S-4/A 1 ds4a.htm AMENDMENT NO. 2 TO FORM S-4 Amendment No. 2 to Form S-4
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As filed with the Securities and Exchange Commission on April 29, 2011

Registration No. 333-172620

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

GIGOPTIX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3674   26-2439072
(State or other jurisdiction of incorporation or organization)  

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer
Identification No.)

 

 

2300 Geng Road, Suite 250, Palo Alto, CA 94303, (650) 424-1937

(Address, including ZIP code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Avi S. Katz, GigOptix, Inc., 2300 Geng Road, Suite 250, Palo Alto, CA 94303, (650) 424-1937

(Name, address, including ZIP code, and telephone number, including area code, of registrant’s agent for service)

 

 

Copies to:

 

Mavis L. Yee, Esq.

Gregory P. O’Hara, Esq.

Jeffrey C. Selman, Esq.

Nixon Peabody LLP

2 Palo Alto Square

3000 El Camino Real, Suite 500

Palo Alto, CA 94306-2016

(650) 320-7700

 

Jodie M. Bourdet, Esq.

Cooley LLP

101 California Street

5th Floor

San Francisco, CA 94111-5800

(415) 693-2000

 

 

Approximate date of commencement of proposed sale of the securities to the public. As soon as practicable after the effective date of this registration statement and all other conditions to the proposed merger described herein have been satisfied or waived.

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer    ¨       Accelerated filer                     ¨
Non-accelerated filer      ¨    (Do not check if a smaller reporting company)    Smaller reporting company    x

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ¨

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ¨

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this proxy statement/prospectus is not complete and may be changed. These securities may not be sold until the Registration Statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus is not an offer to sell these securities and is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED APRIL 29, 2011.

LOGO

Dear Endwave Stockholders:

After careful consideration, the board of directors of Endwave Corporation, or Endwave, has unanimously adopted and approved an Agreement and Plan of Merger in which a wholly-owned subsidiary of GigOptix, Inc., or GigOptix, will merge with and into Endwave, leaving Endwave as a wholly-owned subsidiary of GigOptix. Endwave is sending you the accompanying proxy statement/prospectus to notify you of the special meeting of Endwave stockholders being held to vote on the adoption of the merger agreement and to ask you to vote at the special meeting in favor of the adoption of the merger agreement, as well as a proposal to enable Endwave to adjourn and postpone the special meeting. The special meeting will be held at 8:00 a.m. (local time) on June 10, 2011, at Endwave’s offices at 130 Baytech Drive, San Jose, CA 95134.

GigOptix’ common stock trades on the OTC Bulletin Board under the symbol “GGOX.OB” and Endwave’s common stock trades on the Nasdaq Global Market under the symbol “ENWV.”

If the merger is completed, GigOptix will issue shares of its common stock to holders of Endwave common stock, restricted stock units and options to purchase Endwave common stock with an exercise price less than the closing price as reported on the Nasdaq Global Market on the trading day immediately prior to the effective time of the merger, which we refer to as in-the-money options. The total number of shares GigOptix will issue to holders of outstanding Endwave in-the-money options is determined by a formula that is based on the closing price of Endwave and GigOptix common stock on the trading day immediately preceding the date the merger is completed. The number of GigOptix shares to be issued to holders of Endwave common stock and Endwave restricted stock units is determined according to a separate formula set forth in the merger agreement. The intent of this formula is for GigOptix to issue a total number of shares in exchange for Endwave common stock and Endwave restricted stock units equal to 42.5% of the outstanding stock of the combined company, minus 42.5% of the number derived from the formula used in calculating the number of shares of GigOptix common stock to be issued to holders of outstanding Endwave in-the-money options. The specific number of shares of GigOptix common stock to be issued in the merger, as well as the conversion ratio for Endwave shares and the value of the shares GigOptix will issue, cannot be determined until the time the merger is completed because the number of shares of GigOptix common stock and Endwave common stock, restricted stock units and in-the-money options outstanding at the time the merger is completed, and the closing prices of both Endwave’s and GigOptix’ common stock on the trading day immediately prior to the date the merger is completed, cannot be determined until such time. If the merger were completed on April 28, 2011, based on the GigOptix and Endwave common stock and Endwave options and restricted stock units outstanding as of such date and the respective closing prices of GigOptix’ and Endwave’s common stock on April 27, 2011, each outstanding share of Endwave common stock would convert into approximately 0.909 shares of GigOptix common stock, 9,115,007 shares of GigOptix common stock would be issued to the holders of Endwave common stock and restricted stock units, and 74,573 shares of GigOptix common stock would be issued to the holders of Endwave in-the-money options, for a total of 9,189,580 shares of GigOptix common stock issued in the merger.

The merger cannot be completed unless Endwave stockholders vote to adopt the merger agreement. Your vote is very important, regardless of the number of shares of common stock you own, and Endwave urges you to take the time to vote by following the instructions on your proxy card regardless of whether you plan to attend the special meeting in person.

The proxy statement/prospectus accompanying this letter provides you with detailed information about the proposed merger. It also contains information about Endwave, GigOptix, Inc. and related matters. You are encouraged to read this document carefully. In particular, you should read the “Risk Factors” section beginning on page 18 of this proxy statement/prospectus for a discussion of risks you should consider in evaluating the proposed merger and how it will affect you.

The Endwave board of directors unanimously recommends that you vote “FOR” the adoption of the merger agreement and “FOR” the adjournment proposal.

 

Sincerely,

 

John Mikulsky

President and Chief Executive Officer

Endwave Corporation

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

This proxy statement/prospectus is dated [], 2011, and is first being mailed to stockholders on or about [], 2011.


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ENDWAVE CORPORATION

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 10, 2011

To the Stockholders of Endwave Corporation:

A special meeting of the stockholders of Endwave Corporation, a Delaware corporation, or Endwave, will be held on June 10, 2011, starting at 8:00 a.m., local time, at Endwave’s offices at 130 Baytech Drive, San Jose, CA 95134, for the following purposes:

 

1. to consider and vote upon the proposal to adopt the Agreement and Plan of Merger, dated as of February 4, 2011 (as it may be amended from time to time prior to the date hereof, the “merger agreement”), by and among GigOptix, Inc., a Delaware corporation, Aerie Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of GigOptix, Inc., and Endwave, a copy of which is attached as Annex A to the proxy statement/prospectus accompanying this notice; and

 

2. to consider and vote upon any proposal to adjourn the special meeting to a later date or time, if necessary or appropriate, to solicit additional proxies if there are an insufficient number of votes at the time of such adjournment to adopt the merger agreement.

Endwave’s board of directors has designated the close of business on April 15, 2011 as the record date that will determine the stockholders who are entitled to receive notice of, and to vote at, the special meeting or at any adjournment or postponement of the special meeting. Only stockholders of record at the close of business on the record date are entitled to notice of, and to vote at, the special meeting and at any adjournment or postponement thereof.

At a meeting duly called and held, Endwave’s board of directors has (i) unanimously determined that the merger agreement and the transactions contemplated thereby are fair to, advisable and in the best interests of Endwave’s stockholders, (ii) unanimously approved and adopted the merger agreement and the transactions contemplated thereby and (iii) unanimously resolved to recommend adoption of the merger agreement by the stockholders of Endwave.

THE BOARD OF DIRECTORS OF ENDWAVE UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE MERGER PROPOSAL AND “FOR” THE ADJOURNMENT PROPOSAL.

Please review the proxy statement/prospectus accompanying this notice for more complete information regarding the merger transaction, the merger agreement and the other matters to be considered at the special meeting.

Your vote is important. Whether or not you plan to attend the special meeting in person, Endwave urges you to submit your proxy as promptly as possible by voting electronically as described in this proxy statement/prospectus or marking, signing and dating the enclosed proxy card and returning it in the pre-addressed postage-paid envelope provided. You may revoke your proxy at any time before it is voted at the special meeting. If you attend the special meeting and wish to vote in person, then you may revoke your proxy and vote in person. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the meeting, you must obtain a proxy issued in your name from that record holder.

 

By Order of the Board of Directors of Endwave Corporation

 

John Mikulsky

President and Chief Executive Officer

[], 2011

Important Notice Regarding the Availability of Proxy Materials for Endwave’s Special Meeting of Stockholders to Be Held on June 10, 2011: The accompanying proxy statement/prospectus is available at https://materials.proxyvote.com/29264A.


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TABLE OF CONTENTS

 

     

Page

 

QUESTIONS AND ANSWERS ABOUT THE MERGER

     1   

SUMMARY

     6   

The Companies

     6   

The Merger

     10   

Treatment of Endwave Stock Options and Restricted Stock Units

     11   

Recommendation of Endwave’s Board of Directors

     11   

Opinion of Endwave’s Financial Advisor

     11   

Opinion of GigOptix’ Financial Advisor

     12   

The Endwave Special Meeting

     12   

Common Stock Ownership of Endwave Directors and Officers and Required Vote

     12   

Interests of Certain Persons in the Merger

     13   

Completion of the Merger is Subject to Certain Conditions

     14   

Termination of the Merger Agreement

     15   

Termination Fee and Expenses

     16   

Material U.S. Federal Income Tax Consequences of the Merger

     16   

Regulatory Matters

     17   

Appraisal Rights

     17   

Comparative Stock Prices and Dividends

     17   

RISK FACTORS

     19   

Risks Relating to the Merger

     19   

Risks Related to GigOptix

     22   

Risks Related to Endwave

     39   

SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     49   

INFORMATION ABOUT GIGOPTIX, INC.

     51   

Overview

     51   

Industry Background

     51   

Challenges Faced by Network Equipment Providers

     52   

GigOptix’ Solutions

     53   

Growth Strategy

     54   

Technology and Research and Development

     56   

Products

     56   

Customers

     60   

Manufacturing

     60   

Sales, Marketing and Technical Support

     61   

Competition

     62   

Patents and Other Intellectual Property Rights

     63   

Employees

     65   

Facilities

     65   

Environmental

     65   

Legal Proceedings

     65   

Government Regulations

     66   

Directors and Executive Officers

     67   

Anticipated Executive Officers of GigOptix Following the Merger

     69   

Nominees for Director

     69   

Arrangements with Directors

     70   

Director Independence

     70   

Executive Officer and Director Compensation

     71   

Related Person Transactions

     75   

 

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GIGOPTIX’ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     76   

Overview

     76   

Critical Accounting Policies and Estimates

     78   

Recent Accounting Pronouncements

     81   

Results of Operations

     83   

Liquidity and Capital Resources

     87   

Operating Activities

     88   

Investing Activities

     89   

Financing Activities

     89   

Off-Balance Sheet Arrangements

     90   

INFORMATION ABOUT ENDWAVE CORPORATION

     91   

Introduction

     91   

Industry Background and Markets

     91   

Endwave’s Business Approach

     93   

Products and Technology

     95   

Sales and Marketing

     96   

Customers

     96   

Competition

     97   

Research and Development

     97   

Patents and Intellectual Property Rights

     98   

Operations

     98   

Backlog

     99   

Governmental Regulation

     99   

Executive Officer and Director Compensation

     100   

Seasonality

     106   

Employees

     106   

Properties

     107   

Legal Proceedings

     107   

ENDWAVE’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     108   

Overview

     108   

Markets and Outlook

     108   

Divestiture of Endwave’s Defense and Security RF Module Business

     109   

Critical Accounting Policies and Estimates

     109   

Results of Operations

     112   

Liquidity and Capital Resources

     120   

Recent Accounting Pronouncements

     121   

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

     123   

Pro Forma Combined Information

     123   

Notes to Unaudited Pro Forma Condensed Combined Financial Information

     127   

THE ENDWAVE CORPORATION SPECIAL STOCKHOLDERS MEETING

     129   

Date, Time and Place

     129   

Purpose of Special Meeting

     129   

Recommendation of the Endwave Board of Directors

     129   

Endwave Record Date; Shares Entitled to Vote

     129   

Quorum

     129   

Required Vote

     130   

Abstentions

     130   

 

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Page

 

Shares Held in Street Name

     130   

Voting of Proxies by Holders of Record

     130   

Revocability of Proxies

     131   

Adjournments and Postponements

     131   

Solicitation of Proxies

     131   

PROPOSAL ONE—ADOPTION OF THE MERGER AGREEMENT

     132   

Description of the Merger

     132   

Background of the Merger

     132   

GigOptix’ Reasons for the Merger

     137   

Endwave’s Reasons for the Merger

     139   

Opinion of Endwave’s Financial Advisor

     142   

Opinion of GigOptix’ Financial Advisor

     147   

Indemnification of Executive Officers and Directors

     153   

Board of Directors and Executive Officers of GigOptix Following the Merger

     153   

Interests of Certain Persons in the Merger

     153   

Delisting and Deregistration of Endwave Common Stock

     154   

Restrictions on Shares of GigOptix Common Stock Received in the Merger

     155   

Accounting Treatment

     155   

Appraisal Rights

     155   

Listing of GigOptix Common Stock

     158   

Regulatory Matters

     159   

GigOptix Stockholder Approval Not Required

     159   

THE MERGER AGREEMENT

     160   

The Merger

     160   

Closing

     160   

Merger Consideration

     160   

Treatment of Endwave Stock Options

     161   

Treatment of Endwave Restricted Stock Units

     161   

Dissenting Shares

     161   

Procedures for Exchange of Stock Certificates; Fractional Shares

     162   

Representations and Warranties

     163   

Definition of Material Adverse Effect

     164   

Conduct of Endwave’s Business Pending the Merger

     164   

Conduct of GigOptix’ Business Pending the Merger

     166   

No Solicitation by Endwave

     167   

Changes in Endwave’s Board of Directors’ Recommendation

     168   

No Solicitation by GigOptix

     169   

Indemnification and Insurance

     170   

Listing of GigOptix Common Stock

     170   

Conditions to the Completion of the Merger

     170   

Termination of the Merger Agreement

     172   

Termination Fee and Expenses

     173   

Amendments and Waivers

     174   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

     175   

ADDITIONAL INFORMATION REGARDING ENDWAVE NET OPERATING LOSS CARRYFORWARDS

     178   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE OFFICERS OF GIGOPTIX

     180   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND EXECUTIVE OFFICERS OF ENDWAVE

     182   

 

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DESCRIPTION OF THE CAPITAL STOCK OF GIGOPTIX

     184   

Authorized and Outstanding Capital Stock

     184   

Description of Common Stock

     184   

Description of Preferred Stock

     185   

COMPARISON OF STOCKHOLDER RIGHTS

     186   

General

     186   

Authorized Capital Stock; Authority to Issue Capital Stock

     186   

Dividends and Other Distributions

     187   

Voting Rights

     187   

Size and Composition of the Board of Directors

     187   

Removal of Directors

     188   

Vacancies on the Board

     188   

Appraisal Rights

     188   

Amendments to Charter or Bylaws

     188   

Stockholder Meetings

     189   

Notice of Stockholder Actions

     190   

Stockholder Action by Written Consent

     191   

Indemnification of Directors and Officers

     192   

Personal Liability of Directors, Stockholders and Officers

     192   

Stockholder Agreements

     193   

Restrictions on Transfer

     193   

Dissolution

     193   

PROPOSAL TWO—ADJOURNMENT OR POSTPONEMENT OF SPECIAL MEETING

     194   

Approval of Adjournment or Postponement of the Special Meeting of Endwave Stockholders

     194   

Board Recommendation

     194   

FUTURE STOCKHOLDER PROPOSALS

     194   

OTHER MATTERS

     194   

LEGAL MATTERS

     194   

EXPERTS

     195   

WHERE YOU CAN FIND MORE INFORMATION

     195   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

ANNEXES

  

Annex A—Agreement and Plan of Merger

  

Annex B—Merriman Capital, Inc. Fairness Opinion

  

Annex C—Roth Capital Partners Fairness Opinion

  

Annex D—Delaware General Corporation Law Section 262

  

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

 

Q: Why am I receiving this proxy statement/prospectus?

 

A: Endwave and GigOptix have agreed to the acquisition of Endwave by GigOptix pursuant to the terms of a merger agreement that is described in this proxy statement/prospectus. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A. In order to complete the merger, Endwave stockholders must adopt the merger agreement. This proxy statement/prospectus contains important information about the merger, the merger agreement and the special meeting, which you should read carefully. The enclosed voting materials allow you to vote your shares without attending the special meeting. Your vote is very important. The board of directors of Endwave encourages you to vote as soon as possible. GigOptix stockholders are not required to vote to approve and adopt the merger agreement and the transactions contemplated thereby. GigOptix is not asking its stockholders for a proxy and GigOptix stockholders are requested not to send in a proxy.

 

Q. What will happen in the proposed transaction?

 

A. Before entering into the merger agreement, GigOptix formed a new Delaware corporation, Aerie Acquisition Corporation, which is referred to in this proxy statement/prospectus as “Merger Sub.” At the effective time of the merger, Merger Sub will be merged with and into Endwave. As a result of the merger, the separate corporate existence of Merger Subsidiary will cease and Endwave will survive as a wholly-owned subsidiary of GigOptix.

 

Q. What will Endwave stockholders receive in the merger?

 

A. If the merger is completed, GigOptix will issue shares of its common stock to holders of Endwave common stock, restricted stock units and in-the-money options. The outstanding shares of Endwave common stock (other than shares subject to perfected appraisal rights and other than shares held by Endwave, Merger Sub, GigOptix or any subsidiary of GigOptix), including shares issued upon settlement of all outstanding restricted stock units to acquire 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 (0.425/0.575) and the number of shares of GigOptix common stock outstanding immediately prior to consummation of the merger, less 42.5% of the number derived from the formula used in calculating the number of the shares of GigOptix common stock to be issued to holders of outstanding Endwave in-the-money options. Endwave stockholders will receive cash for any fractional share of GigOptix common stock that they would otherwise receive in the merger based on the closing price of GigOptix’ common stock as reported on the OTC Bulletin Board on the trading day immediately prior to the effective time of the merger.

The closing prices of GigOptix and Endwave common stock as of the trading day prior to completion of the merger, as well as the number of shares of GigOptix and Endwave common stock and the number of Endwave restricted stock units and options outstanding as of the completion of the merger are necessary to determine the conversion ratio and aggregate number of shares of GigOptix common stock being issued. Because the market prices of GigOptix and Endwave common stock and numbers of outstanding shares of common stock of both companies and Endwave restricted stock units and options will continue to fluctuate until the completion of the merger, the conversion ratio and the aggregate number of shares of GigOptix common stock to be issued in the merger, as well as the value of such shares, cannot be determined until immediately before the consummation of the merger, and therefore will not be known to Endwave stockholders at the time of the stockholder vote on the merger proposal at the special meeting. On April 28, 2011, there were 12,374,947 shares of GigOptix common stock outstanding, 10,022,590 shares of Endwave common stock outstanding (including shares to be issued upon settlement of restricted stock units) and 398,425 Endwave options that were “in-the-money” (options that had an exercise price below the closing price of Endwave’s common stock on the Nasdaq Global Market on April 27, 2011). On April 27, 2011, the closing price of GigOptix’ common stock was $2.60 and the closing price of Endwave’s common stock was $2.40. As a result, if the merger were completed on April 28, 2011, GigOptix would issue 74,573 shares of

 

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common stock to the holders of Endwave options. 42.5% of that amount is 31,693. The aggregate number of shares GigOptix common stock that would be issued to the holders of Endwave common stock (including shares issued upon settlement of restricted stock units and assuming no shares are subject to perfected appraisal rights or are held by Endwave, Merger Sub, GigOptix or any subsidiary of GigOptix) if the merger closed on April 28, 2011 would be 9,146,700 ((0.425/0.575) multiplied by 12,374,947) less 31,693, or 9,115,007, and each outstanding share of Endwave common stock would convert into 0.909 shares of GigOptix common stock. Thus, if the merger were completed on April 28, 2011, a total of 9,189,580 (9,115,007 plus 74,573) shares of GigOptix common stock would be issued in the merger.

 

Q. How will Endwave stock options be treated in the merger?

 

A. If the merger is completed, all outstanding options to acquire Endwave common stock will terminate and cease to represent a right to acquire Endwave common stock. Options that are “in-the-money” (options that have an exercise price below the closing price of Endwave’s common stock on the Nasdaq Global Market on the trading day prior to the effective time 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’ common stock on the trading day prior to closing. “Spread value” is the product of the total number of shares subject to the option and the difference between the closing price of Endwave’s common stock on the Nasdaq Global Market on the trading day prior to the effective time of the merger and the option’s per share exercise price. Holders of Endwave stock options that are not in-the-money will not be entitled to receive any shares of GigOptix common stock for those stock options.

 

Q. How will Endwave restricted stock units be treated in the merger?

 

A. If the merger is completed, restricted stock units of Endwave common stock that are outstanding immediately prior to the effective time of the merger will terminate and cease to represent a right to acquire Endwave common stock. Each holder of an Endwave restricted stock unit will be entitled to receive a number of shares of GigOptix common stock equal to the product of (i) the number of shares of Endwave common stock issuable upon settlement of the applicable Endwave restricted stock unit, whether or not vested, and (ii) the ratio at which outstanding shares of Endwave common stock will be converted in the merger into the right to receive shares of GigOptix common stock.

 

Q. How much of GigOptix will former Endwave stockholders own?

 

A. If the merger is completed, GigOptix will issue shares of its common stock to holders of Endwave common stock, restricted stock units and in-the-money options. Following the merger, the pre-merger holders of Endwave 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 in-the-money options. The exact number of shares to be issued cannot be determined until the time the merger is completed. If the merger were completed on April 28, 2011, approximately 9,115,007 shares of GigOptix common stock would be issued in connection with the merger to the holders of Endwave common stock and restricted stock units, representing 42.27% of GigOptix’ outstanding common stock, and approximately 74,573 shares of GigOptix common stock would be issued in connection with the merger to the holders of Endwave stock options, representing 0.35% of GigOptix’ outstanding common stock. Together, if the merger were completed on April 28, 2011, a total of 9,189,580 shares of GigOptix common stock would be issued in the merger.

 

Q. Should I send in my Endwave stock certificates now?

 

A. No. When the merger is completed, former Endwave stockholders will be sent written instructions on how to exchange their stock certificates. GigOptix stock certificates will be in uncertificated book-entry form unless a physical certificate is requested by the holder.

 

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Q: When do you expect to complete the merger?

 

A: Endwave and GigOptix expect to complete the merger within three business days after the special meeting. However, because the merger is subject to closing conditions, the parties cannot predict the exact timing.

 

Q. When and where will Endwave stockholders meet?

 

A. The Endwave special meeting of stockholders will be held at 8:00 a.m. on June 10, 2011 at Endwave’s headquarters located at 130 Baytech Drive, San Jose, CA 95134.

 

Q. What does Endwave’s board of directors recommend with respect to the two proposals?

 

A. Endwave’s board of directors unanimously determined that the merger is fair to, advisable and in the best interests of Endwave and its stockholders, and duly approved the merger agreement, the merger and the other transactions contemplated by the merger agreement. Endwave’s board of directors unanimously recommends that Endwave’s stockholders vote “FOR” adoption of the merger agreement. For the factors considered by Endwave’s board of directors in reaching its decision to approve the merger agreement, see “Proposal One – Adoption of the Merger Agreement —Endwave’s Reasons for the Merger” beginning on page 139 of this proxy statement/prospectus. Endwave’s board of directors also unanimously recommends that Endwave stockholders vote “FOR” the adjournment proposal.

 

Q. Who can vote at the Endwave special meeting?

 

A. Holders of record of Endwave common stock at the close of business on April 15, 2011, which is the record date for the special meeting, are entitled to vote at the special meeting.

