ENWV Endwave Corp. (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

 

000-31635
(Commission file number)
ENDWAVE CORPORATION
(Exact name of registrant as specified in its charter)

 

 

 

(408) 522-3100

 

(Registrant’s telephone number, including area code)

 

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o      No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ .

 

The number of shares of the registrant’s Common Stock outstanding as of April 29, 2011 was 9,892,120 shares.

 

 

ENDWAVE CORPORATION

 

INDEX

 

 

 

ENDWAVE CORPORATION

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

ENDWAVE CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

ENDWAVE CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Endwave Corporation (“Endwave” or the “Company”) designs, manufactures and markets radio frequency (“RF”), products that enable the transmission, reception and processing of high frequency RF signals. The Company’s products consist of two key product lines, semiconductor devices and integrated transceiver modules:

 

 

The accompanying unaudited condensed consolidated financial statements of Endwave have been prepared in conformity with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The year-end condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the results of the interim periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or any future periods. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2010.

 

Proposed Merger with GigOptix

 

On February 4, 2011, Endwave entered into an Agreement and Plan of Merger with GigOptix, Inc. (“GigOptix”), and Aerie Acquisition Corporation, a wholly-owned subsidiary of GigOptix (“Merger Subsidiary”), pursuant to which Merger Subsidiary will, subject to the satisfaction or waiver of the conditions therein, merge with and into Endwave, the separate corporate existence of Merger Subsidiary shall cease and Endwave will be the surviving corporation of the merger and a wholly-owned subsidiary of GigOptix. This agreement is referred to as the Merger Agreement and the proposed merger contemplated by the Merger Agreement as the Merger.

 

Upon the consummation of the Merger, (i) the outstanding shares of Endwave common stock will be converted into the right to receive an aggregate number of shares of GigOptix common stock equal to the product of (.425/.575) and the number of shares of GigOptix common stock outstanding immediately prior to consummation of the Merger, less 42.5% of the shares described in clause (ii) of this sentence and (ii) in-the-money options to acquire Endwave common stock outstanding immediately prior to the consummation of the Merger will be converted into that number of shares of GigOptix common stock determined by dividing the spread value of such options at closing by the closing price of GigOptix’s common stock on the trading day prior to closing, such that following the Merger, the pre-Merger holders of common stock and restricted stock units will own that number of

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

shares equal to 42.5% of the outstanding stock of the combined company, less 42.5% of the shares issued in respect of Endwave stock options.

 

The Merger Agreement includes customary representations, warranties and covenants of Endwave and GigOptix. Endwave has agreed to conduct its operations and the operations of its subsidiaries according to its ordinary and usual course of business consistent with past practice until the effective time of the Merger. The Merger Agreement contains customary “no-solicitation” covenants pursuant to which neither Endwave nor GigOptix is permitted to solicit any alternative acquisition proposals, provide any information to any person in connection with any alternative acquisition proposal, participate in any discussions or negotiations relating to any alternative acquisition proposal, approve, endorse or recommend any alternative acquisition proposal, or enter into any agreement relating to any alternative acquisition proposal. The “no-solicitation” provision is subject to certain exceptions that permit the Board of Directors of each of Endwave and GigOptix, as the case may be, to comply with their respective fiduciary duties, which, under certain circumstances, would enable Endwave or GigOptix, as the case may be, to provide information to, and engage in discussions or negotiations with, third parties with respect to alternative acquisition proposals.

 

The Merger Agreement contains certain termination rights for both Endwave and GigOptix and further provides that, upon termination of the Merger Agreement under certain circumstances, Endwave may be obligated to pay GigOptix a termination fee of $1,000,000 plus certain reasonable documented expenses of GigOptix.

 

The Merger which is subject to regulatory approvals as well as approvals by the stockholders of Endwave is expected to close during the second quarter of 2011.

 

 

The following fair value amounts have been determined using available market information.

 

 

 

At March 31, 2011, the Company had $11.9 million of short-term investments with maturities of less than one year and no long-term investments.

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

At March 31, 2011, the Company had unrealized gains of $5,000 related to $9.5 million of investments in United States government agency bonds and no unrealized losses. Unrealized gains and losses on commercial paper and corporate security investments were immaterial as of March 31, 2011. The investments mature during 2011 and the Company believes that it has the ability to hold these investments until the maturity date. Realized gains and losses were insignificant for the three months ended March 31, 2011 and 2010.

 

The Company reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, credit quality and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. If the Company believes the carrying value of an investment is in excess of its fair value, and this difference is other-than-temporary, it is the Company’s policy to write down the investment to reduce its carrying value to fair value.

 

Fair Value Measurements

 

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010 (in thousands):

 

 

The Company’s financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. As of March 31, 2011, the Company did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3).

 

As of March 31, 2011 and December 31, 2010, the Company did not have any significant transfers of investments between Level 1 and Level 2.

 

The amounts reported as cash and cash equivalents, accounts receivable, note receivable, accounts payable and accrued warranty, compensation and other liabilities approximate fair value due to their short-term maturities. The fair value for the Company’s investments in marketable debt securities is estimated based on quoted market prices and are the only financial instruments required to be adjusted to fair market value on a recurring basis. Based upon

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

borrowing rates currently available to the Company for capital leases with similar terms, the carrying value of its capital lease obligations approximates fair value.

 

 

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market and consisted of the following (in thousands):

 

 

 

The warranty periods for the Company’s products are between 12 and 30 months from the date of shipment. The Company provides for estimated warranty expense at the time of shipment. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, its warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the estimates, revisions to the estimated warranty accrual and related costs may be required.

 

Changes in the Company’s product warranty liability during the three months ended March 31, 2011 and 2010 are as follows (in thousands):

 

 

 

During the first quarter of 2011, the Company undertook certain restructuring activities to reduce expenses. The Company vacated its facilities in Salem, New Hampshire and terminated 12 employees in order to reduce the Company’s cost structure. The employee terminations affected all areas of the Company’s operations. The components of the $804,000 restructuring charges included the following: $527,000 for severance, benefits and payroll taxes, $18,000 for the incremental fair value as a result of the acceleration of certain stock awards for the affected personnel, $203,000 for facilities charges related to exiting the lease in Salem, New Hampshire and a $56,000 loss on disposal of fixed assets for impaired leasehold improvements and equipment related to the closure of the Salem facility.

 

The Company reviews long-lived assets for impairment, whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. During the first quarter of 2011, the Company recognized a non-cash $56,000 loss on disposal of fixed assets for impaired leasehold improvements and

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

equipment related to the closure of the Salem facility. This impairment charge was included in the restructuring expenses in the Company’s condensed consolidated statement of operations.

 

The Company incurred cash charges of approximately $730,000 related to its first quarter 2011 restructuring activities for severance, benefits, payroll taxes and facilities charges and the payments are expected to be substantially completed by the end of the fourth quarter of 2011. The charges related to the acceleration of stock awards and the loss on disposal of fixed assets are non-cash charges.

 

Changes in the Company’s restructuring liabilities discussed above during the three months ended March 31, 2011 and 2010 are summarized as follows (in thousands):

 

 

At December 31, 2010, $431,000 and $234,000 of accrued restructuring charges are included in current liabilities and long-term liabilities, respectively, on the consolidated balance sheet.

 

At March 31, 2011, $926,000 and $115,000 of accrued restructuring charges were included in current liabilities and long-term liabilities, respectively, on the condensed consolidated balance sheet. Of the $1.0 million in total accrued restructuring, approximately $530,000 is related to the first quarter 2011 restructuring plan and $511,000 is related to the restructuring liability for a senior executive which was recognized in the fourth quarter of fiscal year 2009.

 

The restructuring liability related to a senior executive was recorded at its fair value based on an assumed interest rate of 5.0%, which represents the current market rate of interest at which the Company could borrow, due to the long-term nature of the liability. The Company will recognize interest expense associated with amortizing the $77,000 discount on this liability over the 30 month term of the restructuring payout. During the first three months of 2011 and 2010, the Company recognized interest expense of $9,000 and $13,000, respectively. The payments for the restructuring liability related to a senior executive are expected to be completed by end of the second quarter of 2012, but if the proposed Merger is completed, the payments will be accelerated to coincide with the closing of the Merger.

 

The Company’s restructuring estimates will be reviewed and revised quarterly and may result in an increase or decrease to restructuring charges. During the first quarter of 2010, the Company recorded a $14,000 positive adjustment as a result of lower benefit charges in connection with our first quarter 2009 restructuring plan than were originally anticipated. No adjustments were recorded during the first quarter of 2011.

