $94,500 for the first twelve months which will also increase by 4% over each succeeding twelve month period.

        In September 2001, we decided to abandon the smaller building at our San Jose facility based on revised anticipated demand for our products and market conditions. As of December 31, 2002, we have signed three tenants to cover approximately 76% of the excess leased space. In September 2002, we decided to abandon a portion of the larger building at our San Jose facility based on revised anticipated demand for our products and market conditions. This excess space is located on the first floor of our current corporate headquarters and originally housed a portion of our optics and integrated assemblies manufacturing operations. We are actively seeking tenants to occupy the excess leased space. In December 2002, we decided to abandon the Milpitas facility within one year based on our decision to completely outsource our internal wafer fabrication. At that time, we will have a remaining two year commitment for this excess space. For further discussion, see Note 10 to the consolidated financial statements included elsewhere in this Form 10-K.

        We believe that our present facilities are in good condition and suitable for its operations. We also believe that we have excess capacity, which more than meets our anticipated requirements for the foreseeable future.

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Item 3. LEGAL PROCEEDINGS

        We are a defendant in four lawsuits, three of which are purported class action lawsuits, that have been filed against WJ Communications and its directors in connection with Fox Paines's proposal to purchase all of the shares of our common stock not held by Fox Paine and their affiliates which proposal was withdrawn by Fox Paine on March 27, 2003. Fox Paine is also a defendant in these lawsuits. One of the actions, which is not a purported class action, was filed by WJ Communications, Inc.'s former President and Chief Executive Officer, Malcolm J. Caraballo. Among other things, these lawsuits seek an injunction against the consummation of the proposed transaction and an award of unspecified compensatory damages. The specific cases are as follows:

        On September 23, 2002, a purported class action complaint was filed in the Court of Chancery in the State of Delaware in and for New Castle County (No. 19905) by Solomon Weiss, an alleged stockholder of WJ Communications, Inc. The complaint names as defendants WJ Communications, Inc. and each member of its board of directors as well as Fox Paine & Company, LLC. The complaint is a purported class action that alleges, among other things, that (i) Fox Paine & Company, LLC controls WJ Communications, Inc., (ii) the defendants have breached fiduciary duties they assertedly owed to WJ Communications, Inc.'s stockholders in connection with Fox Paine & Company, LLC's intent to purchase all of the shares of WJ Communications, Inc. common stock not held by Fox Paine & Company, LLC and (iii) the merger consideration is unfair and inadequate. The plaintiff seeks, among other things, an injunction against the consummation of the merger, recision of the transaction if it is consummated and an award of rescissory damages, an accounting and unspecified damages, an award of costs, and such other relief as the court may deem just and proper.

        On September 24, 2002, a purported class action complaint was filed in the Court of Chancery in the State of Delaware in and for New Castle County (No. 19906) by Luke Liem, an alleged stockholder of WJ Communications, Inc. The complaint names as defendants WJ Communications, Inc. and each member of its board of directors as well as Fox Paine & Company, LLC. The complaint is a purported class action that alleges, among other things, that (i) Fox Paine & Company, LLC controls WJ Communications, Inc., (ii) the defendants have breached fiduciary duties they assertedly owed to WJ Communications, Inc.'s stockholders in connection with Fox Paine & Company, LLC's intent to purchase all of the shares of WJ Communications, Inc. common stock not held by Fox Paine & Company, LLC and (iii) the merger consideration is unfair and inadequate. The plaintiff seeks, among other things, an injunction against the consummation of the merger, recision of the transaction if it is consummated and an award of rescissory damages, an accounting and unspecified damages, an award of costs, and such other relief as the court may deem just and proper.

        On November 7, 2002, an order of consolidation was entered by the court which consolidated the above two purported class action complaints filed by alleged stockholders, Mr. Weiss and Mr. Liem (consolidated case No. 19905).

        On November 8, 2002, a purported class action complaint was filed in the Superior Court of the State of California, County of Santa Clara (No. CV 812579) by Herbert Weil, an alleged stockholder of WJ Communications, Inc. The complaint names as defendants WJ Communications, Inc. and each member of its board of directors as well as Fox Paine & Company, LLC. The complaint is a purported class action that alleges, among other things, that (i) Fox Paine & Company, LLC controls WJ Communications, Inc., (ii) the defendants have breached fiduciary duties they assertedly owed to WJ Communications, Inc.'s stockholders in connection with Fox Paine & Company, LLC's intent to purchase all of the shares of WJ Communications, Inc. common stock not held by Fox Paine & Company, LLC and entering into the merger, with Fox Paine & Company, LLC and (iii) the merger consideration is unfair and inadequate. The plaintiff seeks, among other things, an injunction against the consummation of the merger, an award of costs and such other relief as the court may deem just and proper.