 

Q. How many votes must be represented in person or by proxy at the Endwave special meeting to have a quorum?

 

A. The holders of a majority of the shares of Endwave common stock outstanding and entitled to vote at the special meeting, present in person or represented by proxy, will constitute a quorum at the special meeting.

 

Q. What vote by Endwave stockholders is required to approve the special meeting proposals?

 

A. The stockholder vote required differs for the two proposals. A quorum must be present at the meeting to approve any proposal, except an adjournment proposal, which has no quorum requirement.

 

   

The merger agreement proposal requires the affirmative vote of a majority of outstanding shares. The affirmative vote of a majority of the shares of Endwave common stock outstanding and entitled to vote as of the record date is required to adopt the merger agreement. If you abstain or fail to vote your shares in favor of adoption of the merger agreement, this will have the same effect as voting your shares against the merger proposal.

 

   

The adjournment proposal requires the affirmative vote of a majority of votes present at the special meeting. The affirmative vote of the holders of a majority of the voting power of the shares of Endwave common stock present in person or represented by proxy at the Endwave special meeting is required to approve one or more adjournments of the Endwave special meeting, if necessary or appropriate, including adjournments to permit further solicitation of proxies in favor of the other proposals.

 

Q. Will GigOptix pay any dividends?

 

A. GigOptix has not paid any cash dividends on its common stock and GigOptix does not anticipate paying any cash dividends on its common stock for the foreseeable future after completion of the merger.

 

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Q. Who will be the executive officers and directors of GigOptix following the merger?

 

A. It is anticipated that Dr. Avi Katz will maintain his position as Chairman of the Board of Directors, Chief Executive Officer and President of the combined company. Curt P. Sacks, the current Chief Financial Officer of Endwave, is expected to serve as the Chief Financial Officer of the combined company. Andrea Betti-Berutto, the current Chief Technology Officer of GigOptix, is expected to serve as the Chief Technology Officer of the combined company. Other key executives from both companies will be combined to serve on the management team. GigOptix’ new board of directors is expected to consist of all five existing GigOptix directors and two Endwave directors, John Mikulsky and Joseph Lazzara.

 

Q. Are Endwave stockholders entitled to appraisal rights?

 

A. Endwave stockholders will be entitled to appraisal rights under the Delaware General Corporation Law, or DGCL, and receive payment for the fair value of their Endwave shares if the merger is completed and the dissenting stockholders follow the requirements of Section 262 of the DGCL. Holders of Endwave common stock who do not vote in favor of the merger will have the right to seek appraisal of the fair value of their shares, but only if they follow the requirements of the DGCL. A copy of Section 262 of the DGCL is included as Annex D to this proxy statement/prospectus and a summary of this provision is included under “Proposal One—Adoption of the Merger Agreement—Appraisal Rights” beginning on page 155 of this proxy statement/prospectus. If the holders of more than 10% of the Endwave common stock outstanding on the record date for the special meeting elect to exercise appraisal rights, then GigOptix can elect to terminate the merger agreement.

 

Q. How may the Endwave stockholders vote their shares for the special meeting proposals presented in this proxy statement/prospectus?

 

A. Endwave stockholders may either vote “For” or “Against” the merger agreement proposal and the adjournment proposal, or abstain from voting from either or both of these proposals. The procedures for voting are as follows:

Stockholder of Record: Shares Registered in Your Name

If you are a stockholder of record, you may vote in person at the annual meeting or vote by proxy using the enclosed proxy card. Whether or not you plan to attend the meeting, Endwave urges you to vote by proxy to ensure your vote is counted. You may still attend the meeting and vote in person even if you have already voted by proxy. To vote using the proxy card, simply complete, sign and date the enclosed proxy card and return it promptly in the envelope provided. If you return your signed proxy card to Endwave before the special meeting, Endwave will vote your shares as you direct.

Beneficial Owner: Shares Registered in the Name of Broker or Bank

To vote in person at the annual meeting, you must obtain a valid proxy from your broker, bank, or other agent. Follow the instructions from your broker or bank included with these proxy materials, or contact your broker or bank to request a proxy form. Proxy materials are available at https://materials.proxyvote.com/29264A.

 

Q. Will a broker or bank holding shares in “street name” for an Endwave stockholder vote those shares for the stockholder at the special meeting?

 

A. The broker or bank will not be able to vote shares for an Endwave stockholder on the merger proposal or any of the other proposals that are not considered “routine” matters under the rules of The Nasdaq Stock Market. If an Endwave stockholder’s shares are held in “street name” by a broker or bank, the broker or bank may only vote the shares that holds for the stockholder in accordance with the stockholder’s instructions, unless the subject of the vote is a “routine” matter, such as the election of directors. It is important that stockholders provide instructions to their broker or bank by voting their proxies promptly to ensure that all shares of Endwave common stock that they own are voted as they wish at the special meeting.

 

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Q. Will Endwave stockholders be able to vote their shares at the special meeting?

 

A. Yes. Submitting a proxy will not affect the right of any Endwave stockholder to vote in person at the special meeting. Endwave will distribute written ballots to any Endwave stockholder who requests, and is entitled, to vote at the special meeting. If an Endwave stockholder holds shares in “street name,” the stockholder must request a proxy from the stockholder’s broker or bank in order to vote those shares in person at the special meeting.

 

Q. What do Endwave stockholders need to do now?

 

A. After carefully reading and considering the information contained in this proxy statement/prospectus, Endwave stockholders are requested to complete and return their proxies as soon as possible. The proxy card will instruct the persons named on the proxy card to vote the stockholder’s Endwave shares at the special meeting as the stockholder directs. If a stockholder signs and sends in a proxy card and does not indicate how the stockholder wishes to vote, the proxy will be voted “FOR” each of the special meeting proposals.

 

Q. May an Endwave stockholder change the stockholder’s vote after submitting a proxy?

 

A. Yes. If you are the record holder of your shares, you may revoke your proxy and change your vote in any one of three ways:

 

   

You may submit another properly completed proxy card with a later date.

 

   

You may send a timely written notice that you are revoking your proxy to Endwave’s Corporate Secretary at 130 Baytech Drive, San Jose, California 95134.

 

   

You may attend the annual meeting and vote in person. Simply attending the meeting will not, by itself, revoke your proxy.

 

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SUMMARY

This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To understand the merger agreement and the merger fully and for a more complete description of the legal terms of the merger agreement and the merger, you should carefully read this entire proxy statement/prospectus and the other documents to which you have been referred. See “Where You Can Find More Information” beginning on page 195 of this proxy statement/prospectus.

The Companies (See pages 76 and 91)

GigOptix, Inc.

GigOptix is a leading supplier of electronic and electro-optic semiconductor products that enable high speed telecommunications, or telecom, and data-communications, or data-com, networks. Its products amplify, process, convert and modulate signals between electrical and optical formats for transmission and reception of voice, data and video, enabling global network providers to offer “triple play” and other enhanced services. GigOptix designs and supplies solutions for the 10Gbps, 40Gbps and the emerging 100Gbps standards, both in parallel and serial applications, spanning from short reach datacenter applications up through ultra long-haul submarine networks. Its digital and analog integrated circuit, or IC, products include broadband amplifiers, low noise receivers, mixed-signal integrated circuits, and monolithic microwave integrated circuits, or MMICs, and GigOptix recently introduced electro-optical thin film polymer on silicon, or TFPS, modulators for ultra-broadband applications. These products offer its customers numerous benefits including the ability to operate at higher speeds and over wider temperature ranges, consume less power at peak loads, and offer a small footprint solution. GigOptix has a global customer base including leading telecommunications and data-communications network equipment systems vendors such as Alcatel-Lucent and other “Tier-One” equipment vendors in the United States, Europe and Asia, as well as leading industrial, aerospace and defense customers.

GigOptix operates as a fabless company, which means that it outsources the manufacturing of silicon wafers and believe it has positioned itself uniquely given its ability to offer the three key components in a transponder, namely, TFPS-modulators, matching drivers, and receiver amplifiers, thereby solving the challenging issue of component interoperability and allowing a more highly integrated and durable product at a smaller footprint and lower cost.

GigOptix also develops and markets custom application specific integrated circuits, or ASICs, based on GigOptix’ Structured ASIC and Hybrid ASIC platforms. GigOptix has over 60 different designs encompassing analog-to-digital converter, digital-to-analog converters, regulators and various power management functions. These products enable GigOptix to enhance its product offerings to its telecom and data-com network customers, as well as cross-sell its optical components to its defense and aerospace customers. In 2010, GigOptix sold its products to over 100 customers globally.

For the years ended December 31, 2010 and 2009, GigOptix incurred net losses of $4.4 million and $10.0 million, respectively, and cash outflows from operations of $3.8 million and $4.1 million, respectively. As of December 31, 2010 and 2009, GigOptix had an accumulated deficit of $73.4 million and $69.0 million, respectively. GigOptix’ then independent registered public accounting firm raised substantial doubt about GigOptix’ ability to continue as a going concern in its report for GigOptix’ consolidated financial statements as of December 31, 2009. GigOptix’ registered independent public accounting firm did not raise substantial doubt about GigOptix’ ability to continue as a going concern in its report for GigOptix’ consolidated financial statements as of December 31, 2010.

GigOptix’ principal executive offices are located at 2300 Geng Road, Suite 250, Palo Alto, CA 94303, its telephone number is (650) 424-1937 and its web site is www.gigoptix.com.

 

 

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GigOptix’ Industry Background

Over the last 30 years, optical networks using light waves to carry digital packets have systematically replaced electrical networks in data-com and telecom due to their inherent technical advantages that enable higher speeds, denser packing of data, lower cost and reduced energy consumption. Cisco recently estimated in its Visual Networking Index that internet video now accounts for more than one-third of all consumer internet traffic and will account for more than 91% of global consumer Internet traffic by 2013; moreover, Cisco forecasts that global internet protocol, or IP, traffic will continue to grow with a 34% compound annual growth rate, or CAGR, from 2009 to 2014 and that mobile IP traffic will grow at a CAGR of 92% from 2010 to 2015 driven to a large degree by increased use of cloud services and viewing of internet video both over fixed and over mobile networks.

Optical technologies such as Dense Wavelength Division Multiplexing, or DWDM, enable multiple independent data streams to travel over the same length of fiber simultaneously without interfering with each other, greatly expanding the potential throughput of the network. These advantages have driven optical networks from ultra-long haul distances greater than 1000 kilometers (trans-oceanic undersea cables) into short distance applications (metropolitan and enterprise networks) and recently even into distances as small as 30 meters (data centers). Additionally, optical interfaces are in early development for very short-range applications, including chip-to-chip interfaces such as those required by PCs and other consumer electronics that will be designed to take advantage of consumer optical standards, which will surpass the abilities of traditional copper circuitry.

Telecommunications and data-communications network systems vendors are producing optical systems increasingly based on 10Gbps, and are moving to 40Gbps and recently introduced 100Gbps standards. Faced with technological and cost challenges, original equipment manufacturers, or OEMs, are focusing on core competencies of software and systems integration, and are relying on component suppliers, such as GigOptix, to design, develop and supply the critical electronic and electro-optic components to perform the key transmit and receive functions. Moreover, the growing complexity of the components and the need to increase the pace of innovation while reducing costs and energy consumption are driving customers to reduce their number of suppliers and favor vendors with comprehensive product portfolios and deeper product and system expertise. GigOptix expects to meet this challenge to become a strategic part of customers’ early product planning, allowing access to technology development and trends, and increasing the likelihood of garnering meaningful market share.

Endwave Corporation

Endwave designs, manufactures and market radio frequency, or RF, products that enable the transmission, reception and processing of high frequency RF signals. Endwave’s products consist of two key product lines, semiconductor devices and integrated transceiver modules:

 

   

Endwave’s semiconductor product line consists of a wide variety of MMICs including amplifiers, voltage controlled oscillators, up and down converters, variable gain amplifiers, voltage variable attenuators, fixed attenuators and filters. These types of devices are widely used in telecommunications, satellite, defense, security, instrumentation, scientific and consumer systems. While Endwave has developed, produced and sold such devices for several years as components of Endwave’s module products, Endwave first offered them for sale as stand-alone products in the latter part of 2009 and they have not yet become a significant source of revenue for Endwave.

 

   

Endwave’s integrated transceiver modules combine several electronic functions into a single RF sub-system. Historically, Endwave’s main customers for these products have been telecommunication network OEMs, and system integrators that utilize them in digital microwave radios. More recently Endwave has identified and pursued uses for these products in additional product areas; however these alternate applications have not yet become a significant source of revenue for Endwave.

 

 

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Endwave’s Industry Background

High-Frequency RF Technology

The applications of RF technology are broad, extending from terrestrial AM radio at the low end of the frequency spectrum, which is less than 1 MHz (megahertz, or million cycles per second), to atmospheric monitoring applications at the high end of the frequency spectrum, which is around 100 GHz (gigahertz, or billion cycles per second). Microwave technology refers to technology for the transmission of signals at high frequencies, from approximately 1 GHz to approximately 20 GHz and millimeter wave technology refers to technology for the transmission of signals at very high frequencies, from approximately 20 GHz to beyond 100 GHz. Endwave’s products employ both microwave and millimeter wave technology. The term microwave is commonly understood in the industries Endwave serves, and that term is used in this prospectus/proxy statement as meaning both microwave and millimeter wave.

Endwave’s products are typically designed to operate at frequencies between 1 GHz and 100 GHz, which are referred to in this report as high-frequency RF. Due to their physical attributes, these frequencies are well-suited for numerous applications requiring the transmission of data at high speeds, detection of physical movement, imaging of inorganic and organic objects and various other types of physical measurements.

Telecommunication Networks

High-frequency transceiver modules and their key constituent components, MMICs, are an integral part of microwave radios, which in turn play a key role in many telecommunication networks. Microwave radio links have a number of applications:

Cellular Telephone Backhaul. The communication link between the cellular base station site and the overall telephone network is referred to as cellular backhaul. This is the most common use of microwave radios. In most parts of the world, cellular backhaul is typically accomplished through the use of microwave radios either because of their ease of deployment and low overall cost relative to available wireline options or because adequate wireline facilities are not available. While in the United States and Canada cellular backhaul has typically been accomplished through the use of wireline facilities, there is a growing trend to migrate to microwave backhaul because wireline systems are not a practical alternative to provide the extremely high backhaul data rates necessitated by contemporary “smart phones” and similar devices.

Carrier Class Trunking. To deploy their networks, communications carriers require high capacity links, or trunk circuits, between major voice and data switching centers. While fiber optic cables are the most common type of trunk circuit facility, microwave radios are often used for portions of these circuits when the intervening terrain, such as mountains or bodies of water, is difficult to traverse or as redundant backup links for the fiber optic network.

Private Voice and Data Networks. When private users, such as companies and universities, deploy stand-alone campus area or metropolitan area voice and data networks, they often encounter situations where it is not possible to access a direct physical path between their facilities due to distance or intervening structures and roads. If third-party wireline facilities are not available or cost-effective, a microwave radio link is often used to provide the network connection. In addition, companies often implement microwave facilities as redundant backup links for their wireline facilities.

Fixed Wireless Access Network Backhaul. Similar to the situation in cellular telephone networks, fixed wireless access networks require a backhaul infrastructure to move the data from individual access points to an internet portal. Various approaches are being considered for the widespread implementation of fixed wireless access networks, including the IEEE 802.16 WiMAX standard and Long Term Evolution, or LTE, technology. Regardless of the underlying access technology, all such fixed wireless access networks will face the

 

 

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technological and cost issues associated with connecting individual access points to the wireline network infrastructure. Endwave believes this need for backhaul represents an opportunity for microwave radios, particularly because the anticipated high bandwidth requirements of fixed wireless access networks are served more cost-effectively by microwave radios than by wireline alternatives.

While transient economic conditions and changing deployment schedules may cause short-term market fluctuations, Endwave believes the long-term prospects for the use of its products and technology in telecommunications networks are good. The continued deployment of mobile networks in developing countries, the continued enhancement of networks in developed regions and the ongoing rate of increases in data traffic all work to increase demand for the types of products Endwave offers.

Defense Systems

High-frequency RF technology is an integral part of various defense systems. Key applications in these markets include:

Radar Systems. Traditional radar systems are configured to detect large objects at significant distances. To add to this capability, many new systems employ complementary high frequency RF radar systems designed to detect small vehicles and personnel. These new systems often use these higher frequencies in order to provide greater resolution. A further use of high frequency radar is airborne imaging equipment that allows pilots to see through low-lying haze and dust much in the same way night vision goggles permit one to see in the dark.

Signal Intelligence Systems. Information about an opposing force can be gathered by monitoring their electronic communications. Systems that gather such information utilize a variety of RF and microwave components to monitor and interpret information over a broad spectrum of potential frequencies that a hostile force might use.

High Capacity Communications. A modern, widely-dispersed military or security force requires communication systems to transmit voice, video and data wherever and whenever it is needed. Many military or security communication systems, whether terrestrial, airborne or satellite, employ microwave technology to meet these requirements. As the data rates in these systems increase, the systems must be able to operate at higher frequencies to take advantage of the transmission bandwidth that is available at those frequencies.

Security Systems

Because millimeter wave energy is both emitted by and reflected off of the human body, various sensors and imaging systems can be constructed to enhance the capability of personnel security systems.

Long Distance Personnel Detection. High-frequency RF signals can be used to detect the presence of humans at significant distances, much in the same way lower frequency radar systems can detect metal objects at a distance. This phenomenon can be employed as a “radar fence” to detect intrusion along lengthy security perimeters such as airport runways, secure compounds and international borders.

Security Portals. Using high-frequency RF signals and holographic image processing techniques, it is possible to create images of the human body through garments and thus detect if the individual is carrying contraband objects or weapons. These systems are used in airport security lanes and for the interdiction of contraband or controlled materials in or out of secure facilities.

Security Cameras. Utilizing security cameras that are capable of detecting and forming images with the high-frequency RF energy emitted by the human body it is possible to observe large areas in search of contraband objects or weapons in a stand-off mode that does not require one to pass through a security portal. These systems are used for loss prevention in warehouse facilities and in large public spaces to protect against terrorist activities.

 

 

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The increasing concern over terrorist attacks in various public spaces is driving demand for these types of security systems and Endwave believes is creating new opportunities for its products.

Other Applications

Scientific Sensors. Various sorts of physical phenomena can be detected and measured using high-frequency RF signals. In particular, they can detect earth movements, both seismic and volcanic, through cloud cover and can also be used to measure atmospheric disturbances at upper altitudes to aid in weather prediction.

Through-wall Imagers. High-frequency RF energy has the capability to see through common building materials and detect if hidden obstructions, electrical lines, pipes or conduits exist inside of a wall. Devices employing this technology are used to avoid disruptions caused by damaging these hidden items during subsequent construction activities.

Automotive Radar. Advanced automotive radar systems utilize high-frequency RF energy to detect road hazards, other vehicles and roadway barriers and signal the power train to take appropriate action to reduce the risk of a collision or other hazardous event.

The range and breadth of applications for high-frequency RF systems continues to grow. Thus, Endwave believes there will be significant market opportunities for its products and technologies going forward.

The Merger (See page 132)

GigOptix, Merger Sub and Endwave have entered into the merger agreement that provides that, subject to the terms of the merger agreement and Delaware law, Merger Sub will be merged with and into Endwave, with Endwave continuing as the surviving entity and a wholly-owned subsidiary of GigOptix.

If the merger is completed, GigOptix will issue shares of its common stock to holders of Endwave common stock, restricted stock units and in-the-money options. The outstanding shares of Endwave common stock (other than shares subject to perfected appraisal rights and other than shares held by Endwave, Merger Sub, GigOptix or any subsidiary of GigOptix), including shares issued upon settlement of all outstanding restricted stock units to acquire 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 (0.425/0.575) and the number of shares of GigOptix common stock outstanding immediately prior to consummation of the merger, less 42.5% of the number derived from the formula used in calculating the number of the shares of GigOptix common stock to be issued to holders of outstanding Endwave in-the-money options. Endwave stockholders will receive cash for any fractional share of GigOptix common stock that they would otherwise receive in the merger based on the closing price of GigOptix’ common stock as reported on the OTC Bulletin Board on the trading day immediately prior to the effective time of the merger.

The closing prices of GigOptix and Endwave common stock as of the trading day prior to completion of the merger, as well as the number of shares of GigOptix and Endwave common stock and the number of Endwave restricted stock units and options outstanding as of the completion of the merger are necessary to determine the conversion ratio and aggregate number of shares of GigOptix common stock being issued. Because the market prices of GigOptix and Endwave common stock and numbers of outstanding shares of common stock of both companies and Endwave restricted stock units and options will continue to fluctuate until the completion of the merger, the conversion ratio and the aggregate number of shares of GigOptix common stock to be issued in the merger, as well as the value of such shares, cannot be determined until immediately before the consummation of the merger, and therefore will not be known to Endwave stockholders at the time of the stockholder vote on the merger proposal at the special meeting. On April 28, 2011, there were 12,374,947 shares of GigOptix common stock outstanding, 10,022,590 shares of Endwave common stock outstanding (including shares to be issued upon settlement of restricted stock units) and 398,425 Endwave options that were “in-the-money” (options that had an

 

 

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exercise price below the closing price of Endwave common stock on the Nasdaq Global Market on April 27, 2011). On April 27, 2011, the closing price of GigOptix’ common stock was $2.60 and the closing price of Endwave’s common stock was $2.40. As a result, if the merger were completed on April 28, 2011, GigOptix would issue 74,573 shares of common stock to the holders of Endwave options. 42.5% of that amount is 31,693. The aggregate number of shares GigOptix common stock that would be issued to the holders of Endwave common stock (including shares issued upon settlement of restricted stock units and assuming no shares are subject to perfected appraisal rights) if the merger closed on April 28, 2011 would be 9,146,700 ((0.425/0.575) multiplied by 12,374,947) less 31,693, or 9,115,007, and each outstanding share of Endwave common stock would convert into 0.909 shares of GigOptix common stock. Altogether, a total of 9,189,580 (9,115,007 plus 74,573) shares of GigOptix common stock would be issued in the merger.

Treatment of Endwave Stock Options and Restricted Stock Units (See page 161)

At the effective time of the merger, all outstanding options to acquire Endwave common stock will terminate and cease to represent a right to acquire Endwave common stock. Options that are “in-the-money” (options that have an exercise price below the closing price of Endwave’s common stock on the Nasdaq Global Market on the trading day prior to the effective time 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’ common stock on the trading day prior to closing. “Spread value” is the product of the total number of shares subject to the option and the difference between the closing price of Endwave’s common stock on the Nasdaq Global Market on the trading day prior to the effective time of the merger and the option’s per share exercise price. Holders of Endwave stock options that are not in-the-money will not be entitled to receive any shares of GigOptix common stock for those stock options.

At the effective time of the merger, restricted stock units of Endwave common stock that are outstanding immediately prior to the effective time of the merger will terminate and cease to represent a right to acquire Endwave common stock. Each holder of an Endwave restricted stock unit will be entitled to receive a number of shares of GigOptix common stock equal to the product of (i) the number of shares of Endwave common stock issuable upon settlement of the applicable Endwave restricted stock unit, whether or not vested, and (ii) the ratio at which outstanding shares of Endwave common stock will be converted in the merger into the right to receive shares of GigOptix common stock.

Recommendation of Endwave’s Board of Directors (See Page 129).