 

 

On October 31, 2008, the Company filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech, the parent company of Allgon Microwave Corporation AB, had breached its contractual obligations with Endwave and owes the Company $994,500 for amounts outstanding under a note receivable and for purchased inventory and authorized finished goods purchase orders. The Company cannot predict the outcome of these proceedings. At the time of default, the note receivable balance was $420,000. Based on Allgon’s bankruptcy

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

liquidation and the related estimates of payments to Allgon’s creditors, the Company still continues to reserve 100%, or $420,000, of the remaining balance of the note receivable.

 

Other than the complaint against Advantech, the Company is not currently a party to any material litigation.

 

As discussed in the restructuring footnote, the Company vacated its facilities in Salem, New Hampshire during the first quarter of 2011 and as a result will incur an early termination charge for exiting the lease. The following table summarizes the Company’s updated operating lease obligations including the early termination charge as of March 31, 2011:

 

 

 

Preferred Stock and Warrant Purchase Agreement

 

The Company had 5,000,000 shares of convertible preferred stock authorized as of March 31, 2011 and December 31, 2010.

 

In April 2006, the Company entered into a purchase agreement with Oak Investment Partners XI, Limited Partnership (“Oak”). Pursuant to the purchase agreement, Oak purchased 300,000 shares of the Company’s Series B preferred stock, par value $0.001 per share, for $150 per preferred share, or a total of $45.0 million. The preferred shares were convertible into 3,000,000 shares of common stock, for an effective purchase price of $15 per common share equivalent. The Company also issued Oak a warrant granting Oak the right to purchase an additional 90,000 shares of Series B preferred stock at an exercise price of $150 per share. The warrant expired on April 24, 2009. The Company received net proceeds of $43.1 million from the sale of the Series B preferred stock and the warrant after the payment of legal fees and other expenses, including commissions.

 

On January 21, 2010, the Company repurchased all 300,000 outstanding shares of its preferred stock held by Oak for $120 per share, or a total of $36.0 million in cash. The total cost of the repurchase was $36.2 million, which included fees and expenses. The 300,000 outstanding shares represented 3,000,000 shares of Endwave common stock on an as-converted basis. Such shares had entitled Oak to a liquidation preference equal to its original investment of $45.0 million before any proceeds from a liquidation or sale of the Company would have been paid to the holders of Endwave’s common stock. In connection with the share repurchase, Eric Stonestrom, Oak’s designee to Endwave’s board of directors, resigned from the board of directors.

 

Since the Company repurchased the preferred stock for official retirement, the excess of the stated value, $43.1 million, over the effective repurchase price of $36.2 million was credited to additional paid-in capital.

 

Stock Based Compensation

 

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. All of the Company’s stock compensation is accounted for as an equity instrument.

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The effect of recording stock-based compensation for the three months ended March 31, 2011 and 2010 was as follows (in thousands, except per share data):

 

 

During the three months ended March 31, 2011, the Company granted options to purchase 19,200 shares of common stock with an estimated grant-date fair value of $27,000 or $1.41 per share. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $4,000. During the three months ended March 31, 2011, the Company did not grant restricted stock units.

 

During the three months ended March 31, 2011, the Company fully accelerated the vesting of options to purchase 47,053 shares of common stock and 9,430 restricted stock units in connection with certain restructuring activities. The Company recorded additional stock-based compensation expense of $18,000 relating to the incremental value of these fully vested modified awards in restructuring expense on the Company’s condensed consolidated statement of operations.

 

During the three months ended March 31, 2010, the Company granted options to purchase 269,600 shares of common stock with an estimated grant-date fair value of $403,000 or $1.49 per share. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $68,000.

 

During the three months ended March 31, 2010, the Company granted 138,000 restricted stock units with an estimated grant-date fair value of $356,000 or $2.58 per share. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $42,000.

 

As of March 31, 2011, the unrecorded stock-based compensation balance related to all stock options was $292,000, net of estimated forfeitures, and will be recognized over an estimated weighted-average service period of 1.3 years. As of March 31, 2011, the unrecorded stock-based compensation balance related to all restricted stock was $197,000, net of estimated forfeitures, and will be recognized over an estimated weighted-average service period of 0.9 years. As of March 31, 2011, the unrecorded stock-based compensation balance related to the employee stock purchase plan was $66,000, net of estimated forfeitures, and will be recognized over an estimate weighted-average service period of 0.5 years.

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Valuation Assumptions

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the graded-vesting method with the following weighted-average assumptions:

 

 

There were no enrollments or shares issued under the employee stock purchase plan for the three months ended March 31, 2011 or 2010.

 

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the combination of historical volatility of the Company’s common stock and the expected future volatility over the period commensurate with the expected life of the options and other factors. The risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded Treasury securities for terms equal to the expected term of the options. The expected term calculation is based on the Company’s observed historical option exercise behavior and post-vesting cancellations of options by employees.

 

The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010 was $10,000 and $39,000, respectively.

 

Equity Incentive Program

 

The Company’s equity incentive program is a broad-based, long-term retention program designed to align stockholder and employee interests. Under the Company’s equity incentive program, stock options generally have a vesting period of four years, are exercisable for a period not to exceed ten years from the date of issuance and are generally granted at prices not less than the fair market value of the Company’s common stock at the grant date. Under the Company’s equity incentive program, restricted stock units generally have a vesting period of two years.

 

The following table summarizes stock option activity for the indicated periods:

 

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The options outstanding and options vested and exercisable at March 31, 2011 were in the following exercise price ranges:

 

 

The following table summarizes restricted stock unit activity for the indicated periods:

 

 

At March 31, 2011, the Company had 125,238 restricted stock units vested and expected to vest with a weighted average remaining contractual term of 0.7 years and an aggregate intrinsic value of $297,000.

 

At March 31, 2011, the Company had 5,158,966 shares available for grant under its equity incentive plans.

 

Employee Stock Purchase Plan

 

In October 2000, the Company established the Endwave Corporation Employee Stock Purchase Plan. All employees who work a minimum of 20 hours per week and are customarily employed by the Company (or an affiliate thereof) for at least five months per calendar year are eligible to participate. Under this plan, employees may purchase shares of common stock through payroll deductions of up to 15% of their earnings with a limit of 3,000 shares per offering period under the plan. The price paid for the Company’s common stock purchased under the plan is equal to 85% of the lower of the fair market value of the Company’s common stock on the date of commencement of participation by an employee in an offering under the plan or the date of purchase. The compensation cost in connection with the purchase plan for the three months ended March 31, 2011 and 2010 was $30,000 and $75,000, respectively. There were no shares issued under the purchase plan during the three months

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

ended March 31, 2011 or 2010. At March 31, 2011, there were 446,473 shares available for purchase under the purchase plan.

 

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock and potential common stock equivalents outstanding during the period, if dilutive. Potential common stock equivalents include options to purchase common stock, unvested restricted stock units and shares to be purchased in connection with the Company’s employee stock purchase plan.

 

Potential dilutive common shares of 1,374,196 as of March 31, 2011 and 1,357,965 as of March 31, 2010 from the assumed exercise of stock options, unvested restricted stock units and shares issuable under the Company’s employee stock purchase plan were not included in the net loss per share calculations, as the Company incurred net losses for all periods presented and the inclusion of such shares would have been anti-dilutive. As a result, diluted net loss per share is the same as basic net loss per share for all periods presented.

 

 

Comprehensive loss generally represents all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. The Company’s unrealized gains and losses on its available-for-sale securities represent the only components of comprehensive loss excluded from the reported net loss and are displayed in the statements of stockholders’ equity.

 

The components of comprehensive loss were as follows (in thousands):

 

 

 

The Company operates in a single business segment. Although the Company sells to customers in various geographic regions throughout the world, the end customers may be located elsewhere. The Company’s total revenues by billing location for the periods ended March 31 were as follows (in thousands):

 

ENDWAVE CORPORATION

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

For the three months ended March 31, 2011, two customers each accounted for greater than 10% of total revenues and combined they accounted for 92% of the Company’s total revenues, the larger of which was Nokia Siemens Networks which accounted for 79% of the Company’s total revenues. For the three months ended March 31, 2010, three customers each accounted for greater than 10% of total revenues and combined they accounted for 94% of the Company’s total revenues, the largest of which was Nokia Siemens Networks, which accounted for 45% of the Company’s total revenues.