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        On January 21, 2003, a complaint was filed in the Superior Court of the State of California, County of Santa Clara (No. CV 814188) by Malcolm J. Caraballo, Sallie Caraballo, Susan C. David, Michael K. David, Sherry Dorfman, Richard Dorfman, Richard Dorfman on behalf of Kelly Dorfman UGMA, and Adam Caraballo, each an alleged stockholder of WJ Communications, Inc. Malcolm J. Caraballo, was the President and Chief Executive Officer of WJ Communications, Inc. from January 31, 2000 to the time of his separation from WJ Communications, Inc. in March 2002. The complaint names as defendants WJ Communications, Inc. and each member of its board of directors as well as Fox Paine & Company, LLC. The complaint alleges, among other things, that (i) Fox Paine & Company, LLC controls WJ Communications, Inc., (ii) the defendants have breached fiduciary duties they assertedly owed to WJ Communications, Inc.'s stockholders in connection with Fox Paine & Company, LLC's intent to purchase all of the shares of WJ Communications, Inc. common stock not held by Fox Paine & Company, LLC and entering into the merger, with Fox Paine & Company, LLC and (iii) the merger consideration is unfair and inadequate. The plaintiffs seek, among other things, an injunction against the consummation of the merger, recision of the transaction if it is consummated and an award of unspecified compensatory damages, unspecified damages, an award of costs, and such other relief as the court may deem just and proper.

        We deny the allegations and intend to vigorously defend ourselves against these actions. Since these lawsuits are in the early stages of litigation, it is difficult at this time to evaluate whether we will incur any liability or to estimate the damages, or range of damages. While we do not expect the ultimate result of these lawsuits to have a material adverse effect on our results of operations, financial position or cash flow, there can be no assurance that this will be the case. We maintain a directors and officers liability insurance policy that provides $10 million of coverage with retention of $1 million and excess directors and officers liability reimbursement coverage of $5 million. However, there can be no assurance that our costs and expenses, including any monetary damages awarded to plaintiffs, will be covered by insurance or if covered, such insurance will be adequate.

        We currently are also involved in litigation and regulatory proceedings incidental to the conduct of our business and expect that we will be involved in other litigation and regulatory proceedings from time to time. While we believe that any adverse outcome of such pending matters will not materially affect our business or financial condition, there can be no assurance that this will be the case.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        There were no matters submitted to a vote of security holders in the fourth quarter of 2002.

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PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock

        Our common stock is traded on the Nasdaq National Market under the symbol "WJCI". The following table sets forth, for the periods indicated the high and low closing sales prices as reported on the Nasdaq National Market for WJ Communications, Inc. common stock, as adjusted for all stock splits.

        As of December 31, 2002, there were approximately 104 stockholders of record of our common stock.

Dividend Policy

        We did not pay any dividends in 2002 and 2001. We do not intend to pay cash dividends on our common stock for the foreseeable future. Instead, we intend to retain all earnings for use in the operation and expansion of our business. Our board of directors will make any future determination of the payment of dividends based upon various factors then existing, including, but not limited to, our financial condition, operating results and current and anticipated cash needs. In addition, covenants in our revolving credit facility limit our ability to declare and pay cash dividends on our common stock, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" and Note 4 to the consolidated financial statements included elsewhere in this annual report.

Report of Public Offering of Securities and Use of Proceeds

        We completed our initial public offering ("IPO") on August 18, 2000, pursuant to a Registration Statement Form S-1 (File No. 333-38518), which was declared effective by the Securities and Exchange Commission on August 17, 2000. In the IPO we sold an aggregate of 6,210,000 shares of common stock, par value of $0.01 per share. The sale of the shares of common stock generated aggregate proceeds of $99.4 million. The aggregate net proceeds were approximately $88.4 million after deducting underwriters discounts and commissions of approximately $7.0 million and directly paid expenses of the offering of $4.0 million. Chase H&Q, CIBC World Markets and Thomas Weisel Partners LLC were the lead underwriters for the IPO.

        Since the completion of our IPO through December 31, 2002 we reasonably estimate that we have used the net proceeds from the initial public offering as follows: approximately $40.0 million to repay outstanding debt amounts, approximately $23.4 million to purchase and install equipment and construct various leasehold improvements, and approximately $6.4 million for working capital and general corporate purposes (including compensation to employees, officers and directors in accordance with their standard agreements). We expect to use the remaining net proceeds for general corporate purposes, including funding our operations, our working capital needs and capital expenditures. Pending further use of the net proceeds, we have invested them in short-term, interest-bearing, investment-grade securities. Except as

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indicated above, all of the payments described above were direct or indirect payments to entities or persons other than directors, officers or greater than 10% owners of our equity securities.

Recent Sales of Unregistered Securities

        In 2002, we did not sell any of our securities that were not registered under the Securities Act.

Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this report. The statements of operations data for the years ended December 31, 2002, 2001, and 2000 and the selected balance sheet data as of December 31, 2002 and 2001 are derived from our audited consolidated financial statements which are included elsewhere in this report. The statements of operations data for the years ended December 31, 1999 and 1998 and the selected consolidated balance sheet data as of December 31, 2000, 1999 and 1998 are derived from our audited consolidated financial statements which are not included in this annual report. The selected consolidated statements of operations data represent our results from continuing operations only and the selected consolidated balance sheet data exclude net assets from discontinued operations. For a discussion of our discontinued operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" and Note 12 to the consolidated financial statements included elsewhere in this Form 10-K. The selected consolidated statements of operations data excludes our extraordinary item resulting from the write-off of unamortized deferred financing costs associated with our early extinguishment of debt and includes our preferred stock dividend—assumed beneficial conversion. For a discussion of our preferred stock dividend—assumed beneficial conversion, see Note 6 to the consolidated financial statements included elsewhere in this Form 10-K. The historical results are not necessarily indicative of results to be expected for any future period.

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