Endwave’s board of directors unanimously determined that the merger is fair to, advisable and in the best interests of Endwave and its stockholders, and duly approved the merger agreement, the merger and the other transactions contemplated by the merger agreement. Endwave’s board of directors unanimously recommends that Endwave’s stockholders vote “FOR” adoption of the merger agreement. For the factors considered by Endwave’s board of directors in reaching its decision to approve the merger agreement, see “Proposal One—Adoption of the Merger Agreement—Endwave’s Reasons for the Merger” beginning on page 139 of this proxy statement/prospectus. Endwave’s board of directors also unanimously recommends that Endwave stockholders vote “FOR” the adjournment proposal.

Opinion of Endwave’s Financial Advisor (See page 142)

Endwave retained Merriman Capital, Inc., which is referred to in this proxy statement/prospectus as Merriman, to act as its financial advisor in connection with the merger transaction and to render to the Endwave board of directors an opinion as to the fairness of the consideration to be received by the holders of Endwave common stock pursuant to the merger agreement. At the meeting of the Endwave board of directors on February 4, 2011, Merriman rendered its opinion to the Endwave board of directors to the effect that, as of that date, and based upon and subject to the various considerations set forth in its opinion, the consideration to be

 

 

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received by holders of Endwave common stock pursuant to the merger agreement was fair, from a financial point of view, to such holders.

Merriman’s opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Merriman in rendering its opinion. Merriman’s opinion was directed to the Endwave board of directors and addresses only the fairness, from a financial point of view and as of the date of the opinion, of the consideration to be received by holders of Endwave common stock. It does not address any other aspects of the merger transaction and does not constitute a recommendation as to how any holder of Endwave common stock should vote on the merger agreement or any matter related thereto.

The full text of the written opinion of Merriman is attached to this proxy statement as Annex B. Endwave encourages you to read Merriman’s opinion carefully and in its entirety.

Opinion of GigOptix’ Financial Advisor (See page 147)

On February 3, 2011, Roth Capital Partners, LLC, which is referred to in this proxy statement/prospectus as Roth (and which was engaged only in the capacity of rendering a fairness opinion to the GigOptix board of directors, and was not an advisor on the transaction), rendered its oral opinion to GigOptix’ board of directors (which opinion was confirmed in writing by delivery of Roth’s written opinion dated February 4, 2011) as to the fairness of the merger consideration to the holders of GigOptix common stock, from a financial point of view, based upon and subject to the assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Roth in rendering its opinion that, among other things, are set forth in Roth’s opinion.

Roth’s opinion is directed to the GigOptix board of directors and addresses only the fairness from a financial point of view of the consideration to be paid pursuant to the merger agreement as of the date of the opinion. It does not address any other aspects of the merger and does not constitute a recommendation to any holder of GigOptix common stock or whether to take any other action with respect to the merger.

The full text of the written opinion of Roth is attached to this proxy statement as Annex C. GigOptix encourages you to read Roth’s opinion carefully and in its entirety.

The Endwave Special Meeting (See page 129)

A special meeting of the Endwave stockholders will be held on June 10, 2011, starting at 8:00 a.m. local time (unless it is adjourned or postponed to a later date) at Endwave’s offices at 130 Baytech Drive, San Jose, California 95134. The purpose of the special meeting is for Endwave stockholders to consider and vote upon proposals to adopt the merger agreement and  approve the potential adjournment of the special meeting.

Common Stock Ownership By Endwave Directors and Officers and Required Vote

At the close of business on the record date for the special meeting, Endwave’s directors and executive officers and their affiliates beneficially owned and had the right to vote 157,933 shares of Endwave common stock at the special meeting, which represents approximately 1.60% of the shares of Endwave common stock entitled to vote at the special meeting.

The affirmative vote of a majority of the shares of Endwave common stock outstanding and entitled to vote as of the record date is required to adopt the merger agreement, and the affirmative vote of the holders of a majority of the voting power of the shares of Endwave common stock present in person or represented by proxy at the special meeting is required to approve the adjournment proposal.

 

 

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It is expected that Endwave’s directors and executive officers will vote their shares “FOR” the adoption of the merger agreement, although none of them has entered into any agreement requiring them to do so.

Interests of Certain Persons in the Merger (See page 153)

Endwave’s executive officers and directors have financial interests in the merger that are different from, or in addition to, their interests as Endwave stockholders generally. The Endwave board of directors were aware of and considered these interests, among other matters, in evaluating the merger agreement and in recommending that the Endwave stockholders adopt the merger agreement.

Each of Endwave’s executive officers are participants in change in control severance plans sponsored by Endwave, which provide severance and other benefits in the case of qualifying terminations of employment following a change in control, including completion of the merger, that may result in the receipt by such executive officers of cash severance payments and other benefits with a total value of approximately $1.87 million (collectively, not individually, and excluding the value of any accelerated vesting of stock awards).

The following table shows the potential payout to Endwave’s named executive officers under its Senior Executive Officer Severance and Retention Plan and its Executive Officer Severance and Retention Plan in connection with the merger, assuming the closing of the merger and termination of employment occurred on December 31, 2010:

 

Name

   Salary (1)      COBRA
Benefits (2)
     Option
Awards (3)
     Total Benefit  

John J. Mikulsky(4)

   $ 987,000       $ 105,000       $ 30,168       $ 1,122,168   

Curt P. Sacks

   $ 220,000       $ 15,000       $ 9,400       $ 244,400   

Daniel P. Teuthorn

   $ 229,000       $ 15,000       $ 10,441       $ 254,441   

 

(1) Reflects the greater of 18 months’ salary or three months’ salary for each full year of employment for Mr. Mikulsky (42 months) and 12 months’ salary for Mr. Sacks and Mr. Teuthorn.
(2) Reflects the greater of nine months coverage or 1.5 months coverage for each full year of employment for Mr. Mikulsky (21 months) and 12 months coverage for Mr. Sacks and Mr. Teuthorn.
(3) Reflects value of options accelerated in the event of termination without cause in connection with a change of control. Because the closing price of Endwave’s common stock on December 31, 2010 was $2.28 and the exercise prices of certain options outstanding and in-the-money on December 31, 2010 were below the closing price, the value of the options that would have been accelerated are reflected above.
(4) In connection with the proposed merger with GigOptix, it is anticipated that Mr. Mikulsky’s benefit will be reduced to a total of $881,867 in order to maximize the aggregate present value of such benefit without causing any payment to create an excise tax liability under Section 4999 of the Internal Revenue Code of 1986, as amended.

Certain of Endwave’s executive officers will be employed by GigOptix after the merger. Agreements with these executive officers are being negotiated but have not yet been entered into.

Endwave’s directors and executive officers each hold restricted stock units and options to acquire shares of Endwave common stock. Under the terms of the merger agreement and Endwave’s equity incentive plan, the vesting of all outstanding options and restricted stock units to acquire Endwave common stock, not just options and restricted stock units held by directors and executive officers, will accelerate in connection with the transaction regardless of whether the holder’s employment or other service relationship with Endwave terminates. The completion of the merger will result in, among other things, the conversion of restricted stock units and in-the-money options to acquire Endwave common stock into shares of GigOptix common stock as described in this proxy statement/prospectus. As of April 15, 2011, Endwave’s directors and executive officers held unvested options to purchase 219,843 shares of Endwave common stock and unvested restricted stock units for 64,000 shares of Endwave common stock.

 

 

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Completion of the Merger is Subject to Certain Conditions (See page 120)

Unless waived by the parties, the respective obligations of each of Endwave, GigOptix and Merger Sub to effect the merger will be subject to the fulfillment of each of the following conditions on or before the effective time of the merger:

 

   

adoption of the merger agreement by holders of a majority of the outstanding shares of Endwave common stock entitled to vote thereon;

 

   

effectiveness of the registration statement of which this proxy statement/prospectus is a part and the absence of any stop order suspending such effectiveness or pending proceeding for the purpose of obtaining any such stop order;

 

   

all authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any government entity, the failure of which to obtain or comply with would be reasonably likely to have a material adverse effect on GigOptix or Endwave, shall have been obtained or filed;

 

   

GigOptix shall have obtained all necessary permits and qualifications required by any state blue sky laws, or otherwise secured an exemption therefrom, in connection with the issuance of GigOptix common stock in the transactions contemplated by the merger agreement, the failure of which to obtain would be reasonably likely to have a material adverse effect on GigOptix or Endwave; and

 

   

absence of any writ, order, temporary restraining order, preliminary injunction or injunction prohibiting completion of the merger and the absence of any pending action, suit or proceeding instituted by a governmental agency seeking any such writ, order, temporary restraining order, preliminary injunction or injunction that is reasonably likely to be successful.

Additionally, unless waived by Endwave, the obligations of Endwave to effect the merger will be subject to the fulfillment of each of the following additional conditions on or before the effective time of the merger:

 

   

certain of the representations and warranties of GigOptix and Merger Sub being true and correct in all respects, and the remaining representations and warranties being true and correct in all material respects, both as of the date of the merger agreement and the date of the closing of the merger, except (i) for changes specifically permitted by the merger agreement, (ii) that the accuracy of representations and warranties that by their terms speak as of the date of the merger agreement or some other date will be determined as of such date and (iii) where the failure of the representations and warranties to be so true and correct does not have a material adverse effect on GigOptix;

 

   

GigOptix and Merger Sub will have performed and complied in all material respects with all agreements and obligations required by the merger agreement to be performed or complied with by it on or prior to the date of the closing of the merger;

 

   

GigOptix will have furnished a certificate of GigOptix executed by one of its officers to evidence compliance with the conditions set forth in the previous two items;

 

   

the absence of any event or occurrence taking place after the date of the merger agreement and the absence of any circumstance that, alone or together with any one or more other events, occurrences or circumstances, has had, is having or would reasonably be expected to result in a material adverse effect on GigOptix; and

 

   

GigOptix shall have obtained the consent of its lender to the completion of the merger.

Further, unless waived by GigOptix, the obligations of GigOptix and Merger Sub to effect the merger will be subject to the fulfillment of each of the following additional conditions on or before the effective time of the merger:

 

 

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certain of the representations and warranties of Endwave being true and correct in all respects, and the remaining representations and warranties being true and correct in all material respects, both as of the date of the merger agreement and the date of the closing of the merger, except (i) for changes specifically permitted by the merger agreement, (ii) that the accuracy of representations and warranties that by their terms speak as of the date of the merger agreement or some other date will be determined as of such date and (iii) where the failure of the representations and warranties to be so true and correct does not have a material adverse effect on Endwave;

 

   

Endwave will have performed and complied in all material respects with all agreements and obligations required by the merger agreement to be performed or complied with by it on or prior to the date of the closing of the merger;

 

   

Endwave will have furnished a certificate of Endwave executed by one of its officers to evidence compliance with the conditions set forth in the previous two items;

 

   

the absence of any event or occurrence taking place after the date of the merger agreement and the absence of any circumstance that, alone or together with any one or more other events, occurrences or circumstances, has had, is having or would reasonably be expected to result in a material adverse effect on Endwave; and

 

   

as of the closing of the merger, the aggregate number of Endwave shares for which valid demands for appraisal under Delaware law have been made and not withdrawn shall not exceed 10% of the number of issued and outstanding shares of Endwave common stock on the record date for the Endwave special meeting.

Termination of the Merger Agreement

The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after the approval and adoption of the merger agreement by Endwave stockholders:

 

   

by mutual written agreement of GigOptix and Endwave duly authorized by the board of directors of each company; or

 

   

by either Endwave or GigOptix if:

 

   

the merger shall not have been consummated by June 30, 2011 for any reason; provided, however, that the right to terminate the merger agreement under this provision will not be available to any party whose action or failure to act has been a principal cause of or resulted in the failure of the merger to occur on or before June 30, 2011 and the action or failure to act constitutes a material breach of a covenant of the party set forth in the merger agreement;

 

   

if a court of competent jurisdiction or other government entity shall have issued an order, decree or ruling or taken any other action, in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which order, decree, ruling or other action is final and nonappealable;

 

   

if Endwave’s stockholders do not adopt the merger agreement by reason of the failure to hold a meeting or the failure to obtain the required vote at a meeting of Endwave stockholders; provided, however, that the right to terminate the merger agreement under this provision will not be available to Endwave where the failure to hold a meeting or the failure to obtain the requisite stockholder approval is caused by the action or failure to act of Endwave and the action or failure to act constitutes a material breach by Endwave of its covenants set forth in the merger agreement;

 

   

(i) the board of directors of Endwave or any committee thereof withdraws or amends or modifies in a manner adverse to GigOptix its recommendation in favor of, the adoption and approval of the

 

 

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merger agreement or the approval of the merger; (ii) Endwave fails to include in this proxy statement/prospectus the recommendation of the board of directors of Endwave in favor of the adoption and approval of the merger agreement and the approval of the merger; (iii) the board of directors of Endwave fails to reaffirm its recommendation in favor of the adoption and approval of the merger agreement and the approval of the merger within ten days after GigOptix requests in writing that such recommendation be reaffirmed at any time following the public announcement of a proposal to acquire Endwave (other than an offer or proposal by GigOptix); (iv) the board of directors of Endwave or any committee thereof shall have approved or recommended any acquisition proposal (other than an offer or proposal by GigOptix); or (v) a tender or exchange offer relating to securities of Endwave is commenced by a person unaffiliated with GigOptix and Endwave does not send to its security holders pursuant to Rule 14e-2 promulgated under the Securities Act, within ten business days after the tender or exchange offer is first published, sent or given, a statement disclosing that Endwave recommends rejection of such tender or exchange offer; or

 

   

by Endwave, upon a breach of any representation, warranty, covenant or agreement on the part of GigOptix set forth in the merger agreement, or if any representation or warranty of GigOptix becomes untrue, in either case such that certain conditions set forth in the merger agreement would not be satisfied as of the time of the breach or as of the time the representation or warranty becomes untrue, provided that the inaccuracy in GigOptix’ representations and warranties or breach by GigOptix remains uncured on the date that is 20 business days following written notice of the breach or inaccuracy from Endwave to GigOptix. Endwave may not terminate the merger agreement pursuant to this provision if it has materially breached any of its covenants in the merger agreement and remains in breach of the applicable covenants as of the date of the termination; or

 

   

by GigOptix, upon a breach of any representation, warranty, covenant or agreement on the part of Endwave set forth in the merger agreement, or if any representation or warranty of Endwave becomes untrue, in either case such that the conditions set forth in the merger agreement would not be satisfied as of the time of the breach or as of the time such representation or warranty becomes untrue, provided that the inaccuracy in Endwave’s representations and warranties or breach by Endwave remains uncured on the date that is 20 business days following written notice of the breach or inaccuracy from GigOptix to Endwave. GigOptix may not terminate the merger agreement pursuant to this provision if it has materially breached any of its covenants in the merger agreement and remains in breach of the applicable covenants as of the date of such termination.

Termination Fee and Expenses

On a 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.

Material U.S. Federal Income Tax Consequences of the Merger (See page 175)

If, as planned and expected, the merger is completed in accordance with the merger agreement and the conditions of the tax opinions being given by Nixon Peabody LLP, counsel to GigOptix, and Cooley LLP, counsel to Endwave, as described in greater detail in “Material U.S. Federal Income Tax Consequences of the Merger”, are otherwise satisfied, Endwave stockholders will not recognize gain or loss upon the receipt of GigOptix common stock in exchange for Endwave stock in connection merger (except to the extent of cash received in lieu of a fractional share of GigOptix common stock). You should read “Material U.S. Federal Income Tax Consequences of the Merger” for a more complete discussion of the U.S. federal income tax consequences of the merger, including the limitations, exceptions, assumptions and conditions set forth therein. Tax matters can be complicated, and the tax consequences of the transaction to you will depend on your

 

 

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particular tax situation. Accordingly, you are urged to consult your own tax advisors to determine the particular federal, state, local or foreign income, reporting or other tax consequences of the merger to you.

Regulatory Matters (See page 159)

There are no regulatory consents or approvals required to complete the merger.

Appraisal Rights (See page 155)

Endwave stockholders will be entitled to appraisal rights under the Delaware General Corporation Law, or DGCL, and receive payment for the fair value of their Endwave shares if the merger is completed and the dissenting stockholders follow the requirements of Section 262 of the DGCL.

Endwave stockholders who desire to exercise their appraisal rights must not vote in favor of the adoption of the merger agreement, must submit a written demand for an appraisal before the vote on the adoption of the merger agreement and must continue to hold their Endwave shares through the effective date of the merger. Endwave stockholders must also comply with other procedures as required by Section 262 of the DGCL. Endwave stockholders who validly demand appraisal of their shares in accordance with the DGCL and do not withdraw their demand or otherwise forfeit their appraisal rights will not receive the merger consideration. Instead, after completion of the proposed merger, the Court of Chancery of the State of Delaware will determine the fair value of their shares exclusive of any value arising from the proposed merger. This appraisal amount will be paid in cash and could be more than, the same as or less than the value an Endwave stockholder would be entitled to receive under the merger agreement.

A copy of Section 262 of the DGCL is included as Annex D to this proxy statement/prospectus and a summary of this provision is included under “The Merger Agreement—Appraisal Rights” beginning on page 155 of this proxy statement/prospectus. If the holders of more than 10% of the Endwave common stock outstanding on the record date for the special meeting elect to exercise appraisal rights, then GigOptix can elect to terminate the merger agreement.

Comparative Stock Prices and Dividends

GigOptix common stock is quoted on the OTC Bulletin Board under the symbol “GGOX.OB” In connection with the merger, GigOptix is required to use its commercially reasonable efforts to have its common stock listed for trading on the NYSE AMEX. Endwave’s common stock is listed on the Nasdaq Global Market and trades under the symbol “ENWV.”

 

 

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The following table sets forth, for the calendar quarters indicated, the high and low sales prices per share of GigOptix common stock, as reported on the OTC Bulletin Board, and per share of Endwave common stock, as reported on the Nasdaq Global Market.

 

     GigOptix      Endwave  
     High      Low      High      Low  

2011

           

Second Quarter (through April 28, 2011)

   $ 3.20       $ 2.50       $ 2.63       $ 2.20   

First Quarter

   $ 3.90       $ 2.39       $ 2.95       $ 2.18   

2010

           

Fourth Quarter

   $ 2.75       $ 1.95       $ 3.14       $ 2.02   

Third Quarter

   $ 2.65       $ 1.60       $ 3.16       $ 2.00   

Second Quarter

   $ 4.45       $ 1.75       $ 3.61       $ 2.62   

First Quarter

   $ 4.90       $ 1.90       $ 2.95       $ 2.28   

2009

           

Fourth Quarter

   $ 3.98       $ 1.90       $ 3.05       $ 2.25   

Third Quarter

   $ 5.50       $ 1.90       $ 3.43       $ 2.24   

Second Quarter

   $ 2.20       $ 1.40       $ 3.08       $ 1.71   

First Quarter

   $ 1.75       $ 0.50       $ 2.51       $ 1.36   

The following table presents the last reported closing sale price per share of GigOptix common stock, as reported on the OTC Bulletin Board, and per share of Endwave common stock, as reported on the Nasdaq Global Market, on February 4, 2011, the last full trading day before the public announcement of the merger, and on April 28, 2011, the last trading day for which this information could be calculated before the filing of this proxy statement/prospectus. This table also presents the merger consideration equivalent proposed for each share of Endwave common stock on each of the specified dates. These illustrative values are calculated by multiplying the closing price of GigOptix common stock on those dates by a conversion ratio of 0.909. This conversion ratio was calculated by assuming that 9,189,580 shares of GigOptix common stock will be issued to holders of Endwave common stock, restricted stock units and stock options pursuant to the merger, which number is calculated based on the number of shares of GigOptix common stock outstanding as of April 28, 2011 (assuming that there are no shares subject to a perfected appraisal process or shares held by Endwave, Merger Subsidiary, GigOptix or any subsidiary of GigOptix). The actual conversion ratio cannot be determined until immediately before the consummation of the merger. The actual conversion ratio may vary significantly from the ratio determined based on the assumptions above.

 

     GigOptix
Common Stock
     Endwave
Common Stock
     Equivalent Per
Share Value of
Endwave
Common Stock
 

February 4, 2011

   $ 2.70       $ 2.24       $ 2.45   

April 2011

   $ 2.55       $ 2.38       $ 2.32   

As of April 15, 2011, GigOptix had 31 holders of record of its common stock and Endwave had 78 holders of record of its common stock.

Neither GigOptix nor Endwave has paid any cash dividends and GigOptix does not anticipate paying any cash dividends for the foreseeable future after completion of the merger.

 

 

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RISK FACTORS

There are risks associated with approving the merger, combining the businesses of Endwave and GigOptix and holding GigOptix common stock to be issued in the merger. In addition, there are risks associated with not approving the merger, continuing to operate Endwave’s business on a standalone basis and continuing to hold Endwave common stock. Accordingly, in deciding whether to vote for or against the proposals set forth in this proxy statement/prospectus, Endwave stockholders should consider the following risks:

Risks Relating to the Merger

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 proxy statement/prospectus 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. Endwave stockholders should obtain recent market quotations before they vote on the matters set forth in this proxy statement/prospectus.

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 as set forth in this proxy statement/prospectus 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

 

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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:

 

   

the companies will not realize the benefits expected from becoming part of a combined company, including a potentially enhanced competitive and financial position;

 

   

the trading price of each company’s common stock may decline to the extent that the current market price of the common stock reflects a market assumption that the merger will be completed; and

 

   

some costs related to the merger, such as legal, accounting and some financial advisory fees, must be paid even if the merger is not completed.

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

 

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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.

 

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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 Related to GigOptix

GigOptix and its predecessors have incurred substantial operating losses in the past and it may not be able to achieve profitability in the future.

GigOptix has incurred negative cash flows from operations since inception. For the years ended December 31, 2010 and 2009, GigOptix incurred net losses of $4.4 million and $10.0 million, respectively, and cash outflows from operations of $3.8 million and $4.1 million, respectively. As of December 31, 2010 and 2009, GigOptix had an accumulated deficit of $73.4 million and $69.0 million, respectively. GigOptix expects development, sales and other operating expenses to increase in the future as it expands its business. If GigOptix’ revenue does not grow to offset these expected increased expenses, it may not be profitable. In fact, in future quarters GigOptix may not have any revenue growth and its revenues could decline. Furthermore, if GigOptix’ operating expenses exceed expectations, financial performance will be adversely affected and it may continue to incur significant losses in the future.

In addition, GigOptix acquired ChipX in November 2009. Chip X incurred net losses of $5.7 million for the year ended December 31, 2008 and an additional net loss of $3.3 million for the period from January 1, 2009 through the date of acquisition of November 9, 2009.

GigOptix may fail to realize the anticipated benefits of its merger with ChipX.

GigOptix’ future success will depend in significant part on its ability to realize the cost savings, operating efficiencies and new revenue opportunities that are expected to result from the integration of the GigOptix and ChipX businesses. Its operating results and financial condition will be adversely affected if GigOptix is unable to integrate successfully the operations of GigOptix and ChipX, 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. In particular, the integration of GigOptix and ChipX may involve, among other matters, integration of sales, marketing, billing, accounting, quality control, management, personnel, payroll, 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.

 

 

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Any estimates of cost savings are based upon GigOptix’ assumptions 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 are often beyond GigOptix’ control.

GigOptix’ strategy of growth through acquisition could harm its business.

It is GigOptix’ intent to continue to grow through strategic acquisitions. Successful integration of newly acquired target companies may place a significant burden on its management and internal resources. The diversion of management’s attention and any difficulties encountered in the transition and integration processes could harm GigOptix’ business, financial condition and operating results. In addition, GigOptix may be unable to execute its acquisition strategy, resulting in under-utilized resources and a failure to achieve anticipated growth.