 

At March 31, 2011, 40% and 60% of the Company’s net book value of its long-lived assets were located in the United States of America and Thailand, respectively. At December 31, 2010, 45% and 55% of the Company’s net book value of its long-lived assets were located in the United States of America and Thailand, respectively.

 

 

In July 2010 the Financial Accounting Standards Board (“FASB”) issued new standards which amend the receivable disclosure requirements, including the credit quality of financing receivables and the allowance for credit losses. These standards require additional disclosures that will facilitate financial statement user’s evaluation of the nature of credit risk inherent in financing receivables, how that risk is analyzed in arriving at the allowance for credit losses, and the reason for any changes in the allowance for credit losses. These new standards are required to be adopted for interim and annual reporting periods beginning on or after December 15, 2010. The Company adopted these standards which did not have a material impact on its consolidated financial statements.

 

.

 

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements, related notes and “Risk Factors” section included elsewhere in this report on Form 10-Q, as well as the information contained under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2010. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to fluctuate in the future.

 

The terms “we,” “us,” “our” and words of similar import below refer to Endwave Corporation.

 

Overview

 

We design, manufacture and market radio frequency, or RF, products that enable the transmission, reception and processing of high frequency RF signals.

 

Our products consist of two key product lines, semiconductor devices and integrated transceiver modules:

 

 

Proposed Merger with GigOptix

 

On February 4, 2011, we entered into an Agreement and Plan of Merger with GigOptix, Inc., or GigOptix, and Aerie Acquisition Corporation, a wholly-owned subsidiary of GigOptix, which we refer to as the Merger Subsidiary, pursuant to which Merger Subsidiary will, subject to the satisfaction or waiver of the conditions therein, merge with and into Endwave, the separate corporate existence of Merger Subsidiary shall cease and Endwave will be the surviving corporation of the merger and a wholly-owned subsidiary of GigOptix. We refer to this agreement as the Merger Agreement and the proposed merger contemplated by the Merger Agreement as the Merger. Upon the consummation of the Merger, (i) the outstanding shares of Endwave common stock will be converted into the right to receive an aggregate number of shares of GigOptix common stock equal to the product of (.425/.575) and the number of shares of GigOptix common stock outstanding immediately prior to consummation of the Merger, less 42.5% of the shares described in clause (ii) of this sentence and (ii) in-the-money options to acquire Endwave common stock outstanding immediately prior to the consummation of the Merger will be converted into that number of shares of GigOptix common stock determined by dividing the spread value of such options at closing by the closing price of GigOptix’s common stock on the trading day prior to closing, such that following the Merger, the pre-Merger holders of common stock and restricted stock units will own that number of shares equal to 42.5% of the outstanding stock of the combined company, less 42.5% of the shares issued in respect of Endwave stock options.

The Merger Agreement includes customary representations, warranties and covenants of Endwave and GigOptix. Endwave has agreed to conduct its operations and the operations of its subsidiaries according to its ordinary and usual course of business consistent with past practice until the effective time of the Merger. The Merger Agreement contains customary “no-solicitation” covenants pursuant to which neither Endwave nor GigOptix is permitted to solicit any alternative acquisition proposals, provide any information to any person in connection with any alternative acquisition proposal, participate in any discussions or negotiations relating to any alternative acquisition proposal, approve, endorse or recommend any alternative acquisition proposal, or enter into any agreement relating to any alternative acquisition proposal. The “no-solicitation” provision is subject to certain exceptions that permit the Board of Directors of each of Endwave and GigOptix, as the case may be, to comply with their respective fiduciary duties, which, under certain circumstances, would enable Endwave or GigOptix, as the case may be, to provide information to, and engage in discussions or negotiations with, third parties with respect to alternative acquisition proposals.

 

The Merger Agreement contains certain termination rights for both Endwave and GigOptix and further provides that, upon termination of the Merger Agreement under certain circumstances, Endwave may be obligated to pay GigOptix a termination fee of $1,000,000 plus certain reasonable documented expenses of GigOptix.

 

We currently expect to complete the Merger in the second quarter of 2011. GigOptix’s and Endwave’s obligations to consummate the Merger are subject to the satisfaction or waiver of customary closing conditions and regulatory approvals, as well as the approval of the merger by the stockholders of Endwave.

 

Results of Operations

 

Three months ended March 31, 2011 and 2010

 

The following table sets forth certain statement of operations data as a percentage of total revenues for the periods indicated:

 

 

Total revenues

 

Total revenues primarily consist of product revenues for sales of our transceiver module and semiconductor products.

 

During the three months ended March 31, 2011, total revenues decreased by $3.6 million, or 74%, compared to the same period in 2010. During 2010, our customers faced increasing competition, which we believe has resulted in their loss of market share. The decline in our customers’ market share has led to decreased demand for our products and contributed to the reduced revenues we experienced in 2010 and the first quarter of 2011. In addition, total revenues decreased during the first three months of 2011 because we experienced operational delays as a result of a delay in receiving regulatory approval for export of certain of our transceiver modules. This approval has since been obtained and we expect to make all delayed shipments in the second quarter.

 

We believe our 2011 revenues will likely be below our 2010 revenues because we are uncertain about our customers’ ability to regain market share given the competitive nature of the industry.

 

Cost of product revenues

 

 

Cost of product revenues consists primarily of: costs of direct materials; equipment depreciation; costs associated with procurement, production control, quality assurance and manufacturing engineering; fees paid to our offshore manufacturing vendor; reserves for potential excess or obsolete material; costs related to stock-based compensation; and accrued costs associated with potential warranty returns offset by the benefit of usage of materials that were previously written off.

 

During the first three months of 2011, the cost of product revenues was $1.0 million compared to $3.4 million in the first three months of 2010. The decrease in dollars for the cost of product revenues was primarily due to decreased revenue.

 

During the first three months of 2011, our inventory reserves increased by a net $124,000, which was primarily due to an increase in reserves for excess materials partially offset by a utilization of inventory that was previously written off.

 

During the first three months of 2010, the cost of product revenues favorably impacted by the utilization of inventory that was previously written off was approximately $10,000.

 

We continue to focus on reducing the cost of product revenues as a percentage of total revenues through the introduction of new designs and technology and further improvements to our offshore manufacturing processes. In addition, our product costs are impacted by the mix and volume of products sold and will continue to fluctuate as a result.

 

Research and development

 

 

Research and development expenses consist primarily of salaries and related expenses for research and development personnel, outside professional services, prototype materials, supplies and labor, depreciation for related equipment, allocated facilities costs and expenses related to stock-based compensation.

During the first three months of 2011, research and development costs were $1.3 million compared to $1.0 million in the first three months of 2010. The increase in research and development costs was primarily due to a $281,000 increase for project-related expenses and a $93,000 increase in personnel-related expenses which were partially offset by an $86,000 decrease in stock-based compensation.

 

Sales and marketing

 

 

Sales and marketing consist primarily of salaries and related expenses for sales and marketing personnel, professional fees, facilities costs, expenses related to stock-based compensation and promotional activities.

 

During the first three months of 2011, sales and marketing costs were $474,000 compared to $584,000 in the first three months of 2010. The decrease in sales and marketing costs was primarily due to a $96,000 decrease in personnel-related expenses.

 

General and administrative

 

 

General and administrative consist primarily of salaries and related expenses for executive, finance, accounting, legal, information technology and human resources personnel, professional fees, facilities costs, and expenses related to stock-based compensation.

 

During the first three months of 2011, general and administrative costs were $1.5 million compared to $1.1 million in the first three months of 2010. The increase in general and administrative costs was primarily due to $488,000 of transaction costs related to the proposed Merger which were partially offset by a $61,000 decrease in professional fees, a $30,000 decrease in public company-related expenses and a $28,000 decrease in stock-based compensation.

 

During the second quarter of 2011, we expect additional Merger-related general and administrative expenses to continue as we complete the proposed Merger.

 

Restructuring

 

 

During the first quarter of 2011, we undertook certain restructuring activities to reduce expenses. We vacated our facilities in Salem, New Hampshire and terminated 12 employees in order to reduce our cost structure. The employee terminations affected all areas of our operations. The components of the $804,000 restructuring charges included the following: $527,000 for severance, benefits and payroll taxes, $18,000 for the incremental fair value as a result of the acceleration of certain stock awards for the affected personnel, $203,000 for facilities charges related

to exiting the lease in Salem, New Hampshire and a $56,000 loss on disposal of fixed assets for impaired leasehold improvements and equipment related to the closure of the Salem facility.