GigOptix faces intense competition and expects competition to increase in the future, which could have an adverse effect on its revenue, revenue growth rate, if any, and market share.

The global semiconductor market in general is highly competitive. GigOptix competes in different target markets to various degrees on the basis of a number of principal competitive factors, including its products’ performance, features and functionality, energy efficiency, size, ease of system design, customer support, products, reputation, reliability and price, as well as on the basis of its customer support, the quality of its product roadmap and its reputation. GigOptix expects competition to increase and intensify as more and larger semiconductor companies as well as the internal resources of large, integrated OEMs, enter its markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect GigOptix’ business, revenue, revenue growth rates and operating results.

GigOptix’ competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets and internal engineering groups within device manufacturers, some of which may be its customers. GigOptix’ primary competitors include Triquint, Vitesse, Oki, Inphi and Gennum. GigOptix expects competition in the markets in which it participates to increase in the future as existing competitors improve or expand their product offerings. In addition, GigOptix believes that a number of other public and private companies are in the process of developing competing products for digital television and other broadband communication applications. Because GigOptix’ products often are “building block” semiconductors that provide functions that in some cases can be integrated into more complex integrated circuits, GigOptix also faces competition from manufacturers of integrated circuits, some of which may be existing customers that develop their own integrated circuit products.

GigOptix’ ability to compete successfully depends on elements both within and outside of its control, including industry and general economic trends. During past periods of downturns in its industry, competition in the markets in which it operates intensified as manufacturers of semiconductors reduced prices in order to combat production overcapacity and high inventory levels. Many of GigOptix’ competitors have substantially greater financial and other resources with which to withstand similar adverse economic or market conditions in the future. Moreover, the competitive landscape is changing as a result of consolidation within its industry as some of its competitors have merged with or been acquired by other competitors, and other competitors have begun to collaborate with each other. These developments may materially and adversely affect GigOptix’ current and future target markets and its ability to compete successfully in those markets.

If GigOptix fails to develop and introduce new or enhanced products on a timely basis, its ability to attract and retain customers could be impaired and its competitive position could be harmed.

GigOptix operates in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. To compete successfully, GigOptix must design, develop, market and sell new or enhanced products that provide increasingly higher levels of performance and reliability and meet the

 

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cost expectations of its customers. The introduction of new products by GigOptix’ competitors, the market acceptance of products based on new or alternative technologies, or the emergence of new industry standards could render its existing or future products obsolete. GigOptix’ failure to anticipate or timely develop new or enhanced products or technologies in response to technological shifts could result in decreased revenue. In particular, GigOptix may experience difficulties with product design, manufacturing, marketing or certification that could delay or prevent its development, introduction or marketing of new or enhanced products. If GigOptix fails to introduce new or enhanced products that meet the needs of its customers or penetrate new markets in a timely fashion, it will lose market share and its operating results will be adversely affected.

GigOptix may require additional capital to continue to fund its operations. If GigOptix needs but does not obtain additional capital, it may be required to substantially limit operations.

GigOptix may not generate sufficient cash from its operations to finance its anticipated operations for the foreseeable future from such operations. Although consummation of the merger with Endwave is expected to improve GigOptix’ cash position and mitigate GigOptix’ near-term liquidity needs, it is anticipated that GigOptix may need to use such cash for its capital needs. Furthermore, to the extent that the merger is not consummated, GigOptix may need to seek funding through public or private financings, including equity financings, and through other arrangements including collaborations. GigOptix could require additional financing sooner than expected if it has poor financial results, including unanticipated expenses, or an unanticipated drop in projected revenues. Such financing may be unavailable when needed or may not be available on acceptable terms. If GigOptix raises additional funds by issuing equity or convertible debt securities, the percentage ownership of its current stockholders will be reduced, and these securities may have rights superior to those of its common stock. If adequate funds are not available to satisfy either short-term or long-term capital requirements, or if planned revenues are not generated, GigOptix may be required to limit its operations substantially. These limitations of operations may include a possible sale or shutdown of portions of its business, reductions in capital expenditures and reductions in staff and discretionary costs.

GigOptix has incurred negative cash flows from operations since inception. For the years ended December 31, 2010 and 2009, GigOptix incurred net losses of $4.4 million and $10.0 million, respectively, and cash outflows from operations of $3.8 million and $4.1 million respectively. As of December 31, 2010 and 2009, GigOptix had an accumulated deficit of $73.4 million and $69.0 million, respectively. GigOptix has incurred significant losses since inception, attributable to GigOptix’ efforts to design and commercialize GigOptix’ products. GigOptix has managed GigOptix’ liquidity during this time through a series of cost reduction initiatives and through increasing GigOptix’ line of credit with GigOptix’ bank. GigOptix’ ability to continue as a going concern is dependent on many events outside of GigOptix’ direct control, including, among other things, obtaining additional financing either privately or through public markets and consumers purchasing GigOptix’ products in substantially higher volumes. During 2010, GigOptix raised approximately $3.9 million in additional equity capital from institutional investors.

GigOptix relies on a limited number of third parties to manufacture, assemble and test its products, and the failure to manage its relationships with its third-party contractors successfully could adversely affect its ability to market and sell its products.

GigOptix does not have its own manufacturing facilities. GigOptix operates an outsourced manufacturing business model that utilizes third-party foundry and assembly and test capabilities. As a result, GigOptix relies on third-party foundry wafer fabrication and assembly and test capacity, including sole sourcing, for many components or products. Currently, GigOptix’ semiconductor devices are manufactured by foundries operated by IBM, Win, Triquint, UMC and SEI. GigOptix also uses third-party contractors for all of its assembly and test operations, including Bourns, Spel, IMT and Sanmina SCI.

 

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Relying on third party manufacturing, assembly and testing presents significant risks to GigOptix, including the following:

 

   

failure by GigOptix, or its customers or their end customers to qualify a selected supplier;

 

   

capacity shortages during periods of high demand;

 

   

reduced control over delivery schedules and quality;

 

   

shortages of materials and potential lack of adequate capacity during periods of excess demand;

 

   

misappropriation of its intellectual property;

 

   

limited warranties on wafers or products supplied to GigOptix;

 

   

potential increases in prices;

 

   

inadequate manufacturing yields and excessive costs;

 

   

difficulties selecting and integrating new subcontractors; and

 

   

potential instability in countries where third-party manufacturers are located.

The ability and willingness of GigOptix’ third-party contractors to perform is largely outside its control. If one or more of GigOptix’ contract manufacturers or other outsourcers fails to perform its obligations in a timely manner or at satisfactory quality levels, GigOptix’ ability to bring products to market and GigOptix’ reputation could suffer. For example, in the event that manufacturing capacity is reduced or eliminated at one or more facilities, including as a response to the recent worldwide decline in the semiconductor industry, manufacturing could be disrupted, GigOptix could have difficulties fulfilling GigOptix’ customer orders and its net revenue could decline. In addition, if these third parties fail to deliver quality products and components on time and at reasonable prices, GigOptix could have difficulties fulfilling its customer orders, its net revenue could decline and its business, financial condition and results of operations would be adversely affected.

GigOptix does not have any long-term supply contracts with its contract manufacturers or suppliers, and any disruption in its supply of products or materials could have a material adverse effect on its business, revenue and operating results.

GigOptix currently does not have long-term supply contracts with any of its third-party vendors. GigOptix makes substantially all of its purchases on a purchase order basis, and its contract manufacturers are not required to supply it products for any specific period or in any specific quantity. GigOptix expects that it would take approximately nine to twelve months to transition performance of its foundry or assembly services to new providers. Such a transition would likely require a qualification process by its customers or their end customers. GigOptix generally places orders for products with some of its suppliers approximately four to five months prior to the anticipated delivery date, with order volumes based on its forecasts of demand from its customers. Accordingly, if GigOptix inaccurately forecasts demand for its products, it may be unable to obtain adequate and cost-effective foundry or assembly capacity from its third-party contractors to meet its customers’ delivery requirements, or GigOptix may accumulate excess inventories. GigOptix’ third-party contractors have not provided any assurance to it that adequate capacity will be available to GigOptix within the time required to meet additional demand for its products.

Average selling prices of GigOptix’ products could decrease rapidly, which could have a material adverse effect on its revenue and gross margins.

GigOptix may experience substantial period-to-period fluctuations in future operating results due to the erosion of its average selling prices. From time to time, GigOptix has reduced the average unit price of its products in anticipation of competitive pricing pressures, new product introductions by it or its competitors and for other reasons. GigOptix expects that it will have to do so again in the future. If GigOptix is unable to offset

 

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any reductions in its average selling prices by increasing its sales volumes or introducing new products with higher operating margins, its revenue and gross margins will suffer. To maintain its gross margins, GigOptix must develop and introduce new products and product enhancements on a timely basis and continually reduce its and its customers’ costs. Failure to do so would cause GigOptix’ revenue and gross margins to decline.

Due to GigOptix’ limited operating history, it may have difficulty accurately predicting its future revenue and appropriately budgeting its expenses.

GigOptix was incorporated in 2008 and had only a limited operating history from which to predict future revenue. This limited operating experience, combined with the rapidly evolving nature of the markets in which it sells its products, substantial uncertainty concerning how these markets may develop and other factors beyond its control, reduces its ability to accurately forecast quarterly or annual revenue. GigOptix is currently expanding its staffing and increasing its expense levels in anticipation of future revenue growth. If its revenue does not increase as anticipated, it could incur significant losses due to its higher expense levels if it is not able to decrease its expenses in a timely manner to offset any shortfall in future revenue.

GigOptix’ customers require its products and its third-party contractors to undergo a lengthy and expensive qualification process, which may delay and does not assure product sales.

Prior to purchasing GigOptix’ products, its customers require that both GigOptix’ products and GigOptix’ third-party contractors undergo extensive qualification processes, which involve testing of the products in the customer’s system and rigorous reliability testing. This qualification process may continue for six months or more. However, qualification of a product by a customer does not assure any sales of the product to that customer. Even after successful qualification and sales of a product to a customer, a subsequent revision to the product, changes in GigOptix’ customer’s manufacturing process or its selection of a new supplier may require a new qualification process, which may result in delays and in GigOptix holding excess or obsolete inventory. After GigOptix’ products are qualified, it can take an additional six months or more before the customer commences volume production of components or devices that incorporate its products. Despite these uncertainties, GigOptix devotes substantial resources, including design, engineering, sales, marketing and management efforts, to qualifying its products with customers in anticipation of sales. If GigOptix is unsuccessful or delayed in qualifying any of its products with a customer, sales of this product to the customer may be precluded or delayed, which may impede GigOptix’ growth and cause GigOptix’ business to suffer.

GigOptix is subject to order and shipment uncertainties, and differences between GigOptix’ estimates of customer demand and product mix and its actual results could negatively affect GigOptix’ inventory levels, sales and operating results.

GigOptix’ revenue is generated on the basis of purchase orders with GigOptix’ customers rather than long-term purchase commitments. In addition, GigOptix’ customers can cancel purchase orders or defer the shipments of GigOptix’ products under certain circumstances. GigOptix’ products are manufactured using a silicon foundry according to its estimates of customer demand, which requires GigOptix to make separate demand forecast assumptions for every customer, each of which may introduce significant variability into GigOptix’ aggregate estimate. GigOptix has limited visibility into future customer demand and the product mix that its customers will require, which could adversely affect GigOptix’ revenue forecasts and operating margins. Moreover, because GigOptix’ target markets are relatively new, many of its customers have difficulty accurately forecasting their product requirements and estimating the timing of their new product introductions, which ultimately affects their demand for GigOptix’ products. In addition, the rapid pace of innovation in GigOptix’ industry could render significant portions of its inventory obsolete. Excess or obsolete inventory levels could result in unexpected expenses or increases in its reserves that could adversely affect GigOptix’ business, operating results and financial condition. Conversely, if GigOptix were to underestimate customer demand or if sufficient manufacturing capacity were unavailable, GigOptix could forego revenue opportunities, potentially lose market share and damage its customer relationships. In addition, any significant future cancellations or deferrals of

 

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product orders or the return of previously sold products due to manufacturing defects could materially and adversely impact GigOptix’ profit margins, increase GigOptix’ write-offs due to product obsolescence and restrict its ability to fund its operations.

The recent earthquake and related tsunami in Japan has accelerated the rate of orders from certain of GigOptix’ customers and negatively affected certain of its suppliers. If GigOptix is unable to properly manage the supply of products to its customers, there could be a negative impact on GigOptix’ financial position, statement of operations and cash flows.

GigOptix has certain customers and suppliers in Japan. To date, the recent earthquake and related tsunami in Japan has not caused a negative impact on GigOptix’ customers, and in some cases, GigOptix has experienced an acceleration in orders from current customers and new customers that cannot obtain supply from other vendors. To the extent that GigOptix is able to plan its inventory and obtain the necessary materials in a timely manner, GigOptix believes that it can support the acceleration in orders from its current customers as well as potential orders from new customers. If GigOptix cannot procure, process, assemble and test the required materials to support these customers, there could be a negative impact on GigOptix’ financial condition, results of operations and cash flows. GigOptix also has certain suppliers that have been negatively impacted by power shortages and other operational problems as a result of the earthquake and tsunami. While in certain cases GigOptix has inventory of products from these suppliers to support sales in the near-term, to the extent GigOptix cannot obtain materials and products in the correct mix from these suppliers to support purchase orders and sales forecasts from its customers, it could have a negative impact on GigOptix’ financial position, statement of operations and cash flows. In order to support future sales requiring materials from these suppliers, GigOptix may have to place larger orders or orders far in advance than is customary in order to secure adequate supply. To the extent GigOptix carries this additional inventory, GigOptix exposes itself to risks that sales forecasts may not materialize as planned and GigOptix will have to record write-downs of inventory, which would negatively impact its results of operations.

Winning business is subject to lengthy competitive selection processes that require GigOptix to incur significant expenditures. Even if GigOptix begins a product design, a customer may decide to cancel or change its product plans, which could cause GigOptix to generate no revenue from a product and adversely affect GigOptix’ results of operations.

The selection process for obtaining new business typically is lengthy and can require GigOptix to incur significant design and development expenditures and dedicate scarce engineering resources in pursuit of a single customer opportunity. GigOptix may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures. These risks are exacerbated by the fact that some of GigOptix’ customers’ products likely will have short life cycles. Failure to obtain business in a new product design could prevent GigOptix from offering an entire generation of a product, even though this has not occurred to date. This could cause GigOptix to lose revenue and require GigOptix to write off obsolete inventory, and could weaken its position in future competitive selection processes.

After securing new business, GigOptix may experience delays in generating revenue from GigOptix’ products as a result of the lengthy development cycle typically required. GigOptix’ customers generally take a considerable amount of time to evaluate GigOptix’ products. The typical time from early engagement by GigOptix’ sales force to actual product introduction could run from 12 to 24 months. The delays inherent in these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing GigOptix to lose anticipated sales. In addition, any delay or cancellation of a customer’s plans could materially and adversely affect GigOptix’ financial results, as GigOptix may have incurred significant expense and generated no revenue. Finally, GigOptix’ customers’ failure to successfully market and sell their products could reduce demand for GigOptix’ products and materially and adversely affect GigOptix’ business, financial condition and results of operations. If GigOptix were unable to generate revenue after incurring substantial expenses to develop any of its products, its business would suffer.

 

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Many of GigOptix’ products will have long sales cycles, which may cause GigOptix to expend resources without an acceptable financial return and which makes it difficult to plan GigOptix’ expenses and forecast GigOptix’ revenue.

Many of GigOptix’ products will have long sales cycles that involve numerous steps, including initial customer contacts, specification writing, engineering design, prototype fabrication, pilot testing, regulatory approvals (if needed), sales and marketing and commercial manufacture. During this time, GigOptix may expend substantial financial resources and management time and effort without any assurance that product sales will result. The anticipated long sales cycle for some of GigOptix’ products makes it difficult to predict the quarter in which sales may occur. Delays in sales may cause GigOptix to expend resources without an acceptable financial return and make it difficult to plan expenses and forecast revenues.

GigOptix is subject to the cyclical nature of the semiconductor industry.

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry is experiencing a significant downturn during the current global recession. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. The current downturn and any future downturns could have a material adverse effect on GigOptix’ business and operating results. Furthermore, any upturn in the semiconductor industry could result in increased competition for access to third-party foundry and assembly capacity. GigOptix is dependent on the availability of this capacity to manufacture and assemble its products, and its third-party manufacturers have not provided assurances that adequate capacity will be available to GigOptix in the future.

A large proportion of GigOptix’ products are directed at the telecommunications and data communications markets, which continue to be subject to overcapacity.

The technology equipment industry is cyclical and has experienced significant and extended downturns in the past, often in connection with, or in anticipation of, maturing product cycles, and capital spending cycles and declines in general economic conditions. The cyclical nature of these markets has led to significant imbalances in demand, inventory levels and production capacity. It has also accelerated the decrease of average selling prices per unit. GigOptix may experience periodic fluctuations in GigOptix’ financial results because of these or other industry-wide conditions. Developments that adversely affect the telecommunications or data communications markets, including delays in traffic growth and changes in U.S. government regulation, could halt GigOptix’ efforts to generate revenue or cause revenue growth to be slower than anticipated from sales of electro-optic modulators, semiconductors and related products. Reduced spending and technology investment by telecommunications companies may make it more difficult for GigOptix’ products to gain market acceptance. GigOptix’ potential customers may be less willing to purchase new technology such as GigOptix’ technology or invest in new technology development when they have reduced capital expenditure budgets.

GigOptix derives a significant portion of its revenue from a small number of customers and the loss of one or more of these key customers, the diminished demand for GigOptix’ products from a key customer, or the failure to obtain certifications from a key customer or its distribution channel could significantly reduce GigOptix’ revenue and profits.

A relatively small number of customers account for a significant portion of GigOptix’ revenue in any particular period. For instance, Alcatel and contracts with the U.S. government accounted for 11% and 14%, respectively, of GigOptix’ revenue for fiscal year 2010. One or more of GigOptix’ key customers may discontinue operations as a result of consolidation, liquidation or otherwise, or reduce significantly its business with GigOptix due to the current economic conditions. Reductions, delays and cancellation of orders from GigOptix’ key customers or the loss of one or more key customers could significantly further reduce GigOptix’

 

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revenue and profits. There is no assurance that GigOptix’ current customers will continue to place orders with GigOptix, that orders by existing customers will continue at current or historical levels or that GigOptix will be able to obtain orders from new customers.

GigOptix relies on a small number of development contracts with the U.S. Department of Defense and government contractors for a large portion of GigOptix’ revenue. The termination or non-renewal of one or more of these contracts could reduce GigOptix’ future revenue.

Fourteen percent of GigOptix’ revenue for the year ended December 31, 2010 was derived from performance on a limited number of development contracts with various agencies within the U.S. government. Any failure by GigOptix to continue these relationships or significant disruption or deterioration of GigOptix’ relationship with the U.S. Department of Defense may reduce revenues. Government programs must compete with programs managed by other contractors for limited and uncertain levels of funding. The total amount and levels of funding are susceptible to significant fluctuations on a year-to-year basis. GigOptix’ competitors frequently engage in efforts to expand their business relationships with the government and are likely to continue these efforts in the future. In addition, GigOptix’ development contracts with government agencies are subject to potential profit and cost limitations and standard provisions that allow the U.S. government to terminate such contracts at any time at its convenience. Termination of these development contracts, a shift in government spending to other programs in which GigOptix is not involved, or a reduction in government spending generally or defense spending specifically could severely harm GigOptix’ business. GigOptix intends to continue to compete for government contracts and expect such contracts will be a large percentage of GigOptix’ revenue for the foreseeable future. The development contracts in place with various agencies within the U.S. Department of Defense require ongoing compliance with applicable federal procurement regulations. Violations of these regulations can result in civil, criminal or administrative proceedings involving fines, compensatory and punitive damages, restitution and forfeitures, as well as suspensions or prohibitions from entering into such development contracts. Also, the reporting and appropriateness of costs and expenses under these development contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, or DCAA, an agency of the U.S. Department of Defense. In addition, GigOptix obtains provisional billing rates from the DCAA to bill under government contracts. Any differences between provisional billing rates and actual billed rates may result in an adjustment to revenue. Any failure to comply with applicable government regulations could jeopardize GigOptix’ development contracts and otherwise harm GigOptix’ business.

GigOptix’ future success depends in part on the continued service of its key senior management, design engineering, sales, marketing, and technical personnel and its ability to identify, hire and retain additional, qualified personnel.

GigOptix’ future success depends to a significant extent upon the continued service of GigOptix’ senior management personnel, including GigOptix’ Chief Executive Officer, Dr. Avi Katz and GigOptix’ Chief Technical Officer, Andrea Betti-Berutto. GigOptix does not maintain key person life insurance on any of GigOptix’ executive officers and do not intend to purchase any in the future. The loss of key senior executives could have a material adverse effect on GigOptix’ business. There is intense competition for qualified personnel in the semiconductor and polymer industries, and GigOptix may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of GigOptix’ business, or to replace engineers or other qualified personnel who may leave GigOptix’ employment in the future. There may be significant costs associated with recruiting, hiring and retaining personnel. Periods of contraction in GigOptix’ business may inhibit GigOptix’ ability to attract and retain GigOptix’ personnel. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to GigOptix’ product development or other aspects of GigOptix’ business.

 

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GigOptix is subject to the risks frequently experienced by early stage companies.

The likelihood of GigOptix’ success must be considered in light of the risks frequently encountered by early stage companies, especially those formed to develop and market new technologies. These risks include GigOptix’ potential inability to:

 

   

establish product sales and marketing capabilities;

 

   

establish and maintain markets for GigOptix’ potential products;

 

   

identify, attract, retain and motivate qualified personnel;

 

   

continue to develop and upgrade GigOptix’ technologies to keep pace with changes in technology and the growth of markets using semiconductors and polymer materials;

 

   

develop expanded product production facilities and outside contractor relationships;

 

   

maintain GigOptix’ reputation and build trust with customers;

 

   

improve existing and implement new transaction processing, operational and financial systems;

 

   

scale up from small pilot or prototype quantities to large quantities of product on a consistent basis;

 

   

contract for or develop the internal skills needed to master large volume production of GigOptix’ products; and

 

   

fund the capital expenditures required to develop volume production due to the limits of available financial resources.

GigOptix’ future growth will suffer if it does not achieve sufficient market acceptance of its products.

GigOptix’ success depends, in part, upon GigOptix’ ability to maintain and gain market acceptance of GigOptix’ products. To be accepted, these products must meet the quality, technical performance and price requirements of GigOptix’ customers and potential customers. The optical communications industry is currently fragmented with many competitors developing different technologies. Some of these technologies may not gain market acceptance. GigOptix’ products, including products based on polymer materials, may not be accepted by OEMs and systems integrators of optical communications networks and consumer electronics. In addition, even if GigOptix achieves some degree of market acceptance for GigOptix’ potential products in one industry, GigOptix may not achieve market acceptance in other industries for which GigOptix is developing products, which market acceptance is critical to meeting GigOptix’ financial targets.

Many of GigOptix’ current products, particularly those based on polymer technology, are either in the development stage or are being tested by potential customers. GigOptix cannot be assured that its development efforts or customer tests will be successful or that they will result in actual material sales, or that such products will be commercially viable.

Achieving market acceptance for GigOptix’ products will require marketing efforts and the expenditure of financial and other resources to create product awareness and demand by customers. It will also require the ability to provide excellent customer service. GigOptix may be unable to offer products that compete effectively due to GigOptix’ limited resources and operating history. Also, certain large corporations may be predisposed against doing business with a company of GigOptix’ limited size and operating history. Failure to achieve broad acceptance of GigOptix’ products by customers and to compete effectively would harm GigOptix’ operating results.

 

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Successful commercialization of current and future products will require GigOptix to maintain a high level of technical expertise.

Technology in GigOptix’ target markets is undergoing rapid change. To succeed in these target markets, GigOptix will have to establish and maintain a leadership position in the technology supporting those markets. Accordingly, GigOptix’ success will depend on GigOptix’ ability to:

 

   

accurately predict the needs of target customers and develop, in a timely manner, the technology required to support those needs;

 

   

provide products that are not only technologically sophisticated but are also available at a price acceptable to customers and competitive with comparable products;

 

   

establish and effectively defend GigOptix’ intellectual property; and

 

   

enter into relationships with other companies that have developed complementary technology into which GigOptix’ products may be integrated.

GigOptix cannot assure you that it will be able to achieve any of these objectives.

The failure to compete successfully could harm GigOptix’ business.

GigOptix’ faces competitive pressures from a variety of companies in GigOptix’ target markets. The telecom, data-com and consumer opto-electronics markets are highly competitive and it expects that domestic and international competition will increase in these markets, due in part to deregulation, rapid technological advances, price erosion, changing customer preferences and evolving industry standards. Increased competition could result in significant price competition, reduced revenues or lower profit margins. Many of GigOptix’ competitors and potential competitors have or may have substantially greater research and product development capabilities, financial, scientific, marketing, and manufacturing and human resources, name recognition and experience than it does. As a result, these competitors may:

 

   

succeed in developing products that are equal to or superior to GigOptix’ products or that will achieve greater market acceptance than GigOptix’ products;

 

   

devote greater resources to developing, marketing or selling their products;

 

   

respond more quickly to new or emerging technologies or scientific advances and changes in customer requirements, which could render GigOptix’ technologies or potential products obsolete;

 

   

introduce products that make the continued development of GigOptix’ potential products uneconomical;

 

   

obtain patents that block or otherwise inhibit GigOptix’ ability to develop and commercialize potential products;

 

   

withstand price competition more successfully than GigOptix;

 

   

establish cooperative relationships among themselves or with third parties that enhance their ability to address the needs of prospective customers better than GigOptix; and

 

   

take advantage of acquisitions or other opportunities more readily than GigOptix.

Competitors may offer enhancements to existing products, or offer new products based on new technologies, industry standards or customer requirements that are available to customers on a more timely basis than comparable products from GigOptix or that have the potential to replace or provide lower cost alternatives to GigOptix’ products. The introduction of enhancements or new products by competitors could render GigOptix’ existing and future products obsolete or unmarketable. Each of these factors could have a material adverse effect on GigOptix’ business, financial condition and results of operations.

 

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GigOptix may be unable to obtain effective intellectual property protection for GigOptix’ potential products and technology.

Any intellectual property that GigOptix has or may acquire, license or develop in the future may not provide meaningful competitive advantages. GigOptix’ patents and patent applications, including those it licenses, may be challenged by competitors, and the rights granted under such patents or patent applications may not provide meaningful proprietary protection. For example, there are patents held by third parties that relate to polymer materials and electro-optic devices. These patents could be used as a basis to challenge the validity or limit the scope of GigOptix’ patents or patent applications. A successful challenge to the validity or limitation of the scope of GigOptix’ patents or patent applications could limit GigOptix’ ability to commercialize the technology and, consequently, reduce revenues.

Moreover, competitors may infringe GigOptix’ patents or those that it licenses, or successfully avoid these patents through design innovation. To combat infringement or unauthorized use, GigOptix may need to resort to litigation, which can be expensive and time-consuming and may not succeed in protecting GigOptix’ proprietary rights. In addition, in an infringement proceeding, a court may decide that GigOptix’ patents or other intellectual property rights are not valid or are unenforceable, or may refuse to stop the other party from using the intellectual property at issue on the ground that it is non-infringing. Policing unauthorized use of GigOptix’ intellectual property is difficult and expensive, and it may not be able to, or have the resources to, prevent misappropriation of GigOptix’ proprietary rights, particularly in countries where the laws may not protect these rights as fully as the laws of the United States.

GigOptix also relies on the law of trade secrets to protect unpatented technology and know-how. GigOptix tries to protect this technology and know-how by limiting access to those employees, contractors and strategic partners with a need to know this information and by entering into confidentiality agreements with these parties. Any of these parties could breach the agreements and disclose GigOptix’ trade secrets or confidential information to competitors, or such competitors might learn of the information in other ways. Disclosure of any trade secret not protected by a patent could materially harm GigOptix’ business.

GigOptix may be subject to patent infringement claims, which could result in substantial costs and liability and prevent GigOptix from commercializing potential products.

Third parties may claim that GigOptix’ potential products or related technologies infringe their patents. Any patent infringement claims brought against GigOptix may cause GigOptix to incur significant expenses, divert the attention of management and key personnel from other business concerns and, if successfully asserted, require GigOptix to pay substantial damages. In addition, as a result of a patent infringement suit, GigOptix may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a patent covering a third party’s intellectual property unless that party grants GigOptix rights to use its intellectual property. GigOptix may be unable to obtain these rights on acceptable terms, if at all. Even if GigOptix is able to obtain rights to a third party’s patented intellectual property, these rights may be non-exclusive, and therefore competitors may obtain access to the same intellectual property. Ultimately, GigOptix may be unable to commercialize GigOptix’ potential products or may have to cease some business operations as a result of patent infringement claims, which could severely harm GigOptix’ business.

If GigOptix’ potential products infringe the intellectual property rights of others, it may be required to indemnify customers for any damages they suffer. Third parties may assert infringement claims against GigOptix’ current or potential customers. These claims may require GigOptix to initiate or defend protracted and costly litigation on behalf of customers, regardless of the merits of these claims. If any of these claims succeed, GigOptix may be forced to pay damages on behalf of these customers or may be required to obtain licenses for the products they use. If GigOptix cannot obtain all necessary licenses on commercially reasonable terms, GigOptix may be unable to continue selling such products.

 

 

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The technology that GigOptix licenses from various third parties may be subject to government rights and retained rights of the originating research institution.

GigOptix licenses technology from various companies or research institutions, such as the University of Washington. Many of these partners and licensors have obligations to government agencies or universities. Under their agreements, a government agency or university may obtain certain rights over the technology that GigOptix has developed and licensed, including the right to require that a compulsory license be granted to one or more third parties selected by the government agency.

In addition, GigOptix’ partners often retain certain rights under their licensing agreements, including the right to use the technology for noncommercial academic and research use, to publish general scientific findings from research related to the technology, and to make customary scientific and scholarly disclosures of information relating to the technology. It is difficult to monitor whether such partners limit their use of the technology to these uses, and GigOptix could incur substantial expenses to enforce its rights to this licensed technology in the event of misuse.

If GigOptix fails to develop and maintain the quality of GigOptix’ manufacturing processes, GigOptix’ operating results would be harmed.

The manufacture of GigOptix’ products is a multi-stage process that requires the use of high-quality materials and advanced manufacturing technologies. With respect to GigOptix’ polymer-based products, polymer-related device development and manufacturing must occur in a highly controlled, clean environment to minimize particles and other yield- and quality-limiting contaminants. In spite of stringent quality controls, weaknesses in process control or minute impurities in materials may cause a substantial percentage of a product in a lot to be defective. If GigOptix is unable to develop and continue to improve on GigOptix’ manufacturing processes or to maintain stringent quality controls, or if contamination problems arise, GigOptix’ operating results would be harmed.

The complexity of GigOptix’ products may lead to errors, defects and bugs, which could result in the necessity to redesign products and could negatively impact GigOptix’ reputation with customers.

Products as complex as GigOptix’ may contain errors, defects and bugs when first introduced or as new versions are released. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of GigOptix’ products or result in a costly recall and could damage GigOptix’ reputation and adversely affect GigOptix’ ability to retain existing customers and to attract new customers. In particular, certain products are customized or designed for integration into specific network systems. If GigOptix’ products experience defects, GigOptix may need to undertake a redesign of the product, a process that may result in significant additional expenses.

GigOptix may also be required to make significant expenditures of capital and resources to resolve such problems. There is no assurance that problems will not be found in new products after commencement of commercial production, despite testing by GigOptix, GigOptix’ suppliers and GigOptix’ customers.

GigOptix could be exposed to significant product liability claims that could be time-consuming and costly and impair GigOptix’ ability to obtain and maintain insurance coverage.

GigOptix may be subject to product liability claims if any of GigOptix’ products are alleged to be defective or harmful. Product liability claims or other claims related to GigOptix’ potential products, regardless of their outcome, could require GigOptix to spend significant time and money in litigation, divert management’s time and attention from other business concerns, require GigOptix to pay significant damages, harm GigOptix’ reputation or hinder acceptance of GigOptix’ products. Any successful product liability claim may prevent GigOptix from obtaining adequate product liability insurance in the future on commercially reasonable terms. Any inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against

 

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potential product liability claims could impair GigOptix’ ability to commercialize GigOptix’ products. In addition, certain of GigOptix’ products are sold under warranties. The failure of GigOptix’ products to meet the standards set forth in such warranties could result in significant expenses to GigOptix.

If GigOptix fails to effectively manage GigOptix’ growth, and effectively transition from GigOptix’ focus on research and development activities to commercially successful products, GigOptix’ business could suffer.

Failure to manage growth of operations could harm GigOptix’ business. To date, a large number of GigOptix’ activities and resources have been directed at the research and development of GigOptix’ technologies and development of potential related products. The transition from a focus on research and development to being a vendor of products requires effective planning and management. Additionally, growth arising from the expected synergies from future acquisitions will require effective planning and management. Future expansion will be expensive and will likely strain management and other resources.

In order to effectively manage growth, GigOptix must:

 

   

continue to develop an effective planning and management process to implement GigOptix’ business strategy;

 

   

hire, train and integrate new personnel in all areas of GigOptix’ business; and

 

   

expand GigOptix’ facilities and increase capital investments.

There is no assurance that GigOptix will be able to accomplish these tasks effectively or otherwise effectively manage GigOptix’ growth.

GigOptix’ business, financial condition and operating results would be harmed if it does not achieve anticipated revenue.

From time to time, in response to anticipated long lead times to obtain inventory and materials from outside contract manufacturers, suppliers and foundries, GigOptix may need to order materials in advance of anticipated customer demand. This advance ordering may result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors render GigOptix’ products less marketable. If GigOptix is forced to hold excess inventory or incur unanticipated inventory write-downs, GigOptix’ financial condition and operating results could be materially harmed.

GigOptix’ expense levels are relatively fixed and are based on GigOptix’ expectations of future revenue. GigOptix will have limited ability to reduce expenses quickly in response to any revenue shortfalls. Changes to production volumes and impact of overhead absorption may result in a decline in GigOptix’ financial condition or liquidity.

GigOptix could suffer unrecoverable losses on GigOptix’ customers’ accounts receivable, which would adversely affect GigOptix’ financial results.

GigOptix’ operating cash flows are dependent on the continued collection of receivables. GigOptix’ accounts receivable as of December 31, 2010 increased by $1.6 million or 43% compared to the balance at December 31, 2009. GigOptix could suffer additional accounting losses as well as a reduction in liquidity if a customer is unable to pay. A significant increase in uncollectible accounts would have an adverse impact on GigOptix’ business, liquidity and financial results.

 

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The industry and markets in which GigOptix competes are subject to consolidation, which may result in stronger competitors, fewer customers and reduced demand.

There has been industry consolidation among communications IC companies, network equipment companies and telecommunications companies in the past. This consolidation is expected to continue as companies attempt to strengthen or hold their positions in evolving markets. Consolidation may result in stronger competitors, fewer customers and reduced demand, which in turn could have a material adverse effect on GigOptix’ business, operating results, and financial condition.

GigOptix’ operating results are subject to fluctuations because GigOptix has international sales.

International sales account for a large portion of GigOptix’ revenue and may account for an increasing portion of future revenue. The revenue derived from international sales may be subject to certain risks, including:

 

   

foreign currency exchange fluctuations;

 

   

changes in regulatory requirements;

 

   

tariffs and other barriers;

 

   

timing and availability of export licenses;

 

   

political and economic instability;

 

   

difficulties in accounts receivable collections;

 

   

difficulties in staffing and managing foreign operations;

 

   

difficulties in managing distributors;

 

   

difficulties in obtaining governmental approvals for communications and other products;

 

   

reduced or uncertain protection for intellectual property rights in some countries;

 

   

longer payment cycles to collect accounts receivable in some countries;

 

   

the burden of complying with a wide variety of complex foreign laws and treaties; and

 

   

potentially adverse tax consequences.

GigOptix is subject to regulatory compliance related to GigOptix’ operations.

GigOptix is subject to various U.S. governmental regulations related to occupational safety and health, labor and business practices. Failure to comply with current or future regulations could result in the imposition of substantial fines, suspension of production, alterations of GigOptix’ production processes, cessation of operations, or other actions, which could harm GigOptix’ business.

GigOptix may incur liability arising from GigOptix’ use of hazardous materials.

GigOptix’ business and facilities are subject to a number of federal, state and local laws and regulations relating to the generation, handling, treatment, storage and disposal of certain toxic or hazardous materials and waste products that are used or generated in GigOptix’ operations. Many of these environmental laws and regulations subject current or previous owners or occupiers of land to liability for the costs of investigation, removal or remediation of hazardous materials. In addition, these laws and regulations typically impose liability regardless of whether the owner or occupier knew of, or was responsible for, the presence of any hazardous materials and regardless of whether the actions that led to their presence were taken in compliance with the law. GigOptix’ domestic facilities use various chemicals in manufacturing processes that may be toxic and covered by various environmental controls. These hazardous materials may be stored on site. The waste created by use of these materials is transported off-site by an unaffiliated waste hauler. Many environmental laws and regulations

 

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require generators of waste to take remedial actions at an off-site disposal location even if the disposal was conducted lawfully. The requirements of these laws and regulations are complex, change frequently and could become more stringent in the future. Failure to comply with current or future environmental laws and regulations could result in the imposition of substantial fines, suspension of production, alteration of production processes, cessation of operations or other actions, which could severely harm GigOptix’ business.

GigOptix has previously identified material weaknesses in GigOptix’ internal control over financial reporting. If it fails to remedy the material weaknesses or otherwise fail to maintain effective internal control over financial reporting, the accuracy and timing of GigOptix’ financial reporting may be adversely affected.

In connection with the preparation of GigOptix’ consolidated financial statements for the years ended December 31, 2010 and 2009, material weaknesses in GigOptix’ internal controls over financial reporting, as defined in rules established by the Public Company Accounting Oversight Board, were identified. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements would not be prevented or detected on a timely basis. The material weaknesses were attributed to GigOptix not maintaining a sufficient complement of personnel with an appropriate level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with GigOptix’ financial reporting requirements. GigOptix has adopted a remediation plan that GigOptix is in the process of implementing in conjunction with its proposed acquisition of Endwave. A key component of the remediation plan will be the addition of accounting personnel with the appropriate level of accounting knowledge, experience, and training in the application of generally accepted accounting principles commensurate with the financial reporting requirements of a public company. GigOptix will continue to update and upgrade its internal processes and systems relating to financial reporting. GigOptix expects to remediate the material weaknesses during 2011.

In addition, other material weaknesses or significant deficiencies in GigOptix’ internal control over financial reporting may be identified in the future. If GigOptix fails to remediate the material weakness or fail to implement required new or improved controls, or encounter difficulties in their implementation, it could harm GigOptix’ operating results, cause failure to meet GigOptix’ SEC reporting obligations on a timely basis or result in material misstatements in GigOptix’ annual or interim financial statements.

GigOptix may be unable to export some of GigOptix’ potential products or technology to other countries, convey information about GigOptix’ technology to citizens of other countries or sell certain products commercially, if the products or technology are subject to U.S. export or other regulations.

GigOptix is developing certain products that it believes the U.S. government and other governments may be interested in using for military and information gathering or antiterrorism activities. U.S. government export regulations may restrict GigOptix from selling or exporting these potential products into other countries, exporting GigOptix’ technology to those countries, conveying information about GigOptix’ technology to citizens of other countries or selling these potential products to commercial customers. GigOptix may be unable to obtain export licenses for products or technology if necessary. GigOptix currently cannot assess whether national security concerns would affect GigOptix’ potential products and, if so, what procedures and policies GigOptix would have to adopt to comply with applicable existing or future regulations.

GigOptix is subject to risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. GigOptix cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of GigOptix’ products will be implemented by the United States or other countries.

Various laws and regulations potentially affect the import and export of GigOptix’ products, including export control, tax and customs laws. Furthermore, some customer purchase orders and agreements are governed by foreign laws, which may differ significantly from laws in the United States. As a result, GigOptix’ ability to

 

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enforce GigOptix’ rights under such agreements may be limited compared with GigOptix’ ability to enforce GigOptix’ rights under agreements governed by laws in the United States.

GigOptix’ business is subject to foreign currency risk.

Sales to customers located outside of the United States comprised 49% and 51% of GigOptix’ revenue for 2010 and 2009, respectively. In addition, GigOptix has a subsidiary overseas (Switzerland) that records its operating expenses in a foreign currency. Because sales of GigOptix’ products have been denominated to date primarily in U.S. dollars, increases in the value of the U.S. dollar could increase the price of GigOptix’ products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in GigOptix’ results of operations. GigOptix currently does not have hedging or other programs in place to protect against adverse changes in the value of the U.S. dollar as compared to other currencies to minimize potential adverse effects.

Restrictive covenants under GigOptix’ credit facility with Silicon Valley Bank may adversely affect its operations.

GigOptix’ loan and security agreement with Silicon Valley Bank contains a number of restrictive covenants that will impose significant operating and financial restrictions on GigOptix’ ability to, without prior written approval from Silicon Valley Bank:

 

   

Merge or consolidate, or permit any of GigOptix’ subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of GigOptix’ subsidiaries to acquire, all or substantially all of the capital stock or property of another person;

 

   

Create, incur, or assume any indebtedness, other than certain indebtedness permitted under the loan and security agreement with Silicon Valley Bank; and

 

   

Pay any dividends or make any distributions or payment on, or redeem, retire or repurchase any capital stock.

The receipt of Silicon Valley Bank’s prior written approval of the proposed merger with Endwave is a condition to Endwave’s obligation to effect the closing of the merger. A failure to comply with the covenants contained in GigOptix’ loan and security agreement could result in an event of default under the agreement that, if not cured or waived, could result in the acceleration of the indebtedness and have a material adverse effect on GigOptix’ business, financial condition and results of operations.

GigOptix’ quarter-to-quarter performance may vary substantially, and this variance, as well as general market conditions, may cause GigOptix’ stock price to fluctuate greatly and potentially expose GigOptix to litigation.

The revenues for GigOptix product lines and its quarterly operating results may vary significantly based on many factors, including:

 

   

reductions or delays in funding of development programs involving new polymer materials technologies by the U.S. government;

 

   

additions of new customers;

 

   

fluctuating demand for GigOptix’ products and technologies;

 

   

announcements or implementation by competitors of technological innovations or new products;

 

   

the status of particular development programs and the timing of performance under specific development agreements;

 

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timing and amounts relating to the expansion of operations;

 

   

costs related to possible future acquisitions of technologies or businesses;

 

   

communications, information technology and semiconductor industry conditions;

 

   

fluctuations in the timing and amount of customer requests for product shipments;

 

   

the reduction, rescheduling or cancellation of orders by customers, including as a result of slowing demand for GigOptix’ products or its customers’ products;

 

   

changes in the mix of products that GigOptix’ customers buy;

 

   

competitive pressures on selling prices;

 

   

the ability of GigOptix’ customers to obtain components from their other suppliers;

 

   

fluctuations in manufacturing output, yields or other problems or delays in the fabrication, assembly, testing or delivery of GigOptix’ products or GigOptix’ customers’ products; and

 

   

increases in the costs of products or discontinuance of products by suppliers.

GigOptix bases its current and future expense estimates, in large part, on estimates of future revenue, which is difficult to predict. GigOptix expects to continue to make significant operating and capital expenditures in the area of research and development and to invest in and expand production, sales, marketing and administrative systems and processes. GigOptix may be unable to, or may elect not to, adjust spending quickly enough to offset any unexpected revenue shortfall. If GigOptix’ increased expenses are not accompanied by increased revenue in the same quarter, its quarterly operating results would be harmed.

In future quarters, GigOptix’ results of operations may fall below the expectations of investors and the trading price of its common stock may decline as a consequence. GigOptix believes that quarter-to-quarter comparisons of its operating results will not be a good indication of future performance and should not be relied upon to predict the future performance of its stock price. In the past, companies that have experienced volatility in the market price of their stock have often been subject to securities class action litigation. GigOptix may be the target of this type of litigation in the future. Securities litigation could result in substantial costs and divert GigOptix’ attention from other business concerns, which could seriously harm its business.

Provisions in GigOptix’ amended and restated certificate of incorporation and GigOptix’ amended and restated bylaws may prevent takeover attempts that could be beneficial to GigOptix’ stockholders.

Provisions of the GigOptix’ amended and restated certificate of incorporation and provisions of the GigOptix’ amended and restated bylaws could discourage a takeover of GigOptix even if a change of control of GigOptix would be beneficial to the interests of its stockholders. These charter provisions include the following:

 

   

a requirement that the GigOptix’ board of directors be divided into three classes, with approximately one-third of the directors to be elected each year; and

 

   

supermajority voting requirements (two-thirds of outstanding shares) applicable to the approval of any merger or other change of control transaction that is not approved by GigOptix’ continuing directors. The continuing directors are all of the directors as of the effective time of the merger or who are elected to the board upon the recommendation of a majority of the continuing directors.

 

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Risks Related to Endwave

Risks Related to Endwave’s Business

Endwave has had a history of losses and may not be profitable in the future.

Endwave had a net loss from continuing operations of $8.1 million in 2010. Endwave also had a net loss from continuing operations of $10.6 million and $4.0 million for the years ended December 31, 2009 and 2008, respectively. There is no guarantee that Endwave will achieve or maintain profitability in the future.

Endwave depends on a small number of key customers in the mobile communication industry for a significant portion of its revenues. If Endwave loses any of its major customers or there is any material reduction in orders for Endwave’s products from any of these customers, Endwave’s 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 Endwave’s products, adversely impacting its results of operations.

Endwave depends, and expects to continue to depend, on a relatively small number of mobile communication customers for a significant part of its revenues. The loss of any of Endwave’s major customers or any material reduction in orders from any such customers would have a material adverse effect on Endwave’s business, financial condition and results of operations. In 2010, three customers each accounted for greater than 10% of total revenues and combined they accounted for 93% of Endwave’s total revenues, the largest of which was Nokia Siemens Networks, which accounted for 52% of Endwave’s total revenues. In 2009, two customers accounted for 88% of Endwave’s total revenues and no other customer accounted for more than 10% of its 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 Endwave’s major customers in this market, or one of the communications service providers supplied by one of Endwave’s major customers, could result in delays or cancellations of orders for Endwave’s products and, accordingly, delays or reductions in its anticipated revenues and reduced profitability or increased net losses.

Endwave’s semiconductor product line will require it to incur significant expenses and may not be successful.