 

We incurred cash charges of approximately $730,000 related to our first quarter 2011 restructuring activities for severance, benefits, payroll taxes and facilities charges and the payments are expected to be substantially completed by the end of the fourth quarter of 2011. The charges related to the acceleration of stock awards and the loss on disposal of fixed assets are non-cash charges.

 

During the first quarter of 2010, we recorded a $14,000 positive adjustment as a result of lower benefit charges in connection with our first quarter 2009 restructuring plan than were originally anticipated. No adjustments were recorded during the first quarter of 2011.

 

Interest and other income (expense), net

 

 

Interest and other income (expense), net consists primarily of interest income earned on our cash, cash equivalents and investments, gains and losses related to foreign currency transactions and interest expense imputed for a long-term restructuring liability.

 

The decrease in the dollar value of interest and other income (expense), net during the three months ended March 31, 2011, compared to the three months ended March 31, 2010, was primarily the result of decreased banking fees related to our investments.

 

During the first three months of 2011, we earned $15,000 of interest income, which was offset by interest expense for a long-term restructuring liability, banking charges and losses on foreign currency transactions. During the first three months of 2010, we earned $21,000 of interest income, which was offset by interest expense for a long-term restructuring liability, banking charges and losses on foreign currency transactions.

 

Our functional currency is the U.S. Dollar. Transactions in foreign currencies other than the functional currency are remeasured into the functional currency at the time of the transaction. Foreign currency transaction losses consist of the remeasurement gains and losses that arise from exchange rate fluctuations related to our operations in Thailand. During the first three months of 2011 and 2010, we recorded foreign currency transaction losses of $2,000 and $3,000, respectively.

 

Provision for income taxes

 

 

During the first three months of 2011, we recorded a $7,000 provision for income taxes for Thailand income taxes.

 

No other income tax expense (benefit) has been recorded because we have incurred operating losses that cannot be benefitted due to a full valuation allowance.

Liquidity and Capital Resources

 

At March 31, 2011, we had $9.3 million of cash and cash equivalents, $11.9 million in short-term investments, working capital of $22.8 million and no debt outstanding. The following table sets forth selected condensed consolidated statement of cash flows data:

 

 

During the first three months of 2011, operating activities used $2.1 million of cash as compared to $436,000 during the first three months of 2010. Our net loss adjusted for depreciation and other non-cash items, was $3.4 million during the first three months of 2011 as compared to $663,000 during the first quarter of 2010. During the first three months of 2011, the remaining provision of $1.3 million in cash was primarily due to a $1.3 million decrease in accounts receivable, a $185,000 increase in accrued compensation, restructuring, other current and other long-term liabilities and a $178,000 decrease in other assets, which were partially offset by a $276,000 decrease in accounts payable and a $134,000 decrease in accrued warranty. During the first three months of 2010, the remaining provision of $227,000 in cash was primarily due to a $681,000 increase in accounts payable and a $375,000 decrease in accounts receivable which were partially offset by a $658,000 increase in inventories and a $291,000 decrease in accrued compensation, restructuring, other current and other long-term liabilities.

 

During the first three months of 2011, investing activities provided cash of $4.3 million as compared to $1.7 million of cash in the first three months of 2010. The primary source of cash during the first three months of 2011 was net sales and maturities of investments of $4.5 million, partially offset by the purchase of leasehold improvements and equipment of $163,000. The primary source of cash during the first three months of 2010 was net sales and maturities of investments of $2.0 million, partially offset by the purchase of leasehold improvements and equipment of $345,000.

 

During the first three months of 2011, financing activities provided $24,000 of cash primarily due to the proceeds from the exercise of employee stock options which were partially offset by payment of capital leases. Financing activities used $36.2 million of cash during the first three months of 2010 primarily due to the $36.2 million repurchase of our preferred stock.

 

At March 31, 2011, we had a net unrealized gain of $5,000 related to $9.5 million of investments in fourteen debt securities. The increase in the value of these investments is primarily related to changes in interest rates. The investments all mature during 2011 and we believe that we have the ability to hold these investments until the maturity date. We recorded a foreign currency transaction loss of $2,000 and $3,000 during the first three months of 2011 and 2010, respectively.

 

We believe that our existing cash and investment balances will be sufficient to meet our operating and capital requirements for at least the next 12 months. With the exception of operating leases discussed in the notes to the consolidated financial statements included in this report, we have not entered into any off-balance sheet financing arrangements and we have not established or invested in any variable interest entities. We have not guaranteed the debt or obligations of other entities or entered into options on non-financial assets.

 

The following table summarizes our future cash obligations for operating leases as of March 31, 2011:

 

Recent Accounting Pronouncements

 

In July 2010 the Financial Accounting Standards Board (“FASB”) issued new standards which amend the receivable disclosure requirements, including the credit quality of financing receivables and the allowance for credit losses. These standards require additional disclosures that will facilitate financial statement user’s evaluation of the nature of credit risk inherent in financing receivables, how that risk is analyzed in arriving at the allowance for credit losses, and the reason for any changes in the allowance for credit losses. These new standards are required to be adopted for interim and annual reporting periods beginning on or after December 15, 2010. We adopted these standards which did not have a material impact on our consolidated financial statements.

 

 

There have been no material changes in our reported market risks since our report on market risks in our Annual Report on Form 10-K for the year ended December 31, 2010 under the heading corresponding to that set forth above. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. In order to reduce this interest rate risk, we usually invest our cash primarily in investments with short maturities. As of March 31, 2011, our investments in our portfolio were classified as cash equivalents and short-term investments. The cash equivalents and short-term investments consisted primarily of United States Treasury note, United States government agency notes, United States government money market funds, commercial papers and corporate notes. Since our investments consist of cash equivalents and short-term investments, a change in interest rates would not have a material effect on our financial condition or results of operations. Declines in interest rates over time will, however, reduce interest income.

 

Currently, all sales to international customers are denominated in United States dollars and, accordingly we are not exposed to foreign currency rate risks in connection with these sales. However, if the dollar were to strengthen relative to other currencies that could make our products less competitive in foreign markets and thereby lead to a decrease in revenues attributable to international customers.

 

We currently pay a number of expenses related to our Thai personnel and office in Thai Bhat. During the first quarter of 2011, the total payments made in Thai Bhat were $297,000 and we recorded a related foreign currency transaction loss of $2,000. During the first quarter of 2010, the total payments made in Thai Bhat were $199,000 and we recorded a related foreign currency transaction loss of $3,000.

 

 

 

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were effective as of the end of the period covered by this report.

 

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and our chief executive officer and our chief financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

 

There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

 

 

On October 31, 2008, we filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech Advanced Microwave Technologies Inc., or Advantech, the parent company of Allgon Microwave Corporation AB, or Allgon, had breached its contractual obligations with Endwave and owes us $994,500 for amounts outstanding under a note receivable and for purchased inventory and authorized finished goods purchase orders. We cannot predict the outcome of these proceedings.

 

The Company is not a party to any other material legal proceeding which is expected to have a material adverse effect on our consolidated financial statements or results of operations. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion of management efforts.

 

 

You should consider carefully the following risk factors as well as other information in this report before investing in any of our securities. If any of the following risks actually occur, our business, operating results and financial condition could be adversely affected. This could cause the market price of our common stock to decline, and you may lose all or part of your investment.

 

**Indicates risk factor has been updated since our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Risks Relating to the Merger with GigOptix

 

Because the conversion ratio is not adjustable based on the market price of either GigOptix or Endwave common stock, you cannot be sure of the value of the merger consideration that you will receive.

 

The number of shares of common stock to be issued by GigOptix in the merger is not adjustable based on the market price of either GigOptix or Endwave common stock and the merger agreement may not be terminated as a result of any such changes. The market value of the shares of GigOptix common stock that Endwave stockholders will be entitled to receive when the merger is completed will depend on the market value of shares of GigOptix common stock at that time, which could vary significantly from the market value of shares of GigOptix common stock on the date the merger agreement was executed, the date of this report or the date of the special meeting. Accordingly, at the time of the special meeting, Endwave stockholders will not know or be able to calculate the market value of the consideration they would receive upon completion of the merger. These variations may result from, among other factors, changes in the business, operations, results and prospects of GigOptix, market expectations of the likelihood that the merger will be completed and the timing of completion, the prospects of post-merger operations, the effect of any conditions or restrictions imposed on or proposed with respect to GigOptix by regulatory agencies and authorities, general market and economic conditions and other factors.