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

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

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

 

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In addition, Endwave currently purchases a number of components, some from single source suppliers, including, but not limited to:

 

   

semiconductor devices;

 

   

application-specific monolithic microwave integrated circuits;

 

   

voltage regulators;

 

   

passive components;

 

   

unusual or low usage components;

 

   

surface mount components compliant with the EU’s Restriction of Hazardous Substances, or RoHS, Directive;

 

   

custom metal parts;

 

   

high-frequency circuit boards; and

 

   

custom connectors.

Any delay or interruption in the supply of these or other components could impair Endwave’s ability to manufacture and deliver its products, harm its reputation and cause a reduction in its revenues. In addition, any increase in the cost of the components that Endwave uses in its products could make its products less competitive and lower Endwave’s margins. In the past, Endwave suffered from shortages of and quality issues with various components. These shortages and quality issues adversely impacted Endwave’s product revenues and could reappear in the future. Endwave’s single source suppliers could enter into exclusive agreements with or be acquired by one of its competitors, increase their prices, refuse to sell their products to Endwave, discontinue products or go out of business. Even to the extent alternative suppliers are available to Endwave and their components are qualified with Endwave’s customers on a timely basis, identifying them and entering into arrangements with them may be difficult and time consuming, and they may not meet Endwave’s quality standards. Endwave may not be able to obtain sufficient quantities of required components on the same or substantially the same terms.

Competitive conditions often require Endwave to reduce prices and, as a result, require Endwave to reduce its costs in order to be profitable.

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

Endwave’s operating results may be adversely affected by substantial quarterly and annual fluctuations and market downturns.

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

 

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

Endwave utilizes both industry standard semiconductor components and its own custom-designed semiconductor devices. However, Endwave does not own or operate a semiconductor fabrication facility, or foundry, and relies on a limited number of third parties to produce its custom-designed components. If any of Endwave’s semiconductor suppliers is unable to deliver semiconductors to it in a timely fashion, the resulting delay could severely impact its ability to fulfill customer orders and could damage its relationships with its customers. In addition, the loss of Endwave’s relationship with or access to any of the semiconductor foundries it currently uses for the fabrication of custom designed components and any resulting delay or reduction in the supply of semiconductor devices to Endwave, would severely impact Endwave’s ability to fulfill customer orders and could damage its relationships with its customers.

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

Endwave relies heavily on a Thailand facility of HANA, a contract manufacturer, to produce its RF modules and to package its 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 Endwave’s manufacturing arrangement, Endwave will be forced to find an alternative manufacturer and may not be able to fulfill its production commitments to its customers, which could cause sales to be delayed or lost and could harm Endwave’s reputation.

Endwave outsources the assembly and testing of its products to a Thailand facility of HANA, a contract manufacturer. Endwave plans to continue this arrangement as a key element of its operating strategy. If HANA does not provide Endwave with high quality products and services in a timely manner, terminates its relationship with Endwave, or is unable to produce its products due to financial difficulties or political instability, Endwave 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 Endwave’s products could be delayed or lost and its reputation could be harmed. Endwave’s 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 Endwave.

Potential misclassification of certain products under the Export Administration Regulations may result in liability for Endwave and affect ongoing operations.

In December 2009, Endwave 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 its request, Endwave believed based on its 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 it had operations or sold products. In response to Endwave’s commodity classification

 

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request, however, BIS determined that its 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.

Endwave has requested reconsideration of certain BIS classifications and is in the process of reviewing the affected transactions. As part of this review, Endwave has quarantined the affected products. Endwave has also submitted an initial voluntary self-disclosure to BIS and will provide a detailed report to BIS regarding the affected transactions.

At this time, Endwave believes that all the transactions entered into by Endwave could have qualified for license exceptions under the Export Administration Regulations. Nevertheless, Endwave may be responsible for monetary penalties and may experience operational delays that could have a material adverse effect on its business and operations.

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

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

Endwave may not be able to design its products as quickly as its customers require, which could cause it to lose sales and may harm its reputation.

Existing and potential customers typically demand that Endwave design products for them under difficult time constraints. In the current market environment, the need to respond quickly is particularly important. If Endwave is unable to commit the necessary resources to complete a project for a potential customer within the requested timeframe, it may lose a potential sale. Endwave’s 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. Endwave has, in the past, expended significant resources on research and design efforts on potential customer products that did not result in additional revenue.

Each of Endwave’s 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 Endwave must adapt its products rapidly to use a wide range of different frequencies. This may require the design of products at a number of different frequencies

 

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simultaneously. This design process can be difficult and time consuming, could increase Endwave’s costs and could cause delays in the delivery of products to Endwave’s customers, which may harm Endwave’s reputation and delay or cause it to lose revenues.

Endwave’s customers often have specific requirements that can be at the forefront of technological development and therefore difficult and expensive to meet. If Endwave is not able to devote sufficient resources to these products, or experiences development difficulties or delays, Endwave could lose sales and damage its reputation with those customers.

Endwave depends on its key personnel. Skilled personnel in Endwave’s industry can be in short supply. If Endwave is unable to retain its current personnel or hire additional qualified personnel, its ability to develop and successfully market its products would be harmed.

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

Due to its relatively small number of employees and the limited number of individuals with the skill set needed to work in its industry, Endwave is particularly dependent on the continued employment of its senior management team and other key personnel. If one or more members of Endwave’s 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 Endwave’s ability to conduct its business successfully could be seriously harmed. Endwave does not maintain key person life insurance policies.

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

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

 

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

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

 

   

the failure of a supplier to deliver needed components on a timely basis or with acceptable quality;

 

   

lack of sufficient capacity;

 

   

poor manufacturing yields;

 

   

equipment failures;

 

   

manufacturing personnel shortages;

 

   

transportation disruptions;

 

   

changes in import/export regulations;

 

   

infrastructure failures at the facilities of Endwave’s offshore contract manufacturer;

 

   

natural disasters;

 

   

acts of terrorism; and

 

   

political instability.

Manufacturing Endwave’s 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 Endwave’s yield is lower than it expects, Endwave may not be able to deliver products on time. For example, in the past, Endwave has on occasion experienced poor yields on certain products that have prevented it from delivering products on time and have resulted in lost sales. If Endwave fails to manufacture and deliver products in a timely fashion, its reputation may be harmed, it may jeopardize existing orders and lose potential future sales, and it may be forced to pay penalties to its customers.

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

Endwave has been required historically to place firm orders for products and manufacturing equipment with its suppliers up to six months prior to the anticipated delivery date and, on occasion, prior to receiving an order for the product, based on its forecasts of customer demands. Endwave’s sales process requires it to make multiple demand forecast assumptions, each of which may introduce error into its estimates. If Endwave overestimates customer demand, Endwave may allocate resources to manufacturing products that it may not be able to sell when it expects, if at all. As a result, Endwave would have additional usage of cash, excess inventory and overhead expense, which would harm its financial results. On occasion, Endwave has 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 Endwave underestimates customer demand or if insufficient manufacturing capacity were available, it would lose revenue opportunities, market share and damage its customer relationships. On occasion, Endwave has been unable to adequately respond to unexpected increases in customer purchase orders and was unable to benefit from this increased demand. There is no guarantee that Endwave will be able to adequately

 

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respond to unexpected increases in customer purchase orders in the future, in which case Endwave may lose the revenues associated with those additional purchase orders and its customer relationships and reputation may suffer.

Any failure to protect Endwave’s intellectual property appropriately could reduce or eliminate any competitive advantage Endwave has.

Endwave’s success depends, in part, on its ability to protect its intellectual property. Endwave relies primarily on a combination of patent, copyright, trademark and trade secret laws to protect its proprietary technologies and processes. As of December 31, 2010, Endwave had 43 United States patents issued, many with associated foreign filings and patents. Its issued patents include those relating to basic circuit and device designs, semiconductors, Endwave’s multilithic microsystems technology and system designs. Its issued United States patents expire between 2013 and 2028. Endwave maintains a vigorous technology development program that routinely generates potentially patentable intellectual property. Its 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 its intellectual property, Endwave regularly enters into written confidentiality and assignment of rights to inventions agreements with its employees, and confidentiality and non-disclosure agreements with third parties, and generally controls access to and distribution of its documentation and other proprietary information. These measures may not be adequate in all cases to safeguard the proprietary technology underlying Endwave’s products. It may be possible for a third party to copy or otherwise obtain and use Endwave’s products or technology without authorization, develop similar technology independently or attempt to design around Endwave’s patents. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited outside of the United States, Europe and Japan. Endwave may not be able to obtain any meaningful intellectual property protection in other countries and territories. Additionally, Endwave may, for a variety of reasons, decide not to file for patent, copyright, or trademark protection outside of the United States. Moreover Endwave occasionally agrees to incorporate a customer’s or supplier’s intellectual property into its designs, in which case Endwave has obligations with respect to the non-use and non-disclosure of that intellectual property. Endwave also licenses technology from other companies, including Northrop Grumman Corporation. There are no limitations on Endwave’s rights to make, use or sell products Endwave may develop in the future using the chip technology licensed to it by Northrop Grumman Corporation. Steps taken by Endwave to prevent misappropriation or infringement of its intellectual property or the intellectual property of its customers, may not be successful. Litigation may be necessary in the future to enforce Endwave’s intellectual property rights, to protect its trade secrets or to determine the validity and scope of proprietary rights of others, including Endwave’s customers. Litigation of this type could result in substantial costs and diversion of Endwave’s resources.

Endwave may receive in the future notices of claims of infringement of other parties’ proprietary rights. In addition, the invalidity of its patents may be asserted or prosecuted against Endwave. Furthermore, in a patent or trade secret action, Endwave 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. Endwave has also at times agreed to indemnification obligations in favor of its customers and other third parties that could be triggered upon an allegation or finding of its infringement of other parties’ proprietary rights. These indemnification obligations would be triggered for reasons including Endwave’s sale or supply to a customer or other third parties of a product that was later discovered to infringe upon another party’s proprietary rights. Irrespective of the validity or successful assertion of such claims, Endwave would likely incur significant costs and diversion of its resources with respect to the defense of such claims. To address any potential claims or actions asserted against it, Endwave may seek to obtain a license under a third party’s intellectual property rights. However, in such an instance, a license may not be available on commercially reasonable terms, if at all.

 

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With regard to Endwave’s 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 Endwave’s 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 Endwave’s technology might make it easier for its competitors to offer similar products and use similar manufacturing techniques.

Endwave is exposed to fluctuations in the market values of its investment portfolio.

Although Endwave has not experienced any material losses on its cash, cash equivalents and short-term investments, future declines in their market values could have a material adverse effect on Endwave’s financial condition and operating results. Although its portfolio has no direct investments in auction rate or sub-prime mortgage securities, Endwave’s 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 Endwave holds 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 Endwave’s cash equivalents and short-term and long-term investments could decline and result in a material impairment.

Risks Relating to Endwave’s Industry

Endwave’s failure to compete effectively could reduce its revenues and margins.

Among suppliers in the mobile communication market who provide integrated transceivers to radio OEMs, Endwave primarily competes 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 Endwave. To the extent that mobile communication OEMs presently, or may in the future, produce their own transceiver modules, Endwave loses the opportunity to provide its modules to them. However, when Endwave launched it semiconductor product line, it gained the opportunity to provide integrated circuits to all radio OEMs.

Endwave’s 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. Endwave believes that its 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 Endwave serves or could require costly alterations of its current or future products.

The markets that Endwave serves 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 Endwave serves or could require costly alterations of Endwave’s current or future products.

 

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Endwave’s failure to continue to develop new or improved semiconductor process technologies could impair its competitive position.

Endwave’s future success depends in part upon its 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 Endwave fails to keep abreast of the new and improved semiconductor process technologies as they emerge, it may lose market share, which could adversely affect Endwave’s operating results.

The segment of the semiconductor industry in which Endwave participates is intensely competitive, and Endwave’s inability to compete effectively would harm its business.

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

Endwave expects competition in its 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 Endwave is not able to compete effectively, its market share and revenue could be adversely affected and its business and results of operations could be harmed.

Risks Relating to Ownership of Endwave’s Stock

The market price of Endwave’s common stock has fluctuated historically and is likely to fluctuate in the future.

The price of Endwave’s common stock has fluctuated widely since its initial public offering in October 2000. In 2010, the lowest daily sales price for Endwave’s common stock was $2.00 and the highest daily sales price for Endwave’s common stock was $3.61. In 2009, the lowest daily sales price for Endwave’s common stock was $1.36 and the highest daily sales price for its common stock was $3.43. The market price of Endwave’s common stock can fluctuate significantly for many reasons, including, but not limited to:

 

   

Endwave’s financial performance or the performance of its competitors;

 

   

the purchase or sale of common stock, short-selling or transactions by large stockholders;

 

   

technological innovations or other significant trends or changes in the markets Endwave serves;

 

   

successes or failures at significant product evaluations or site demonstrations;

 

   

the introduction of new products by Endwave or its competitors;

 

   

acquisitions, strategic alliances or joint ventures involving Endwave or its competitors;

 

   

decisions by major customers not to purchase products from Endwave or to pursue alternative technologies;

 

   

decisions by investors to de-emphasize investment categories, groups or strategies that include Endwave or its industry;

 

   

market conditions in the industry, the financial markets and the economy as a whole; and

 

   

the low trading volume of Endwave’s common stock.

It is likely that Endwave’s 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 Endwave’s common stock would likely decline.

 

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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 Endwave’s common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for its common stock. Additionally, future stock price volatility for Endwave’s common stock could provoke the initiation of securities litigation, which may divert substantial management resources and have an adverse effect on Endwave’s business, operating results and financial condition. Endwave’s existing insurance coverage may not sufficiently cover all costs and claims that could arise out of any such securities litigation. Endwave anticipates that prices for its common stock will continue to be volatile.

Endwave has a few stockholders that each own a large percentage of Endwave’s 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 April 28, 2011, Endwave’s five largest stockholders together owned approximately 40% of Endwave’s outstanding common stock. Because most matters requiring approval of Endwave’s stockholders require the approval of the holders of a majority of the shares of Endwave’s outstanding capital stock present in person or by proxy at a meeting of stockholders, the significant ownership interest of these stockholders allows them to significantly affect the election of Endwave’s 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 Endwave’s stockholders as a whole.

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

Endwave is subject to certain Delaware anti-takeover laws by virtue of its status as a Delaware corporation. These laws prevent Endwave from engaging in a merger or sale of more than 10% of its assets with any stockholder, including all affiliates and associates of any stockholder, who owns 15% or more of Endwave’s outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of Endwave’s voting stock, unless Endwave’s board of directors approved the business combination or the transaction that resulted in the stockholder becoming an interested stockholder, or upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation, or the business combination is approved by Endwave’s board of directors and authorized by at least 66 2/3% of Endwave’s 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, Endwave has not chosen to do so. Endwave’s 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 stockholders to act by written consent, discretionary authority given to Endwave’s board of directors as to the issuance of preferred stock, and indemnification rights for Endwave’s directors and executive officers. Additionally, Endwave has 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 Endwave’s board of directors. Endwave has 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 its executive officers and certain senior, non-executive employees under specified conditions. These plans may make Endwave a less attractive acquisition target or may reduce the amount a potential acquirer may otherwise be willing to pay for Endwave.

 

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SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus includes “forward-looking statements” about GigOptix, Endwave and the combined company after the merger within the meaning and protections of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements include statements with respect to GigOptix’ and Endwave’s beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond the control of either GigOptix or Endwave, and which may cause the companies’ actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through the use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation:

 

   

GigOptix and Endwave have a history of incurring losses;

 

   

the ability to remain competitive in the markets the companies serve;

 

   

the effects of future economic, business and market conditions;

 

   

the ability to successfully integrate the GigOptix and Endwave businesses;

 

   

the ability to achieve cost savings, operating efficiencies and new revenue opportunities as a result of the merger, and the incurrence of unforeseen costs and expenses;

 

   

the effects of the uncertainty of the merger on relationships with customers, employees and suppliers;

 

   

consolidation in the industry the companies serve;

 

   

the failure of Endwave stockholders to approve the merger;

 

   

GigOptix’ and Endwave’s ability to continue to develop, manufacture and market innovative products and services that meet customer requirements for performance and reliability;

 

   

GigOptix’ ability to establish effective internal controls over its financial reporting;

 

   

costs associated with the merger;

 

   

risks relating to the transaction of business internationally;

 

   

GigOptix’ failure to realize anticipated benefits from other acquisitions or the possibility that such acquisitions could adversely affect GigOptix, and risks relating to the prospects for future acquisitions;

 

   

the loss of key employees and the ability to retain and attract key personnel, including technical and managerial personnel;

 

   

quarterly and annual fluctuations in results of operations;

 

   

investments in research and development;

 

   

protection and enforcement of intellectual property rights and proprietary technologies;

 

   

costs associated with potential intellectual property infringement claims asserted by a third party;

 

   

GigOptix’ and Endwave’s exposure to product liability claims resulting from the use of their products;

 

   

the loss of one or more of significant customers, or the diminished demand for GigOptix’ and Endwave’s products;

 

   

dependence on contract manufacturing and outsourced supply chain, as well as the costs of materials;

 

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reliance on third parties to provide services for the operation of GigOptix’ and Endwave’s businesses;

 

   

the effects of war, terrorism, natural disasters or other catastrophic events;

 

   

GigOptix’ and Endwave’s success at managing the risks involved in the foregoing items; and

 

   

other risks and uncertainties, including those listed under the heading “Risk Factors” in this proxy statement/prospectus.

The forward-looking statements are based upon beliefs and assumptions of the management of GigOptix and Endwave and are made as of the date of this proxy statement/prospectus. GigOptix and Endwave undertake no obligation to publicly update or revise any forward-looking statements included in this proxy statement/prospectus or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise, except to the extent required by federal securities laws. Any investor should consider all risks and uncertainties disclosed in the companies filings with the SEC, described below under the heading “Where You Can Find More Information,” all of which is accessible on the SEC’s website at www.sec.gov.

 

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INFORMATION ABOUT GIGOPTIX, INC.

Overview

GigOptix is a leading supplier of electronic and electro-optical semiconductor products that enable high-speed telecommunications and data-communications networks globally. GigOptix’ products convert signals between electrical and optical formats for transmitting and receiving data over fiber optic networks, a critical function in optical communications equipment. GigOptix is creating innovations in both telecommunications and data-communications applications for fast growing markets in 10Gbps, 40Gbps and 100Gbps drivers, receiver ICs, electro–optic modulator components and multi-chip-modules, or MCM. GigOptix believes that its expertise in semiconductor electro-optical and optical technologies has helped it create a broad portfolio of products that addresses customer demand for performance at higher speeds, over wider temperature ranges, in smaller sizes, and at lower power consumption compared to other products currently available in the market. GigOptix views itself as a strategic vendor to a number of GigOptix’ customers given GigOptix’ early engagement in their product design plans. GigOptix has well-established relationships with many of the leading telecommunications and data-communications network systems vendors such as Alcatel-Lucent and other “Tier-One” equipment vendors in the United States, Europe and Asia, as well as leading industrial, aerospace and defense customers.

Telecommunications and data-communications networks are becoming increasingly congested due to the growing demand for high bandwidth applications by consumers and enterprises. This bandwidth constraint has caused network service providers to turn to component vendors like GigOptix to provide solutions that maximize bandwidth and reliability while minimizing cost. Increasing the communications data rate in networks has been an important element of easing network congestion, and, as a result, network service providers are in process of upgrading their 10Gbps systems to 40Gbps and 100Gbps equipment deployments throughout their networks. GigOptix focuses on the 10Gbps and above markets, which GigOptix believes present the fastest growing and primary market opportunity in the communications industry.

Since inception, GigOptix has expanded its customer base, acquired and integrated four businesses with complementary products and customers, and in so doing expanded GigOptix’ product line from a few 10Gbps ultra-long reach electronic modulator drivers to a line of over 100 products that includes drivers, receivers and modulators for 10 to 100Gbps applications and custom ASICs. GigOptix’ direct sales force is based in 5 countries and is supported by more than 50 channel representatives and distributors that are selling GigOptix’ products throughout North America, Europe, Japan and Asia. In 2010, GigOptix shipped over 90 products to over 100 customers.

Industry Background

Over the past several years, communications networks have undergone significant challenges as network operators pursue more profitable service offerings while reducing operating costs. The growing demand for bandwidth due to the explosion of data and video across networks by enterprises and consumers has driven service providers to continuously add high speed access such as Wi-Fi, WiMax, 3G, DSL, cable and FTTx, as well as converging their separate voice and data networks into a single IP-based high capacity integrated network to easily manage and provision these services. Other high bandwidth applications such as e-mail, music, video downloads and streaming, on-line social networks, on-line gaming, and VOD or IPTV are also challenging network service providers to supply increasing bandwidth to their customers and results in increased network utilization across the entire core and edge of wireline, wireless and cable networks. Additionally, enterprises and institutions are managing their rapidly escalating demand for data and bandwidth and are upgrading and deploying high speed local, storage and wide area networks (LANs, SANs and WANs, respectively). U.S. Defense and Homeland Security efforts also add to the demand for bandwidth, as vast amounts of data are generated though sophisticated surveillance and defense network applications. The U.S. government and its contractors are incorporating optical technologies into its systems and infrastructure to address these challenges.

 

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Optical networking technologies support higher speeds, added features and offer greater interoperability to accommodate higher bandwidth requirements at a lowest cost. Leading network systems vendors such as Alcatel-Lucent and Cisco are producing optical systems for carriers increasingly based on 10Gbps and 40Gbps speeds including multi-service switches, DWDM transport terminals, access multiplexers, routers, Ethernet switches and other networking systems. Mirroring the convergence of telecommunications and data-communications networks, these systems vendors are increasingly addressing both telecommunications and data-communications applications and are also looking to converge their network equipment offerings to a single product. Faced with technological and cost challenges of building fully integrated systems that can handle voice, data and video, OEMs are re-focusing on core competencies of software and systems integration, and relying on outside module and component suppliers for the design, development and supply of critical electro–optic products that perform the critical transmit and receive functions.

Challenges Faced by Network Equipment Providers

The performance requirements of communications applications and the technical challenges associated with the data-communications and telecommunications markets present difficult obstacles to service providers and equipment designers that serve those markets. The core challenges of processing and transmitting high quality broadband streams include:

 

   

Performance: Optical components and systems have to be well integrated and inter–operate with the other components that perform the transmit and receive functions while running at low temperatures in a wide variety of operating environments.

 

   

Power consumption: The increase in optical transmission speeds inherently leads to higher power consumption by the electronic components being used. This in turn leads to thermal management challenges due to the high port densities being demanded by customers. For instance in data centers, there is a significant investment required to cool the facility, for every $1 invested in computer/network infrastructure there is typically another $1 investment required to cool the facility.

 

   

Size: Customers need to maximize the utilization of their central office space and rack size and therefore demand small solution footprints to maximize port density. The industry has responded by migrating from line-cards to 300pin transponders to pluggable transceivers with more than a 60x reduction in size for 10Gbps communication components since 1999. This is turn puts severe size constraints on electronic and optical component suppliers to maintain the pace of size reduction roadmaps.

 

   

Cost: There are significant price pressures within the optical communications markets to reduce component and system costs. End users continually demand more bandwidth and features while the operators generally do not keep pace with the bandwidth usage increases. Moreover, the average sales price, or ASP, increase per new generation component does not scale proportionally with the speed increase. For example, a 4x increase in speed can only generate only a 2.5x increase in ASP to the vendor.

 

   

Complexity: The increasing technological complexity of optical systems and components, the need to increase the pace of innovation while also reducing costs have led customers to reduce their number of module and component suppliers and rely on vendors that have more comprehensive product portfolios, deeper product expertise and the ability to support future roadmaps.

 

   

Manufacturing: The optical industry still predominantly utilizes discrete components to implement their systems. Many of these components are manufactured by different vendors and these discrete solutions lead to manufacturing inefficiencies and yield reductions. Integration has been a key enabler in the historical success of the silicon IC technology, enabling the improvement of system performance, reducing system size and cost by increasing the functionality that can be implemented on one device and thereby decreasing the components count required to implement a system.

 

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GigOptix’ Solutions

GigOptix offers a comprehensive 10Gbps and 40Gbps transceiver product portfolio and is one of the first companies in the developing market for 100Gbps products. GigOptix combines high performance analog and mixed signal design skills, with experience in integrated systems, interoperability, power management and size optimization. GigOptix believes customers choose to work with GigOptix for several reasons including:

Superior Performance: GigOptix believes its performance advantage is derived from industry leading drivers, receivers, modulators and superior integration and module design capabilities. GigOptix’ core III-V and silicon semiconductor, as well as TFPS technology knowledge allows GigOptix to design products that exceed the current performance, power, size, temperature and reliability requirements of GigOptix’ customers. GigOptix recently introduced a 100 Gbps quad-driver built from indium phosphide that is the market’s first 100Gbps driver. GigOptix’ single, 4 and 12 channel VCSEL drivers and receivers have ultra low-power consumption and use less than 10mW to stream 1Gbps. GigOptix has also developed 10Gbps drivers and receivers for outdoor, non-temperature controlled environments that enable higher capacity in GigOptix’ customers’ next generation data center systems.

Broad Product Line: GigOptix has a comprehensive portfolio of products for telecommunications, data-communications, defense and industrial applications designed for speeds of 10Gbps and beyond. GigOptix’ products support a wide range of data rates, protocols, transmission distances and industry standards. This wide product offering allows GigOptix to serve as a “one-stop shop” to GigOptix’ customers in offering them a comprehensive product arsenal, as well as allowing GigOptix to reduce costs as it utilizes pre-existing design building-blocks. GigOptix’ portfolio consists of the following product ranges:

 

   

laser and modulator drivers for 10Gbps, 40Gbps and 100Gbps applications

 

   

receiver amplifiers or Trans-impedance Amplifiers, or TIAs, for 10Gbps, 40Gbps and 100Gbps applications

 

   

driver & receiver chipsets for 4 and 12 channel parallel optics applications from 3Gbps to 10Gbps

 

   

electro-optic modulators based on proprietary thin film polymer on silicon suitable for various 40Gbps and 100Gbps modulation schemes, such as DPSK, DQPSK and DP-QPSK

 

   

ultra–broadband amplifiers with flat gain response

 

   

Standard Cell, and Structured ASIC and Hybrid ASIC designs and manufacturing service for multiple markets offering ITAR compliance for defense applications

Power Consumption: GigOptix’ designs and enabling technologies utilize efficient circuit techniques and material technology to reduce energy usage. For example, GigOptix has demonstrated a 10Gbps short-reach optical link that consumes less than 100mW across 100 meter of fiber, representing a 75% reduction over the previous generation of products.

Size Reduction: GigOptix’ designs have small footprints. GigOptix recently announced its LX8401 40Gbps TFPS modulator is nearly half the size of competing products enabling an overall smaller transponder design. Similarly, comparable solutions competing with GigOptix’ GX6261 40Gbps DQPSK driver require 40% more board space. Moreover, GigOptix’ GX62455 100Gbps driver integrates four 32Gbps drivers into a single package thereby reducing the total system size while also improving electrical performance.

Cost Reduction: GigOptix is skilled in designing and utilizing a number of semiconductor process technologies such as indium phosphide, gallium arsenide, silicon germanium and silicon CMOS. This portfolio of technology solutions provides the flexibility to optimize the cost/performance of GigOptix’ products to the challenge at hand. For instance, GigOptix’ new portfolio of 10Gbps, 40Gbps and 100Gbps TIAs were designed using silicon germanium and this enables lower production costs compared with competing TIA solutions using indium phosphide. This coupled with the ability to integrate more complex logic functions into the TIA designs offer compelling value to

 

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GigOptix’ customers. GigOptix provides a broad portfolio of solutions that customers are now beginning to leverage to extract further volume discounts by consolidating their purchasing power on one vendor.

Integration: GigOptix’ vision is to leverage its broad portfolio of products to integrate optical modulators monolithically onto GigOptix’ semiconductor chips. The close coupling of optical and electronic components will realize the maximum performance at high speeds while ensuring the smallest size, potentially lower costs and improved interoperability performance. GigOptix believes that its step-wise approach to this goal is aligned to deliver continuously more integrated products along the innovation path starting with bundling in the system level going to package level on to chip level. For instance, GigOptix is currently funded by the Air Force Research Labs to develop an integrated modulator-driver capable of 200Gbps optical transmission, which is seen as critical to enable lightweight, ultra-high bandwidth optical transceivers to on the road to supporting tera-scale data processing. Integrating optical modulators monolithically onto semiconductor chips coupled with innovative driver design topologies can enable implementation of a monolithic optical modulator/driver component.

Partnership: Through a deep understanding both of the system level challenges faced by GigOptix’ customers developing optical transponders and transceivers and of the capabilities and limitations of GigOptix’ technology, GigOptix is able to suggest and implement new system partitioning concepts to ease manufacturing, increase yields and reduce power and cost. For example through the addition of certain design recommendations, GigOptix is able to guide GigOptix’ customers to simplify system manufacturing using GigOptix’ designs.

Technology Leadership: GigOptix’ products are built on a foundation of semiconductor and electro-optic polymer technologies supported by over 20 years of innovation and research and development experience that has resulted in more than 100 patents awarded and patent applications pending worldwide. GigOptix’ technology innovation extends from the design of ultra high speed semiconductor integrated circuits, monolithic microwave integrated circuit design, multi-chip modules, electro-optic thin-film polymer materials, and optical modulator design. These areas of competence include signal integrity, thermal models, power consumption, integration of multiple ICs into sub-system multi-chip module components, and molecular science of electro-optic polymers. The many years of experience allows GigOptix to design high performance solutions. For this reason GigOptix was selected as a partner to a Tier 1 equipment supplier to develop 100Gbps modulator drivers for the first commercially available 100Gbps systems to be launched in 2010. Additionally, GigOptix’ ASIC portfolio and team has the competency in low cost silicon CMOS design and high volume manufacturing. GigOptix believes this will be an important asset in the future transition of optics to consumer applications that call for low cost, high volume designs. GigOptix conducts its research both independently, through contractual relationships with U.S. government agencies and in cooperation with customers. GigOptix is committed to conduct fundamental research into the integration of electronic and electro-optic, or EO, components using semiconductor and EO polymers as a source of differentiation.

Horizontal Business Model: GigOptix deploys a horizontal business model as opposed to a vertical integration model since it is GigOptix’ mission to serve the broad customer base in the optical communications and defense markets with best in class components. GigOptix believes this will be driven by the system vendor end customers’ desire for continuous price reduction as volumes increase and will be enabled by the growth of capable component suppliers such as GigOptix as well as the availability of high quality electronics contract manufacturers, or ECMs. GigOptix cultivates the “Virtual Vertical” model, which is based on strong relationships with ECMs and other component vendors in the supply chain with aligned objectives.

Growth Strategy

GigOptix’ objective is to be the leading provider of high performance electronic and electro-optic components for the optically and wireless connected digital world, growing through both organic and strategic means. Elements of GigOptix’ strategy include the following:

Focus on High Growth Market Opportunities. GigOptix will continue to focus its product development resources on high growth market segments both within the markets GigOptix currently serves as well as in new

 

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markets that utilize GigOptix’ core technologies. GigOptix will continue to invest substantially in products for 40Gbps and 100Gbps applications and selectively target new products for the 10Gbps markets where GigOptix can sustain a differentiation. GigOptix believes high growth opportunities exist even within more established communications segments by virtue of introducing innovative device and system architectures as well as business models to disrupt the established players and value chain relationships. Outside of telecom and data communications, GigOptix is able to reuse the same designs re-characterized for RF systems used in defense applications such as phased array radar, super-computers and in wireless applications, such as point-to-point back-haul systems.

Grow Customer Base. GigOptix intends to continue to broaden GigOptix’ strategic relationship with key customers by maximizing design wins across their product lines. GigOptix intends to continue to leverage the approved vendor status GigOptix has with these key customers to qualify GigOptix’ products into additional optical and wireless systems, a process that is accelerated when GigOptix had already been qualified in a customer’s systems. GigOptix is adding sales and technical support staff to better serve key customers, markets and regions. GigOptix also intends to add to GigOptix’ number of strategic relationships by selectively targeting certain existing customers with whom GigOptix is not yet a strategic vendor. GigOptix will expand its development efforts with these customers through initiatives including providing specialized sales and support resources, holding technology forums to align GigOptix’ product development effort and implementing custom manufacturing linkages.

Engage Customers Early in their Product Planning Cycle. By engaging GigOptix’ customers early in their system design process, GigOptix gains critical information regarding their system requirements and objectives that influences GigOptix’ component design. GigOptix’ sales force, product marketing teams and developmental engineers engage regularly with GigOptix’ customers to understand their product development plans. Additionally, for certain key customers, which are referred to as GigOptix’ “Lighthouse” customers, GigOptix holds periodic technology forums and technology audits so that the product development teams of these customers can interact directly with GigOptix’ research and development teams. Likewise, GigOptix’ early involvement in their system development processes also enables GigOptix to influence standards and introduce differentiated products early to market. Moreover, GigOptix believes that this interaction between GigOptix and its customers provides GigOptix a competitive advantage, valuable insight and a close customer relationship that grows over each generation of products introduced by GigOptix’ customers.

Partner for Innovation. Over the past few years, GigOptix has successfully partnered with “Lighthouse” customers, contract manufacturers and U.S. government agencies on research and development in both GigOptix’ electronic components and electro-optics polymer materials. GigOptix sees this as a core element of GigOptix’ strategy both to support the investment required to maintain GigOptix’ innovation as well as aligning GigOptix’ R&D with the future needs of industry and defense markets. In order to maintain GigOptix’ position at the forefront of next generation optical modules and components, GigOptix intends to continue GigOptix’ longstanding relationship with the U.S. government agencies such as the Defense Advanced Research Projects Agency and the Air Force Research Laboratory as well as their network of contractors. GigOptix has aligned with GigOptix’ partners on the long term objectives of research and development related to the integration of semiconductor and thin-film polymer modulators to address tera scale computing and communications for defense and commercial markets and GigOptix has defined multiyear projects to develop and bring these technologies to reality. Similarly, GigOptix partners with leading commercial customers on developments of product required in the one to two years horizon, often sharing the investment. GigOptix believes that this again gives it the assurance of alignment to the market needs when considering the sometimes significant investment in a new development. This model has been used for GigOptix’ 100Gbps modulator drivers for telecom networks, which was launched in 2010. Other cooperative projects include a 100Gbps short reach multi-channel driver and receiver pair with a leading Japanese networking solutions provider, and an innovative ultra low power 10Gbps single channel chipset for a leading enterprise networking solutions provider in China.

Strategic Acquisitions. To augment GigOptix’ organic growth strategy, GigOptix actively pursues acquisitions that provide an efficient alternative to in-house development of technology, products or revenue. The

 

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synergies GigOptix searches for include efficient extension of GigOptix’ product offering to strengthen GigOptix’ market position, enhancing of GigOptix’ technology base, enhancing of GigOptix’ revenue base, and expanding GigOptix’ customer base in selected markets to provide cross selling opportunities or to enhance GigOptix’ geographic or market segment presence. GigOptix continuously evaluates potential acquisitions against the above criteria. GigOptix’ process aims to conduct a swift integration to quickly eliminate duplicate and redundant costs to ensure early accretive performance within one to two quarters. GigOptix’ acquisition of ChipX in 2009 accomplished physical and systems integration, reduced headcount, closed a facility in Haifa, Israel and consolidated its Santa Clara, California personnel into GigOptix’ Palo Alto offices.

Technology and Research and Development

GigOptix utilizes proprietary technology at many levels within GigOptix’ product development, ranging from the basic materials research that created the innovative materials GigOptix uses in GigOptix’ TFPS modulators to sophisticated integration and optimization techniques GigOptix uses to design its components. GigOptix is committed to conducting fundamental research in thin-film polymer materials and manufacturing technologies. GigOptix’ technology is protected by GigOptix’ patent portfolio and trade secrets developed in deployments with GigOptix’ extensive customer base. GigOptix’ leading technologies include GigOptix’ fundamental and unique thin-film polymer on silicon technology for optical modulation and extend through ultra broadband MMIC design, MCM design, innovative ultra-low power laser driver and receiver IC design in silicon germanium, high speed analog and RF IC design, mixed signal IC design, and Structured and Hybrid ASIC infrastructure. In particular, the following technologies are central to GigOptix’ business:

High Speed Analog Semiconductor Design & Development. One of GigOptix’ key core competences is circuit design for optimal signal integrity performance in high power applications. GigOptix uses a variety of semiconductor processes to implement GigOptix’ designs including III-V processes such as indium phosphide and gallium arsenide for higher power applications such as long reach telecom transponder. GigOptix also has expertise in low power designs in silicon germanium and CMOS silicon for use in short reach data-com and optical interconnects application and circuit design to reduce cross-talking in dense multi-channel designs.

Electro-Optic TFPS Material. GigOptix’ unique, patent-protected technology is used to lithographically form a Mach-Zehnder modulator using standard silicon production technology processes and GigOptix’ proprietary thin-film polymeric materials. Optical modulators are commonly used as high performance shutters to switch optical signals to apply the digital data to light stream. GigOptix’ technology can support bandwidths of up to 200GHz, while the current generation of material optimized for production is used in 40GHz and 100GHz optical modulators, which are as competitive with leading 40Gbps modulators in the market. The technology has several ground-breaking characteristics as follows: it provides the fastest switching of any available technology and is effectively limited by the bandwidth of the digital control circuit up to 200Gbps bit/second rate; it is suitable for lithographic implementation of an existing semiconductor production line, which facilitates both lower cost manufacturing of on-chip modulators and arrays and close proximity to the digital circuits for optimal performance; and the material operates effectively at very low temperatures, which enables increased frequencies due to the absence of thermally induced noise. All of these unique advantages make the material attractive for telecom, defense and super-computing applications.

GigOptix’ research and development plans are driven by customer and partner input obtained by GigOptix’ sales and marketing teams, through GigOptix’ participation in various standards bodies, and by GigOptix’ long-term technology and product strategies. GigOptix reviews research and development priorities on a regular basis and advise key customers of GigOptix’ progress to achieve better alignment in GigOptix’ product and technology planning. For new components research and development is conducted in close collaboration with GigOptix’ contract manufacturer partners to shorten the time to market and optimize the manufacturability of the products.

Products

GigOptix designs and markets products that amplify electrical signals during both the transmission (drivers) and reception (TIAs) of optical signals as well as modulate optical signals in the transmission of data. GigOptix

 

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has a comprehensive product portfolio for these markets, particularly at data rates that exceed 10Gbps. The primary target market and application for GigOptix’ products are optical interface modules such as line-cards, transponders and transceivers within telecom and data-communications switches and routers. These are critical blocks used in both telecom or data-communications optical communication networks from the long haul to the short reaches where the conversion of data from the electrical domain to the optical domain occurs. GigOptix’ drivers amplify the input digital data stream that is used to modulate laser light either by direct modulation of the laser or by use of an external modulator that acts as a precise shutter to switch on and off light to create the optical data stream. At the other end of the optical fiber, GigOptix’ sensitive receiver TIAs detect and amplify the small currents generated by photo-diodes converting the faint received light into an electrical current. The TIAs amplify the small current signals into a larger voltage signal that can be read by the electronics and processors in the network servers. GigOptix supplies an optimized component for each type of laser, modulator and photo-diode depending upon the speed, reach and required cost. Generally, the shorter the reach is, the higher the volume, the less demanding the product specifications and the greater the pressure to reduce costs. GigOptix implements its products on a number of process technologies and have been at the forefront of extracting optimal performance from each technology to be able to address each market segment’s individual requirements in a cost effective manner. GigOptix’ product portfolio is designed to cover the broad range of solutions needed in these different modules and includes the product lines described below.

GigOptix’ product portfolio comprises components from 5 product lines:

1. GX Series: Serial drivers and TIA ICs devices for telecom and data-com markets

2. HX Series: Multi-channel driver and TIA ICs for short reach data-com and optical interconnect applications

3. LX Series: TFPS modulators for high speed telecom and defense applications

4. iT Series: High performance amplifiers for microwave applications in defense and instrumentation

5. CX Series: Family of ASIC solutions for custom integrated circuit design

GX Series

The GigOptix GX Series services both the telecom and data-com markets with a broad portfolio of drivers and transimpedence amplifiers that address 10Gbps, 40Gbps and 100Gbps speeds over distances that range from 100 meters to more than 4000 kilometers. The GX Series devices are used in FiberChannel, Ethernet, SONET/SDH components and those based upon the OIF standardization.

 

   

Within the 10Gbps market, GigOptix has enabled solutions such as the GX3110 linear TIA for use in systems using Electronic Dispersion Compensation and requiring excellent linearity and low total harmonic distortion to address the demanding SONET TIA receiver requirements. Moreover, GigOptix also supplies the GX6155 Mach-Zehnder driver that is implemented in a ceramic package, which enables both high performance electrical signals and robust packaging and improved manufacturability.

 

   

Within the 40Gbps market, GigOptix has enabled significantly lower power transponder designs with GigOptix’ GX6261 40Gbps DQPSK driver. This compares with competitor solutions that consume 50% more power and require 40% more real estate on the board. Both savings are significant since each 40Gbps transponder typically requires two drivers. Furthermore, in 2010 GigOptix introduced two surface mounted single-ended low power driver solutions, the GX6255 single channel driver and GX62255 dual channel driver, each consuming less than 1.6W per channel and available with integrated high frequency chokes to simplify board manufacture. GigOptix also supplies the GX3220, a low power 40Gbps DQPSK TIA to amplify the received optical signals. This solution coupled with GigOptix drivers transponder enables customers to implement low power transponder solutions. Furthermore, GigOptix also supplies the GX3440 differential amplifier that has broad bandwidth and

 

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high gain and enables single chip amplification of 40Gbps DPSK signals as small 50mVpp to 800mVpp and is used extensively in Tier 1 DPSK receivers.

 

   

Within the 100Gbps market, GigOptix supplies a high performance monolithic driver solution for both the 4x28Gbps and 4x32Gbps DP-QPSK format. The GX62450 was developed in close collaboration with a Tier-1 telecom OEM and is designed to plug seamlessly between the transmission multiplexer and the Mach-Zehnder modulator to provide excellent electrical connectivity quality. Furthermore, in 2010 GigOptix introduced two surface mounted single-ended low power driver solutions, the GX6255 single channel driver and GX62255 dual channel driver, each consuming less than 1.6W per channel and available with integrated high frequency chokes to simplify board manufacture. GigOptix also introduced the highly integrated GX62455 quad driver device that consumes less than 7W and is available in the same form factor as the GX62450. GigOptix also supplies a 32Gbps TIA that is compliant with the 100Gbps DP-QPSK standard in a dual channel configuration to enable easier manufacturing within the receiver.

HX Series

The GigOptix HX Series services the high performance computing, or HPC, data-com and consumer markets with a portfolio of parallel VCSEL drivers and TIAs that address 3Gbps, 5Gbps and 10Gbps channel speeds over 100-300 meters distances in 4 and 12 channel configurations. The HX Series devices are used in proprietary HPC formats, Infiniband, Ethernet and optical HDMI components.

 

   

Within the 3Gbps market, GigOptix supplies the HXT3404 VCSEL driver and HXR3404 TIA 4 channel arrays die that enable both proprietary HPC communication and 30 to 100 meter HDMI active optical cables, or AOC, in the consumer space. These HDMI AOCs are becoming more prevalent with the move to displays situated further from the signal source such as those found in in-flight entertainment systems, displays in airport and bus terminals as well as advertisement displays in shopping malls.

 

   

Within the higher speed markets, GigOptix supplies the ultralow power HXT4104/HXR4104 four channel array dies used in 40GBASE-SR4 Ethernet and 40G-IB QDR Infiniband specifications as well as the HXT4112/HXR4112 twelve channel array dies used in both 100GBASE-SR10 Ethernet and 120G-IB QDR Infiniband specification. The HXT4012/HXR4112 solution set has been demonstrated to be able to deliver 120Gbps over 100m with less than 1W of power dissipation signifying an 8mW/Gbps power link budget. Both arrays also provide the VCSEL monitoring capabilities that is becoming more important in large datacenter deployments where there can be 1000’s to 10,000’s of cables that require remote and accurate optical link health monitoring capabilities.

 

   

Within the single channel SFP+ markets, GigOptix developed the HXT4101 VCSEL driver and HXR4101 TIA chip set for a new Smart Transmit Optical SubAssembly, or TOSA, and Receive Optical SubAssembly, or ROSA, solution to address the 10Gbps short reach market. The solution leverages GigOptix’ extensive mixed signal experience in high volume parallel optics devices to combine advanced RF analog circuit techniques that reduce power consumption with integrated on-chip analog-to-digital converters and digital-to-analog converters to enable a fully digitally controlled TOSA and ROSA. This architecture significantly simplifies the design of an optical transceiver such as an SFP+ by eliminating all analog and RF circuits from the PCB. The elimination of RF analog interfaces improves performance and reduces both power consumption and EMI within the transceiver. The new architecture also reduces costs while significantly reducing the engineering effort associated with developing a solution.

LX Series

The GigOptix LX Series services the 40Gbps and above telecom market for high performance Mach-Zehnder modulators. The LX Series devices are based on GigOptix’ proprietary TFPS EO material technology. The technology provides what GigOptix believes are significant advantages over competing technologies such as indium phosphide and lithium niobate in areas such as bandwidth, size and power consumption.

 

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GigOptix currently offers two LX products:

 

   

The LX8900 is the industry’s only serial 100Gbps Mach-Zehnder modulator with a bandwidth of 65GHz. It is primarily being used in emerging applications such as “Beyond 100G” optical links trials and ultra-broadband RF photonic military products.

 

   

The LX8401 is the industry’s smallest 40Gbps DPSK modulator device and is almost half the size of competing technology solutions while providing the same level of performance. The small size enables customers to reduce their transponder size considerably, which in turn allows more transponders to be placed on a line-card and increases chassis port density for end customers.

GigOptix is now in the process of leveraging GigOptix’ new TFPS technology to enable 40Gbps DQPSK and 100Gbps DP-QPSK devices in market leading small form factors and at the same time leveraging GigOptix’ GX Series of drivers to enable a complete integrated solution set for the customer.

iT Series

The GigOptix iT Series of products leverages the high performance die and design techniques developed for the GX Series telecom and data-com drivers for related defense and instrumentation applications. GigOptix differentiates itself in the defense and instrumentation markets by providing high gain, broadband devices that exhibit minimal ripple across the gain spectrum of the device: this ensures optimum performance. Moreover, most of GigOptix’ devices have only a single rail supply, which both simplifies the board design and improves reliability of the system. For instance, GigOptix supplies the single rail supply iT2008 high power 26GHz amplifier with a saturated output power of 1W and 1dB of ripple. This device’s performance and ease of use power up sequence has led to extensive use in military radar and satellite communication systems.