 

GigOptix may fail to realize the anticipated benefits of the merger.**

 

GigOptix’ future success will depend in significant part on its ability to utilize Endwave’s cash and cash equivalents and to realize the cost savings, operating efficiencies and new revenue opportunities that it expects to result from the integration of the GigOptix and Endwave businesses. GigOptix’ operating results and financial condition will be adversely affected if GigOptix is unable to integrate successfully the operations of GigOptix and Endwave, fails to achieve or achieve on a timely basis such cost savings, operating efficiencies and new revenue opportunities, or incurs unforeseen costs and expenses or experiences unexpected operating difficulties that offset anticipated cost savings or Endwave’s cash and cash equivalents, in whole or in part. In particular, the integration of GigOptix and Endwave may involve, among other matters, integration of sales, marketing, billing, accounting, manufacturing, engineering, management, personnel, payroll, quality control, regulatory compliance, network

infrastructure and other systems and operating hardware and software, some of which may be incompatible and therefore may need to be replaced.

 

The cost savings estimates expected to result from the merger do not include one-time adjustments that GigOptix will record in connection with the merger. In addition, the estimates are based upon assumptions by the managements of GigOptix and Endwave concerning a number of factors, including operating efficiencies, the consolidation of functions, and the integration of operations, systems, marketing methods and procedures. These assumptions are uncertain and are subject to significant business, economic and competitive conditions that are difficult to predict and often beyond the control of management.

 

Endwave will be subject to business uncertainties and contractual restrictions while the merger is pending that could adversely affect its business.

 

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on Endwave and consequently on GigOptix following the merger. These uncertainties may impair each company’s ability to attract, retain and motivate key personnel until the merger is completed and for a period of time thereafter, and could cause customers, suppliers and others that deal with Endwave to seek to change existing business relationships with Endwave. Employee retention may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their future roles with Endwave. If, despite Endwave’s retention efforts, key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Endwave, Endwave’s business and consequently the business of GigOptix following the merger could be seriously harmed.

 

Failure to complete the merger could negatively affect GigOptix and Endwave.

 

If the merger is not completed for any reason, GigOptix and Endwave may be subject to a number of material risks, including the following:

 

 

Endwave’s ability to pursue alternatives to the merger is restricted.

 

The merger agreement contains customary “no-solicitation” covenants pursuant to which neither Endwave nor GigOptix is permitted to solicit any alternative acquisition proposals, provide any information to any person in connection with any alternative acquisition proposal, participate in any discussions or negotiations relating to any alternative acquisition proposal, approve, endorse or recommend any alternative acquisition proposal, or enter into any agreement relating to any alternative acquisition proposal. The “no-solicitation” provision is subject to certain exceptions that permit the board of directors of each of Endwave and GigOptix, as the case may be, to comply with their respective fiduciary duties, which, under certain circumstances, would enable Endwave or GigOptix, as the case may be, to provide information to, and engage in discussions or negotiations with, third parties with respect to alternative acquisition proposals. Upon termination of the merger agreement under certain circumstances, Endwave may be obligated to pay GigOptix a termination fee of $1,000,000 plus certain reasonable documented expenses of GigOptix. These provisions could discourage a potential acquiror that might have an interest in acquiring all or a significant part of Endwave from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the consideration GigOptix proposes to pay in the merger or might result in a potential competing acquiror proposing to pay a lower per share price to acquire Endwave than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable to GigOptix in certain circumstances.

Endwave stockholders will have reduced ownership and voting interests in GigOptix and will be able to exercise less influence over management following the merger.**

 

Immediately after the merger, based on the conversion ratios contained in the merger agreement, the pre-merger holders of Endwave common stock and restricted stock units will own that number of shares equal to approximately 42.5% of the outstanding stock of the combined company, less 42.5% of the shares issued in the merger in respect of Endwave stock options. Consequently, stockholders of Endwave will be able to exercise less influence over the management and policies of GigOptix than they currently exercise over the management and policies of Endwave.

 

There may be a limited public market for shares of GigOptix common stock, and the ability of its stockholders to dispose of their common stock may be limited.**

 

GigOptix common stock has been traded on the OTC Bulletin Board since December 2008. GigOptix cannot foresee the degree of liquidity that will be associated with its common stock. A holder of its common stock may not be able to liquidate his, her or its investment in a short time period or at the market prices that currently exist at the time the holder decides to sell. The market price for GigOptix’ common stock may fluctuate in the future, and such volatility may bear no relation to its performance.

 

Substantial future sales of GigOptix’ common stock in the public market could cause GigOptix’ stock price to fall.**

 

The sale of GigOptix’ outstanding common stock or shares issuable upon exercise of options or warrants, or the perception that such sales could occur, could cause the market price of GigOptix common stock to decline. As of April 28, 2011, GigOptix had approximately 12,374,947 shares of common stock, options to purchase 7,384,549 shares of GigOptix’ common stock and warrants to purchase approximately 2,257,159 shares of GigOptix’ common stock outstanding. These shares of common stock, including shares of common stock issued upon exercise of options and warrants, have either been registered under the Securities Act and as such are freely tradable without restriction or are otherwise freely tradeable without restriction (subject to the requirements of Rule 144 under the Securities Act), unless the shares are purchased by “affiliates” as that term is defined in Rule 144 under the Securities Act. Any shares purchased by an affiliate may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144 of the Securities Act. In addition, one of the stockholders of GigOptix, the DBSI Liquidating Trust, holds 1,715,161 shares of GigOptix stock and warrants to purchase 1,000,000 shares of GigOptix’ common stock. GigOptix filed a Registration Statement on Form S-1 for the resale registration of the 1,715,161 shares held directly by the DBSI Liquidity Trust, and to the extent it is permitted to do so, GigOptix will file an amendment to the registration statement for the purpose of registering the 1,000,000 shares underlying the warrants. GigOptix may issue additional shares of GigOptix common stock in the future in private placements, public offerings or to finance mergers or acquisitions.

 

The exercise of options and warrants and other issuances of shares of common stock or securities convertible into common stock will dilute the interest of GigOptix stockholders.**

 

As of April 28, 2011, there were outstanding options to purchase an aggregate of 7,384,549 shares of GigOptix common stock at a weighted-average exercise price of $2.66 per share, of which options to purchase 2,480,935 shares at a weighted-average exercise price of $3.58 per share were exercisable as of such date. As of April 28, 2011, there were warrants outstanding to purchase 2,257,159 shares of GigOptix common stock at a weighted average exercise price of $5.86 per share. Certain of these warrants contain adjustment provisions that will reset the exercise price per share of such warrants to any lower price than the existing exercise price at which GigOptix issues shares of its common stock in the future for so long as those warrants are outstanding. The exercise of options and warrants at prices below the market price of GigOptix common stock could adversely affect the price of shares of GigOptix common stock. Additional dilution may result from the issuance of shares of GigOptix capital stock in connection with acquisitions or in connection with financing efforts.

Any issuance of GigOptix common stock that is not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock split, will result in dilution to each stockholder by reducing his, her or its percentage ownership of the total outstanding shares. Moreover, if GigOptix issues options or warrants to purchase its common stock in the future and those options or warrants are exercised, or if GigOptix issues restricted stock, stockholders may experience further dilution.

 

In addition, certain warrants to purchase shares of GigOptix’ common stock currently contain an exercise price above the current market price for the common stock. These warrants are known as “above-market” warrants. As a result, it is possible that the holders of these warrants may choose not to exercise them prior to their expiration, in which case GigOptix may not realize any proceeds from their exercise.

 

The combined company will not be able to fully utilize Endwave’s current net operating loss carryforwards. **

 

As of December 31, 2010, Endwave had a federal net operating loss carryforward of approximately $205.6 million, federal research and development tax credit carryforwards of approximately $2.2 million and a California net operating loss carryforward of approximately $82.2 million. These amounts, if not subject to limitation, would be available to offset the income of Endwave (and, after the merger, GigOptix) that would otherwise be subject to federal and California taxation. However, federal and state net operating loss carryforwards are and will continue to be subject to limitations based on ownership changes of Endwave as well as the combined company after the merger. Due to ownership changes that have occurred to date, only $29.9 million of Endwave’s federal net operating loss carryforwards currently may be used to offset Endwave’s taxable income, which amount would increase (to the extent not utilized) by $4.4 million in 2011 and 2012 and $1.5 million in subsequent tax years through 2027, for total of $61.8 million. The consummation of the merger will result in an additional limitation on the ability to utilize Endwave’s current net operating loss carryforwards. Based on Endwave’s most recent Section 382 analysis and Endwave’s estimate of the value of the shares to be issued in the merger and its balance sheet as of the closing of the merger, and assuming no further ownership changes until the date the merger is consummated, Endwave believes the completion of the merger with GigOptix would have the effect of decreasing the amount of realizable federal net operating loss carryforwards to approximately $400,000 per year, which would have the effect of reducing Endwave’s total realizable federal net operating loss carryforwards from approximately $61.8 million to $7.8 million.

 

Risks Relating to Our Business

 

We have had a history of losses and may not be profitable in the future.**

 

We had a net loss from continuing operations of $3.9 million in first quarter of 2011. We also had a net loss from continuing operations of $8.1 million and $10.6 million for the years ended December 31, 2010 and 2009, respectively. There is no guarantee that we will achieve or maintain profitability in the future.

 

We depend on a small number of key customers in the mobile communication industry for a significant portion of our revenues. If we lose any of our major customers or there is any material reduction in orders for our products from any of these customers, our business, financial condition and results of operations would be adversely affected. In addition, consolidation in this industry could result in delays or cancellations of orders for our products, adversely impacting our results of operations.**

 

We depend, and expect to continue to depend, on a relatively small number of mobile communication customers for a significant part of our revenues. The loss of any of our major customers or any material reduction in orders from any such customers would have a material adverse effect on our business, financial condition and results of operations. For the three months ended March 31, 2011, two customers each accounted for greater than 10% of total revenues and combined they accounted for 92% of our total revenues, the larger of which was Nokia Siemens Networks which accounted for 79% of our total revenues. For the three months ended March 31, 2010, three customers each accounted for greater than 10% of total revenues and combined they accounted for 94% of our total revenues, the largest of which was Nokia Siemens Networks, which accounted for 45% of our total revenues.

The mobile communication industry has undergone significant consolidation in the past few years. For example, during January 2011, Ceragon Networks Ltd. entered into a definitive agreement to merge with Nera Networks AS. The acquisition of one of our major customers in this market, or one of the communications service providers supplied by one of our major customers, could result in delays or cancellations of orders for our products and, accordingly, delays or reductions in our anticipated revenues and reduced profitability or increased net losses.

 

Our semiconductor product line will require us to incur significant expenses and may not be successful.**

 

Our semiconductor product line will require us to incur expenses to design, test, manufacture and market these products including the purchase of inventory, supplies and capital equipment. The future success of our semiconductor product line will depend on our ability to develop these products in a cost-effective and timely manner and to market them effectively. The development of our products is complex, and from time to time we may experience delays in completing the development and introduction of our new products or fail to efficiently manufacture such products in the early production phase. The semiconductor product line may have little immediate impact on our revenue because a new product may not generate meaningful revenue. In the meantime, we will have incurred expenses to design, produce and market the product, and we may not recover these expenses, and thus adversely affect operating results, if demand for the product fails to reach forecasted levels.

 

Because of the shortages of some components and our dependence on single source suppliers and custom components, we may be unable to obtain an adequate supply of components of sufficient quality in a timely fashion, or we may be required to pay higher prices or to purchase components of lesser quality**.

 

Many of our products are customized and must be qualified by our customers. This means that we cannot change components in our products easily without the risks and delays associated with requalification. Accordingly, while a number of the components we use in our products are made by multiple suppliers, we may effectively have single source suppliers for some of these components. Further, we have recently experienced extended lead times for many components.

 

We currently purchase a large number of components, some from single source suppliers, including, but not limited to:

 

 

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. In the past, we suffered from shortages of and quality issues with various components. These shortages and quality issues adversely impacted our product revenues and could reappear in the future. Our single source suppliers could enter into exclusive agreements with or be acquired by one of our competitors, increase their prices, refuse to sell their products to us, discontinue products or go out of business. Even to the extent alternative suppliers are available to us and their components are qualified by our customers on a timely basis, identifying them and entering into

arrangements with them may be difficult and time consuming, and they may not meet our quality standards. We may not be able to obtain sufficient quantities of required components on the same or substantially the same terms.

 

Competitive conditions often require us to reduce prices and, as a result, require us to reduce our costs in order to be profitable.**

 

In the past, we reduced the prices of many of our telecommunication products in order to remain competitive and we expect market conditions will cause us to reduce our prices again in the future. In order to reduce our per-unit cost of product revenues, we must continue to design and re-design products to utilize lower cost materials and improve our manufacturing efficiencies. The combined effects of these actions may be insufficient to achieve the cost reductions needed to maintain or increase our gross margins or achieve profitability.

 

Our operating results may be adversely affected by substantial quarterly and annual fluctuations and market downturns.

 

Our revenues, earnings and other operating results have fluctuated in the past and our revenues, earnings and other operating results may fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control. These factors include, among others, global economic conditions, overall growth in our target markets, the ability of our customers to obtain adequate capital, U.S. export law changes, changes in customer order patterns, customer consolidation, availability of components from our suppliers, the gain or loss of a significant customer, changes in our product mix and market acceptance of our products and our customers’ products. These factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly or annual operating results.

 

We rely on the semiconductor foundry operations of third-party semiconductor foundries to manufacture the integrated circuits sold directly to our customers and contained in our products. The loss of our relationship with any of these foundries without adequate notice would adversely impact our ability to fill customer orders and could damage our customer relationships.

 

We utilize both industry standard semiconductor components and our own custom-designed semiconductor devices. However, we do not own or operate a semiconductor fabrication facility, or foundry, and rely on a limited number of third parties to produce our custom-designed components. If any of our semiconductor suppliers is unable to deliver semiconductors to us in a timely fashion, the resulting delay could severely impact our ability to fulfill customer orders and could damage our relationships with our customers. In addition, the loss of our relationship with or our access to any of the semiconductor foundries we currently use for the fabrication of custom designed components and any resulting delay or reduction in the supply of semiconductor devices to us, would severely impact our ability to fulfill customer orders and could damage our relationships with our customers.

 

We may not be successful in forming alternative supply arrangements that provide us with a sufficient supply of gallium arsenide devices. Gallium arsenide devices are used in a substantial portion of the products we manufacture. Because there are a limited number of semiconductor foundries that use the particular process technologies we select for our products and that have sufficient capacity to meet our needs, using alternative or additional semiconductor foundries would require an extensive qualification process that could prevent or delay product shipments and revenues. We estimate that it may take up to six months to shift production of a given semiconductor circuit design to a new foundry.

 

We rely heavily on a Thailand facility of HANA, a contract manufacturer, to produce our RF modules and to package our microwave and millimeter wave integrated circuits. If HANA is unable to produce or package these modules and circuits in sufficient quantities or with adequate quality, or it chooses to terminate our manufacturing arrangement, we will be forced to find an alternative manufacturer and may not be able to fulfill our production commitments to our customers, which could cause sales to be delayed or lost and could harm our reputation.

 

We outsource the assembly and testing of our products to a Thailand facility of HANA, a contract manufacturer. We plan to continue this arrangement as a key element of our operating strategy. If HANA does not provide

us with high quality products and services in a timely manner, terminates its relationship with us, or is unable to produce our products due to financial difficulties or political instability we may be unable to obtain a satisfactory replacement to fulfill customer orders on a timely basis. In the event of an interruption of supply from HANA, sales of our products could be delayed or lost and our reputation could be harmed. Our latest manufacturing agreement with HANA expires in October 2011, but will renew automatically for successive one-year periods unless either party notifies the other of its desire to terminate the agreement at least one year prior to the expiration of the term. No such notification has been sent to or received from HANA. In addition, either party may terminate the agreement without cause upon 365 days prior written notice to the other party, and either party may terminate the agreement if the non-terminating party is in material breach and does not cure the breach within 30 days after notice of the breach is given by the terminating party. There can be no guarantee that HANA will not seek to terminate its agreement with us.

 

A prior misclassification of certain products under the Export Administration Regulations may result in liability for Endwave.**

 

In December 2009, we sought and obtained a formal commodity classification from the Department of Commerce’s Bureau of Industry and Security, or BIS, regarding certain amplifier products rated to operate between 34 and 40 GHz. Prior to our request, we believed based on our internal review that the products and related technology were properly classified as EAR99 and that export licenses were not required to any destination in which we had operations or sold products. In response to our commodity classification request, however, BIS determined that our MMIC amplifiers rated to operate between 34 and 40 GHz are classified under Export Classification Control Number, or ECCN, 3A001, which controls MMIC power amplifiers rated for operation at frequencies exceeding 31.8 GHz up to and including 37.5 GHz without regard to power output or fractional bandwidth limits. Products falling under ECCN 3A001 are controlled for national security purposes and are subject to export licensing requirements for most countries. Similarly, technology for the development or production of items controlled under ECCN 3A001 falls under ECCN 3E001. Exports of such technology are likewise controlled for national security purposes and subject to restrictive licensing requirements. License exceptions are available under the Export Administration Regulations for items and technology classified under ECCNs 3A001 and 3E001, respectively.

 

In March 2011, we submitted a voluntary self-disclosure to BIS detailing the affected transactions. In May 2011, we received BIS authorization to release the affected products. Because we were unable to ship certain transceiver products in the first quarter while the authorization was pending, our revenues were adversely affected in the first quarter. Even though BIS approval was obtained, we may be responsible for monetary penalties for the misclassification.

 

Our products may contain component, manufacturing or design defects or may not meet our customers’ performance criteria, which could cause us to incur significant repair expenses, harm our customer relationships and industry reputation, and reduce our revenues and profitability.

 

We have experienced manufacturing quality problems with our products in the past and may have similar problems in the future. As a result of these problems, we have replaced components in some products, or replaced the product, in accordance with our product warranties. Our product warranties typically last twelve to thirty months. As a result of component, manufacturing or design defects, we may be required to repair or replace a substantial number of products under our product warranties, incurring significant expenses as a result. Further, our customers may discover latent defects in our integrated circuits and module products that were not apparent when the warranty period expired. These latent defects may cause us to incur significant repair or replacement expenses beyond the normal warranty period. In addition, any component, manufacturing or design defect could cause us to lose customers or revenues or damage our customer relationships and industry reputation.

 

We 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. We have, in the past, expended significant resources on research and design efforts on potential customer products that did not result in additional revenue.

 

Each of our communication products is designed for a specific range of frequencies. Because different national governments license different portions of the frequency spectrum for the mobile communication market, and because communications service providers license specific frequencies as they become available, in order to remain competitive we must adapt our products rapidly to use a wide range of different frequencies. This may require the design of products at a number of different frequencies simultaneously. This design process can be difficult and time consuming, could increase our costs and could cause delays in the delivery of products to our customers, which may harm our reputation and delay or cause us to lose revenues.

 

Our customers often have specific requirements that can be at the forefront of technological development and therefore difficult and expensive to meet. If we are not able to devote sufficient resources to these products, or we experience development difficulties or delays, we could lose sales and damage our reputation with those customers.

 

We depend on our key personnel. Skilled personnel in our industry can be in short supply. If we are unable to retain our current personnel or hire additional qualified personnel, our ability to develop and successfully market our products would be harmed.

 

We believe that our future success depends upon our ability to attract, integrate and retain highly skilled managerial, research and development, manufacturing and sales and marketing personnel. Skilled personnel in our industry can be in short supply. As a result, our employees are highly sought after by competing companies and our ability to attract skilled personnel is limited. To attract and retain qualified personnel, we may be required to grant large stock option or other stock-based incentive awards, which may harm our operating results or be dilutive to our other stockholders. We may also be required to pay significant base salaries and cash bonuses, which could harm our operating results.

 

Due to our relatively small number of employees and the limited number of individuals with the skill set needed to work in our industry, we are particularly dependent on the continued employment of our senior management team and other key personnel. If one or more members of our senior management team or other key personnel were unable or unwilling to continue in their present positions, these persons would be very difficult to replace, and our ability to conduct our business successfully could be seriously harmed. We do not maintain key person life insurance policies.

 

The length of our sales cycle requires us to invest substantial financial and technical resources in a potential sale before we know whether the sale will occur. There is no guarantee that the sale will ever occur and if we are unsuccessful in designing integrated circuits and module products for a particular generation of a customer’s products, we may need to wait until the next generation of that product to sell our products to that particular customer.

 

Our products are highly technical and the sales cycle can be long. Our sales efforts involve a collaborative and iterative process with our customers to determine their specific requirements either in order to design an appropriate solution or to transfer the product efficiently to our offshore contract manufacturer. Depending on the product and market, the sales cycle can take anywhere from 2 to 24 months, and we incur significant expenses as part of this process without any assurance of resulting revenues. We generate revenues only if our product is selected for incorporation into a customer’s system and that system is accepted in the marketplace. If our product is not selected, or the customer’s development program is discontinued, we generally will not have an opportunity to sell our product to that customer until that customer develops a new generation of its system. There is no guarantee that our product will be selected for that new generation system. The length of our product development and sales cycle makes us particularly vulnerable to the loss of a significant customer or a significant reduction in orders by a customer because we may be unable to quickly replace the lost or reduced sales.

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

 

We may not be able to manufacture products and deliver them to our customers at the times and in the volumes they require. Manufacturing delays and interruptions can occur for many reasons, including, but not limited to:

 

 

Manufacturing our products is complex. The yield, or percentage of products manufactured that conform to required specifications, can decrease for many reasons, including materials containing impurities, equipment not functioning in accordance with requirements or human error. If our yield is lower than we expect, we may not be able to deliver products on time. For example, in the past, we have on occasion experienced poor yields on certain products that have prevented us from delivering products on time and have resulted in lost sales. If we fail to manufacture and deliver products in a timely fashion, our reputation may be harmed, we may jeopardize existing orders and lose potential future sales, and we may be forced to pay penalties to our customers.

 

Although we do have long-term commitments from many of our customers, they are not for fixed quantities of product. As a result, we must estimate customer demand, and errors in our estimates could have negative effects on our cash, inventory levels, revenues and results of operations.

 

We have been required historically to place firm orders for products and manufacturing equipment with our suppliers up to six months prior to the anticipated delivery date and, on occasion, prior to receiving an order for the product, based on our forecasts of customer demands. Our sales process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates. If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect, if at all. As a result, we would have additional usage of cash, excess inventory and overhead expense, which would harm our financial results. On occasion, we have experienced adverse financial results due to excess inventory and excess manufacturing capacity. For example, the second quarter of 2010 included a $1.5 million write-off of inventory associated with excess materials related to a rapid drop in sales of a legacy product for a major customer’s radio platform.

 

Conversely, if we underestimate customer demand or if insufficient manufacturing capacity were available, we would lose revenue opportunities, market share and damage our customer relationships. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders and were unable to benefit from this increased demand. There is no guarantee that we will be able to adequately respond to unexpected increases in customer purchase orders in the future, in which case we may lose the revenues associated with those additional purchase orders and our customer relationships and reputation may suffer.

Any failure to protect our intellectual property appropriately could reduce or eliminate any competitive advantage we have.**

 

Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on a combination of patent, copyright, trademark and trade secret laws to protect our proprietary technologies and processes. As of March 31, 2011, we had 43 United States patents issued, many with associated foreign filings and patents. Our issued patents include those relating to basic circuit and device designs, semiconductors, our multilithic microsystems technology and system designs. Our issued United States patents expire between 2013 and 2028. We maintain a vigorous technology development program that routinely generates potentially patentable intellectual property. Our decision as to whether to seek formal patent protection is done on a case by case basis and is based on the economic value of the intellectual property, the anticipated strength of the resulting patent, the cost of pursuing the patent and an assessment of using a patent as a strategy to protect the intellectual property.

 

To protect our intellectual property, we regularly enter into written confidentiality and assignment of rights to inventions agreements with our employees, and confidentiality and non-disclosure agreements with third parties, and generally control access to and distribution of our documentation and other proprietary information. These measures may not be adequate in all cases to safeguard the proprietary technology underlying our products. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or attempt to design around our patents. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited outside of the United States, Europe and Japan. We may not be able to obtain any meaningful intellectual property protection in other countries and territories. Additionally, we may, for a variety of reasons, decide not to file for patent, copyright, or trademark protection outside of the United States. Moreover we occasionally agree to incorporate a customer’s or supplier’s intellectual property into our designs, in which case we have obligations with respect to the non-use and non-disclosure of that intellectual property. We also license technology from other companies, including Northrop Grumman Corporation. There are no limitations on our rights to make, use or sell products we may develop in the future using the chip technology licensed to us by Northrop Grumman Corporation. Steps taken by us to prevent misappropriation or infringement of our intellectual property or the intellectual property of our customers may not be successful. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. Litigation of this type could result in substantial costs and diversion of our resources.

 

We may receive in the future, notices of claims of infringement of other parties’ proprietary rights. In addition, the invalidity of our patents may be asserted or prosecuted against us. Furthermore, in a patent or trade secret action, we could be required to withdraw the product or products as to which infringement was claimed from the market or redesign products offered for sale or under development. We have also at times agreed to indemnification obligations in favor of our customers and other third parties that could be triggered upon an allegation or finding of our infringement of other parties’ proprietary rights. These indemnification obligations would be triggered for reasons including our sale or supply to a customer or other third parties of a product which was later discovered to infringe upon another 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.

 

With regard to our pending patent applications, it is possible that no patents may be issued as a result of these or any future applications or the allowed patent claims may be of reduced value and importance. If they are issued, any patent claims allowed may not be sufficiently broad to protect our technology. Further, any existing or future patents may be challenged, invalidated or circumvented thus reducing or eliminating their commercial value. The failure of any patents to provide protection to our technology might make it easier for our competitors to offer similar products and use similar manufacturing techniques.

We are exposed to fluctuations in the market values of our investment portfolio.

 

Although we have not experienced any material losses on our cash, cash equivalents and short-term investments, future declines in their market values could have a material adverse effect on our financial condition and operating results. Although our portfolio has no direct investments in auction rate or sub-prime mortgage securities, our overall investment portfolio is currently and may in the future be concentrated in cash equivalents including money market funds. If any of the issuers of the securities we hold default on their obligations, or their credit ratings are negatively affected by liquidity, credit deterioration or losses, financial results, or other factors, the value of our cash equivalents and short-term and long-term investments could decline and result in a material impairment.

 

Risks Relating to Our Industry

 

Our failure to compete effectively could reduce our revenues and margins.

 

Among suppliers in the mobile communication market who provide integrated transceivers to radio OEMs, we primarily compete with Compel Electronics SpA, Filtronic plc, and Microelectronics Technology Inc. Additionally, there are mobile communication OEMs, such as Ericsson and NEC Corporation, that use their own captive resources for the design and manufacture of their transceiver modules, rather than using suppliers like us. To the extent that mobile communication OEMs presently, or may in the future, produce their own transceiver modules, we lose the opportunity to provide our modules to them. However, when we launched our semiconductor product line, we gained the opportunity to provide integrated circuits to all radio OEMs.

 

Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, excess inventory, sales limitations and criminal and civil liabilities.

 

Due to environmental concerns, the need for lead-free solutions in electronic components and systems is receiving increasing attention within the electronics industry as companies are moving towards becoming compliant with the RoHS Directive. The RoHS Directive is European Union legislation that restricts the use of a number of substances, including lead, after July 2006. We believe that our products impacted by these regulations are compliant with the RoHS Directive and that materials will continue to be available to meet these regulations. However, it is possible that unanticipated supply shortages or delays or excess non-compliant inventory may occur as a result of these new regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences, including loss of sales, fines, suspension of production, excess inventory and criminal and civil liabilities.

 

Government regulation of the communications industry could limit the growth of the markets that we serve or could require costly alterations of our current or future products.

 

The markets that we serve are highly regulated. Communications service providers must obtain regulatory approvals to operate broadband wireless access networks within specified licensed bands of the frequency spectrum. Further, the Federal Communications Commission and foreign regulatory agencies have adopted regulations that impose stringent RF emissions standards on the communications industry that could limit the growth of the markets that we serve or could require costly alterations of our current or future products.

 

Our failure to continue to develop new or improved semiconductor process technologies could impair our competitive position.

 

Our future success depends in part upon our ability to continue to gain access to the current semiconductor process technologies in order to adapt to emerging customer requirements and competitive market conditions. If we fail to keep abreast of the new and improved semiconductor process technologies as they emerge, we may lose market share which could adversely affect our operating results.

The segment of the semiconductor industry in which we participate is intensely competitive, and our inability to compete effectively would harm our business.

 

The markets for our products are extremely competitive, and are characterized by rapid technological change and continuously evolving customer requirements. Many of our competitors have significantly greater financial, technical, manufacturing, sales and marketing resources than we do. As a result, our competitors may develop new technologies, enhancements of existing products or new products that offer price or performance features superior to ours. In addition, our competitors may be perceived by prospective customers to offer financial and operational stability superior to ours.

 

We expect competition in our markets to intensify as new competitors enter the RF, microwave and millimeter wave component market, existing competitors merge or form alliances, and new technologies emerge. If we are not able to compete effectively, our market share and revenue could be adversely affected and our business and results of operations could be harmed.

 

Risks Relating to Ownership of Our Stock

 

The market price of our common stock has fluctuated historically and is likely to fluctuate in the future.**

 

The price of our common stock has fluctuated widely since our initial public offering in October 2000. In first three months of 2011, the lowest daily sales price for our common stock was $2.18 and the highest daily sales price for our common stock was $2.95. In 2010, the lowest daily sales price for our common stock was $2.00 and the highest daily sales price for our common stock was $3.61. The market price of our common stock can fluctuate significantly for many reasons, including, but not limited to:

 

 

It is likely that our operating results in one or more future quarters may be below the expectations of security analysts and investors. In that event, the trading price of our common stock would likely decline. In addition, the stock market has experienced extreme price and volume fluctuations. These market fluctuations can be unrelated to the operating performance of particular companies and the market prices for securities of technology companies have been especially volatile. Future sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. Additionally, future stock price volatility for our common stock could provoke the initiation of securities litigation, which may divert substantial management resources and have an adverse effect on our business, operating results and financial condition. Our existing insurance coverage may not sufficiently cover all costs and claims that could arise out of any such securities litigation. We anticipate that prices for our common stock will continue to be volatile.

We have a few stockholders that each own a large percentage of our outstanding capital stock and, as a result of their significant ownership, are able to significantly affect the outcome of matters requiring stockholder approval.**

 

As of March 31, 2011, our five largest stockholders together owned approximately 40% of our outstanding common stock. Because most matters requiring approval of our stockholders require the approval of the holders of a majority of the shares of our outstanding capital stock present in person or by proxy at the annual meeting, the significant ownership interest of these shareholders allows them to significantly affect the election of our directors and the outcome of corporate actions requiring stockholder approval. This concentration of ownership may also delay, deter or prevent a change in control and may make some transactions more difficult or impossible to complete without their support, even if the transaction is favorable to our stockholders as a whole.

 

Our certificate of incorporation, bylaws and arrangements with executive officers could delay or prevent a change in control.

 

We are subject to certain Delaware anti-takeover laws by virtue of our status as a Delaware corporation. These laws prevent us from engaging in a merger or sale of more than 10% of our assets with any stockholder, including all affiliates and associates of any stockholder, who owns 15% or more of our outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of our voting stock, unless our board of directors approved the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, or upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock of the corporation, or the business combination is approved by our board of directors and authorized by at least 66 2 / 3 % of our outstanding voting stock not owned by the interested stockholder. A corporation may opt out of the Delaware anti-takeover laws in its charter documents; however we have not chosen to do so. Our certificate of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control of management, including a staggered board of directors, the elimination of the ability of our stockholders to act by written consent, discretionary authority given to our board of directors as to the issuance of preferred stock, and indemnification rights for our directors and executive officers. Additionally, we have adopted a Stockholder Rights Plan, providing for the distribution of one preferred share purchase right for each outstanding share of common stock that may lead to the delay or prevention of a change in control that is not approved by our board of directors. We have a Senior Executive Officer Severance Retention Plan, an Executive Officer Severance Plan and a Key Employee Severance and Retention Plan that provide for severance payments and the acceleration of vesting of a percentage of certain stock options granted to our executive officers and certain senior, non-executive employees under specified conditions.

 

These plans may make us a less attractive acquisition target or may reduce the amount a potential acquirer may otherwise be willing to pay for our company.

 

 

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, Endwave Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ENDWAVE CORPORATION

 

John J. Mikulsky

President and Chief Executive Officer
(Duly Authorized Officer and Principal
Executive Officer)

 

Curt P. Sacks
Chief Financial Officer and
Senior Vice President
(Duly Authorized Officer and

Principal Financial and Accounting Officer)

 

Date: May 16, 2011

 

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