CX Series

The GigOptix CX Series of products offers a broad portfolio of distinct paths to digital and analog mixed signal ASICs with the capability of supporting designs of up to 10M gates in technologies ranging from 0.6µ through 0.13µ. The CX Series uses GigOptix’ proprietary technology in Structured and Hybrid ASICs to enable a generic ASIC solution that can be customized for a customer using only a few metal mask layers. This ensures fast turnaround times with significant cost advantages for customers over both FPGA and dedicated ASIC implementations. The CX Series also offers value added ASIC services including integrating proven Analog and Mixed Signal IP into designs and taking customers designs from RTL or gate-level netlist to volume production with major third party foundries. The CX Series has a significant customer base in the consumer, instrumentation, networking, medical, military and aerospace markets.

The following is a compilation of GigOptix’ product portfolio for optical communications:

LOGO

 

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Customers

GigOptix has a global customer base in the telecommunications, data-communications, defense and industrial electronics markets. GigOptix’ customers include many of the leading network systems vendors supplying worldwide. During 2010 GigOptix sold to major customers including Alcatel-Lucent and other “Tier-One” equipment vendors in the United States, Europe and Asia, as well as leading industrial, aerospace and defense customers.

Of GigOptix’ total revenues in 2010, 25%, 51% and 24% were generated by customers located in Asia, North America and Europe, respectively, compared with 24%, 49% and 27%, respectively, for the year ended December 31, 2009. In 2010, 14% of GigOptix’ revenue was contributed by GigOptix’ government contracts and 86% was contributed by product revenue, compared with 24% and 76%, respectively, for the year ended December 31, 2009.

GigOptix’ customers in the industrial and commercial markets consist of a broad range of companies that design and manufacture electro-optics and high speed information management products. These include medical, industrial, test and measurement, scientific systems, printing engines for high-speed laser printers and defense and aerospace applications. The number of leading network systems vendors which supply the global telecommunications and data communications market is concentrated, and so, in turn, is GigOptix’ customer base. Additionally, Alcatel-Lucent is GigOptix’ largest telecommunications customer, representing 11% and 23% of GigOptix’ total revenues for the years ended December 31, 2010 and December 31, 2009, respectively. Other than Alcatel-Lucent, no other telecommunications customer accounted for more than 10% of total revenues for the years ended December 31, 2010 and December 31, 2009, respectively; however, contracts with the U.S. Government accounted for 14% and 24%, respectively, of our total revenues for the years ended December 31, 2010 and December 31, 2009, respectively.

Manufacturing

GigOptix’ foundry and contract manufacturing partners are located in China, Japan, the Philippines, Taiwan, and the United States. Certain of GigOptix’ contract manufacturing partners that assemble or produce modules are strategically located close to GigOptix’ customers’ contract manufacturing facilities to shorten lead times and enhance flexibility.

GigOptix follows established new product introduction processes that ensure product reliability and manufacturability by controlling when new products move from sampling stage to mass production. GigOptix has stringent quality control processes in place for both internal and contract manufacturing. GigOptix utilizes manufacturing planning systems to coordinate procurement and manufacturing to GigOptix’ customers’ forecasts. These processes and systems help GigOptix closely coordinate with GigOptix’ customers, support their purchasing needs and product release plans, and streamline GigOptix’ supply chain.

Electronic components: Integrated circuits and multi-chip modules: For GigOptix’ ICs and MCMs, GigOptix uses an outsourced contract manufacturing model. GigOptix has a prototype manufacturing and testing facility in GigOptix’ Palo Alto location, which is used to optimize manufacturing and test procedures to achieve internal yield and quality requirements before transferring production to GigOptix’ contract manufacturing partners. GigOptix develops long-term relationships with strategic contract manufacturing partners to reduce assembly costs and provide greater manufacturing flexibility. The manufacture of some products such as certain low volume, high complexity or customized multi-chip modules may remain in-house even in mass production to speed time to market and bypass manufacturing transfer costs.

For GigOptix’ less complex packaged chips and bare die products, GigOptix typically moves new product designs directly to contract manufacturing partners. These products fit easily in a standard fabless semiconductor production flow and ramp up to much greater volumes in mass production.

 

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TFPS electro-optic components: Four chemical synthesis labs within GigOptix’ Bothell facility are equipped with chemical hoods capable of delivering EO polymer and claddings in volumes up to kilogram batch volumes. Polymer manufacturing and development are supported by a characterization and test lab equipped with state-of-the-art equipment for measuring molecular and material properties.

Wafer fabrication is supported within the 1,400 square feet class 100 clean-room equipped with standard semiconductor processing. Wafer dicing, cleaning, and facet polishing is supported in the “back end” processing lab outside of the clean-room. GigOptix’ Bothell facility is capable of supporting manufacturing and development of up to five 150mm diameter substrates/week. As volumes increase, GigOptix has identified IMT in Santa Barbara, California as an outsourcing partner with a 30,000 square feet class 100 clean-room dedicated to support contract manufacturing, and IMT is able to support high volume wafer manufacturing. Chip level screening and testing is performed in Bothell using a semi-automated fiber alignment station capable of low frequency testing of insertion loss, Vpi and extinction ratio. EO testing at the chip and package level utilizes RF equipment capable of testing modulators up to 40 GHz. Optical pig-tailing, wire bonding, and sealing are also performed in-house. Samina SCI located in Shenzhen, China has been identified as a source to support volume packaging of up to thousands of units per month.

Sales, Marketing and Technical Support

In the communications market, GigOptix primarily sells its products through its direct sales force supported by a network of manufacturer representatives and distributors. GigOptix’ sales force works closely with GigOptix’ field application engineers, product marketing and sales operations teams in an integrated approach to address a customer’s current and future needs. GigOptix assigns account managers for each strategic customer account to provide a clear interface to GigOptix’ customers, with some account managers responsible for multiple customers. The support provided by GigOptix’ field application engineers is critical in the product qualification stage. Transceiver modules, especially at 10Gbps and above, are complex products that are subject to rigorous qualification procedures of both the product and the supplier and these procedures differ from customer to customer. Also, many customers have custom requirements in addition to those defined by MSAs in order to differentiate their products and meet design constraints. GigOptix’ product marketing teams interface with GigOptix’ customers’ product development staffs to address customization requests, collect market intelligence to define future product development, and represent GigOptix in MSAs.

For GigOptix’ “Lighthouse” customers, GigOptix holds periodic technology forums for their product development teams to interact directly with GigOptix’ research and development teams. These forums provide GigOptix insight into GigOptix’ customers’ longer term needs while helping GigOptix’ customers adjust their plans to the product advances GigOptix can deliver. Also, GigOptix’ customers are increasingly utilizing contract manufacturers while retaining design and key component qualification activities. As this trend matures, GigOptix continually upgrades its sales operations and manufacturing support to maximize GigOptix’ efficiency and flexibility and coordination with GigOptix’ customers.

In the industrial and commercial market, GigOptix primarily sells through a network of manufacturing representatives and distributors to address the broad range of applications and industries in which GigOptix’ products are used. The sales effort is managed by an internal sales team and supported by dedicated field application engineering and product marketing staff. GigOptix also sells direct to certain strategic customers. Through GigOptix’ customer interactions, GigOptix believes that it continually increases its knowledge of each application’s requirements and utilize this information to improve GigOptix’ sales effectiveness and guide product development.

Since inception, GigOptix has actively communicated the GigOptix brand worldwide through participation at trade shows and industry conferences, publication of research papers, bylined articles in trade media, and advertisements in trade publications and interactive media, interactions with industry press and analysts, press releases and GigOptix’ website, as well as through print and electronic sales material.

 

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Competition

The market for electronic and electro-optic devices is characterized by price competition, rapid technological change, short product life cycles, and global competition. While no one company competes against GigOptix in all of GigOptix’ product areas, GigOptix’ competitors range from the large, international companies offering a wide range of products to smaller companies specializing in narrow markets. Due to the increasing demands for high-speed, high-frequency components, GigOptix expects competition to increase from existing semiconductor and electro-optical modulator suppliers, in addition to the entry of new competitors to GigOptix’ target markets and from the internal operations of some companies producing products similar to GigOptix’ for their own internal requirements.

Because some of GigOptix’ competitors are large public companies with longer operating histories and greater financial, technical, marketing and other resources, these companies have the ability to devote greater resources to the development, promotion, sale and support of their products. For example, in the telecommunications and data-communications markets, some of GigOptix’ competitors have deeper relationships with prospective customers, related to wider portfolio of products they are selling to them across the board. Other competitors may also have preferential access to certain network systems vendors, or offer directly competitive products that may have better performance measures than GigOptix’ products. Moreover, competitors that have large market capitalizations or cash reserves may be better positioned than GigOptix is to acquire other companies in order to gain new technologies or products that may compete with GigOptix’ product lines. Any of these factors could give GigOptix’ competitors a strategic advantage. Therefore, although GigOptix believes it currently competes favorably with its competitors, GigOptix cannot assure you that it will be able to compete successfully against either current or future competitors in the future.

GigOptix believes the principal competitive factors impacting all of its products are:

 

   

product performance including size, speed, operating temperature range, power consumption and reliability;

 

   

price to performance characteristics;

 

   

delivery performance and lead times;

 

   

time to market;

 

   

breadth of product solutions;

 

   

sales, technical and post-sales service and support;

 

   

technical partnership in early stage of product development;

 

   

sales channels; and

 

   

ability to drive standards and comply with new industry MSAs.

GX Products

In the telecom and data-communications segments, GigOptix competes with Triquint, Rohm, InPhi, Gennum and Vitesse. GigOptix competes with Triquint predominantly in the 10Gbps, 40 Gbps and 100Gbps Mach Zehnder driver space; Rohm predominantly in the 10Gbps EML driver space; InPhi predominately in the TIA spaces and the 40Gbps driver space; Gennum predominately in the data-communications space and Vitesse in the 10Gbps TIA receiver space.

HX Products

In the market for PMD ICs GigOptix competes with Avago, Emcore, Tyco Electronics (formerly Zarlink) and Iptronics. Avago, Emcore and Tyco Electronics are vertically integrated transceiver module manufacturers

 

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with in-house PMD ICs designs. These companies have comparable products to GigOptix’ products but have been later to market in offering a 10Gbps solutions. In addition to these companies, Iptronics also competes in this space and is a venture-funded startup specializing in parallel optical interconnect with a family of devices at 10Gbps and is a direct competitor.

LX Products

GigOptix competes with JDSU, Oclaro, Sumitomo and Fujitsu that supply lithium niobate modulators for the long haul/Metro market and more recently JDSU, Sumitomo, Emcore and Oclaro that supply indium phosphide modulators for the Metro market. GigOptix expects that GigOptix’ TFPS modulators will be competitive with lithium niobate and indium phosphide products in terms of pricing and operating performance and will provide significant performance advantages in areas such as size, bandwidth and optical extinction ratio.

iT Products

GigOptix’ ultra-broadband amplifiers and limiters offer performance with gain flatness and low noise figures. GigOptix competes with Triquint, Hittite, Northrop Grumman (for internal use) and Mimix in this product area.

CX Products

GigOptix’ ASICs compete in the custom integrated circuit industry, an industry that is intensely competitive. In the low to medium volume market, the primary competitors include Lattice Semiconductor and Actel Corporation. In the medium to high volume market, there are over 30 companies competing in this market. Companies that GigOptix competes with most often include On Semiconductor, eSilicon, Open Silicon, Faraday, Toshiba and eASIC.

GigOptix believes that important competitive factors specific to the custom integrated circuit industry include: Product pricing, time-to-market, product performance, reliability and quality, power consumption, availability and functionality of predefined IP cores, inventory management, access to leading-edge process technology, track record of successful product execution and achieving first time working silicon, ability to provide excellent applications support and customer service, ability to offer a broad range of ASIC solutions to retain existing customers, and compliance with ITAR.

Patents and Other Intellectual Property Rights

GigOptix relies on patent, trademark, copyright and trade secret laws and internal controls and procedures to protect GigOptix’ technology. GigOptix believes that a robust technology portfolio that is assessed and refreshed periodically is an essential element of GigOptix’ business strategy. GigOptix believes that its success will depend in part on GigOptix’ ability to:

 

   

Obtain patent and other proprietary protection for the materials, processes and device designs that GigOptix develops;

 

   

Enforce and defend patents and other rights in technology, once obtained;

 

   

Operate without infringing the patents and proprietary rights of third parties; and

 

   

Preserve GigOptix’ trade secrets.

As of December 31, 2010, GigOptix and its subsidiaries have been issued 67 patents and has 9 patent applications pending. Patents have been issued in various countries with the main concentrations in the United States. GigOptix’ patent portfolio covers a broad range of intellectual property including semiconductor design and manufacturing, device packaging, module design and manufacturing, electrical circuit design, thin film polymer technology, modulator design and manufacturing. GigOptix follows well-established procedures for

 

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patenting intellectual property and have internal incentive plans to encourage the protection of new inventions. The portfolio also represents a balanced compilation of intellectual property that has been filed by the various companies GigOptix has acquired, and hence protects all of GigOptix’ product lines. GigOptix also licenses patented technology from the University of Washington. Many of the pending and issued U.S. patents have one or more corresponding internal or foreign patents or applications. GigOptix’ existing significant U.S. patents will expire between August 2021 and November 2028.

GigOptix takes extensive measures to protect GigOptix’ intellectual property rights and information. For example, every employee enters into a confidential information, non-competition and invention assignment agreement with GigOptix when they join and are reminded of their responsibilities when they leave. GigOptix also enters into and enforce a confidential information and invention assignment agreement with contractors.

GigOptix has patents and patents pending covering technologies relating to:

Polymers

 

   

Optical polymers and synthesis;

 

   

Production of polymers in commercial quantities;

 

   

Materials characterization and testing methods; and

 

   

Devices, designs and processes relating to polymers.

High-Speed Integrated Circuits

 

   

Circuit topology to achieve ultra-large frequency bandwidth;

 

   

Efficient voltage control circuit for broadband high voltage drivers; and

 

   

Control circuit to stabilize over temperature gain control functionality.

ASICs

 

   

Customizable integrated circuit devices;

 

   

Single metal programmability in a customizable integrated circuit device;

 

   

Configurable cell for customizable logic array device;

 

   

In-Circuit device, system and method to parallelize design and verification; and

 

   

Method of developing application specific integrated circuit devices.

Although GigOptix believes its patent portfolio is a valuable asset, the discoveries or technologies covered by the patents, patent applications or licenses may not have commercial value. Issued patents may not provide commercially meaningful protection against competitors. Other parties may be able to design around GigOptix’ issued patents or independently develop technology having effects similar or identical to GigOptix’ patented technology. The scope of GigOptix’ patents and patent applications is subject to uncertainty and competitors or other parties may obtain similar patents of uncertain scope. Other parties may discover uses for polymers or technology different from the uses covered in GigOptix’ patents or patent applications and these other uses may be separately patentable. Other parties may have patents covering the composition of polymers for which GigOptix has patents or patent applications covering only methods of use of these polymers.

Third parties may infringe the patents that GigOptix owns or licenses, or claim that GigOptix’ potential products or related technologies infringe their patents. Any patent infringement claims that might be brought by or against GigOptix may cause GigOptix to incur significant expenses, divert the attention of GigOptix’

 

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management and key personnel from other business concerns and, if successfully asserted against GigOptix, require GigOptix to pay substantial damages. In addition, a patent infringement suit against GigOptix could force GigOptix to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a patent covering a third party’s intellectual property.

GigOptix periodically evaluates its patent portfolio based on GigOptix’ assessment of the value of the patents and the cost of maintaining such patents, and may choose from time to time to let various patents lapse, terminate or be sold.

Employees

As of December 31, 2010, GigOptix had 83 full-time employees, including 37 in research and development, 27 in operations, 9 in sales and marketing and 10 in general and administrative.

Facilities

GigOptix has offices in three locations: GigOptix’ headquarters in Palo Alto, California and design centers in Bothell, Washington, and Zurich, Switzerland.

Palo Alto: This location houses the corporate functions and the research and development activities for the GX and CX product lines. It also houses the prototype MCM assembly and test facilities.

Bothell, WA: This is the location of GigOptix’ LX product line. GigOptix’ Bothell, WA site is equipped with facilities to manufacture and develop EO polymer modulators starting at the material level, through wafer fabrication, chip testing, packaging, and final test.

Zurich: This location houses the wholly-owned subsidiary of GigOptix, GigOptix-Helix AG. It is primarily a research and development location with some operations activities to support the HX product line.

The table below lists and describes the terms of GigOptix’ leased properties:

 

Location

   Approximate
Square Feet
    

Function

   Lease Expiration Date

Palo Alto, California

     17,109       Administration, Sales, Marketing, Research and Development, Operations    December 31, 2013

Zurich, Switzerland

     2,724       Research and Development, Operations    Month by month

Bothell, Washington

     11,666       Research and Development, Operations    March 31, 2014

Environmental

GigOptix’ operations involve the use, generation and disposal of hazardous substances and are regulated under international, federal, state and local laws governing health and safety and the environment. GigOptix believes that its products and operations at its facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated.

Legal Proceedings

From time to time, GigOptix may become involved in legal proceedings, claims and litigation arising in the ordinary course of business. When GigOptix believes a loss is probable and can be reasonably estimated, it accrues the estimated loss in its consolidated financial statements. Where the outcome of these matters is not determinable, GigOptix does not make a provision in its financial statements until the loss, if any, is probable and

 

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can be reasonable estimated or the outcome becomes known. GigOptix believes that there are currently no claims or legal actions that would, in management’s judgment based on information currently available, have a material adverse effect on GigOptix’ results of operations, financial condition or cash flows.

In or about November 2008, an entity named DBSI Inc., which at the time was the beneficial owner of membership units in a predecessor of GigOptix, filed for bankruptcy in the United States Bankruptcy Court for the District of Delaware (Case No. 08-12687 (PJW)). In December 2008, in connection with the merger of such predecessor, Lumera Corporation and GigOptix, the membership units converted into 1,715,161 shares of GigOptix’ common stock and GigOptix issued warrants to purchase 660,473 shares of common stock at a weighted average exercise price of $32.35 per share with a range of exercise periods that expire between December 31, 2011 and April 23, 2017. The DBSI Liquidating Trust subsequently became the holder of the 1,715,161 shares of common stock and the warrants to purchase 660,473 shares of common stock. GigOptix understands that an affiliate of the DBSI Liquidating Trust, the DBSI Estate Litigation Trust, has been evaluating various potential claims which it might assert against a number of entities, including GigOptix and certain affiliated parties. GigOptix’ management engaged in discussions with the trustee regarding whether the DBSI Estate Litigation Trust has any claims against GigOptix. GigOptix disputed the existence of any such claims, and intended to vigorously defend any claims made.

On April 8, 2011, GigOptix and the trustees for the DBSI Estate Litigation Trust and the DBSI Liquidating Trust reached the following agreement. As full settlement of all potential claims, the DBSI Liquidating Trust surrendered to GigOptix for cancellation all of the existing warrants to purchase 660,473 shares of GigOptix’ common stock and GigOptix in exchange issued to the DBSI Liquidating Trust two warrants which will not be exercisable for a period of six months from the date of issuance; one warrant for 500,000 shares of common stock, which will have a term of three years and an exercise price of $2.60 per share, and the other warrant, also for 500,000 shares of common stock, which will have a term of four years and an exercise price of $3.00 per share. To the extent that it is permitted to do so, GigOptix will file an amendment to the registration statement filed on Form S-1 on March 28, 2011 for the purpose of including the registration of the shares of common stock underlying the warrants in such registration statement. To the extent that GigOptix is unable to file such an amendment, then the shares of common stock underlying the warrants shall have “piggy-back” registration rights for a period of one year, after which the DBSI Liquidating Trust shall have demand registration rights with regard to the shares of common stock underlying the warrants. As further consideration for the issuance of the warrants, the DBSI Estate Litigation Trust and the DBSI Liquidating Trust have given GigOptix a full release of all known and unknown claims which each of them may have, and acknowledge that GigOptix disclaims all liability.

Government Regulations

GigOptix is subject to federal, state and local laws and regulations relating to the generation, handling, treatment, storage and disposal of certain toxic or hazardous materials and waste products that GigOptix uses or generates in its operations. GigOptix regularly assesses its compliance with environmental laws and management of environmental matters. GigOptix believes that its products and operations at its facilities comply in all material respects with applicable environmental laws.

GigOptix is also subject to federal procurement regulations associated with its U.S. government contracts. Violations of these regulations can result in civil, criminal or administrative proceedings involving fines, compensatory and punitive damages, restitution and forfeitures as well as suspensions or prohibitions from entering into government contracts. The reporting and appropriateness of costs and expenses under GigOptix’ government contracts are subject to extensive regulation and audit by the Defense Contract Audit Agency, an agency of the U.S. Department of Defense. The contracts and subcontracts to which GigOptix is a party are also subject to potential profit and cost limitations and standard provisions that allow the U.S. government to terminate such contracts at its convenience. GigOptix is entitled to reimbursement of GigOptix’ allowable costs and to an allowance for earned profit if the contracts are terminated by the U.S. government for convenience.

 

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Sales of GigOptix’ products and services internationally may be subject to the policies and approval of the U.S. Department of State and Department of Defense. Any international sales may also be subject to United States and foreign government regulations and procurement policies, including regulations relating to import-export control such as ITAR, investments, exchange controls and repatriation of earnings.

Directors and Executive Officers

The table below sets forth information regarding the existing members of GigOptix’ board of directors and GigOptix’ non-director executive officers that will continue to serve as directors or executive officers of GigOptix after the consummation of the merger. GigOptix’ certificate of incorporation divides the board of directors into three classes with overlapping three year terms. One class is elected each year at the annual meeting of stockholders, and the classes are to be as nearly equal in number as possible. Each director holds office until his or her successor is duly qualified. The board of directors and executive officers of GigOptix are as follows:

 

Name

   Age     

Position

   Director
Since
 

Dr. Avi Katz

     53       Chairman of the Board of Directors, Chief Executive Officer and President      2008   

Andrea Betti-Berutto

     47       Senior Vice President and Chief Technical Officer   

Julie Tipton

     47       Senior Vice President of Operations   

Kimberly D.C. Trapp

     52       Director      2008   

Neil J. Miotto

     64       Director      2008   

C. James Judson

     66       Director      2008   

Frank W. Schneider

     69       Director      2010   

Dr. Avi Katz has served as Chief Executive Officer, President, and Chairman of the board of directors of GigOptix LLC and GigOptix, Inc. since he co-founded GigOptix LLC in May 2007 and GigOptix, Inc. in September 2007, to facilitate the merger of GigOptix LLC and Lumera Corporation in December 2008, at which point they both became subsidiaries of GigOptix, Inc. Since the merger, he has served as the Chairman of the board of directors, Chief Executive Officer and President of GigOptix, Inc. Dr. Katz also served as a board member, Chief Executive Officer and President of iTerra Communications LLC, the predecessor to GigOptix LLC, from April 2007 until October 2007. Dr. Katz also serves as the Chairman of the board of directors of GigOptix-Helix AG and GigOptix Israel Ltd., all wholly-owned subsidiaries of GigOptix, Inc. From April 2006 to April 2007, he was the Corporate Development executive with Symphony Services Corp., and a Managing Partner and Chairman of APU-Global, a technology consulting company, which he founded in 2005. Dr. Katz was the Chief Executive Officer, President and a board member of Intransa, Inc., a provider of storage area network over the IP systems, from 2003 to 2005, and was the Chief Executive Officer, President and a board member of Equator Technologies, Inc., a fabless semiconductor company, from 2000 to 2003. He holds numerous U.S. and international patents, has published about 300 technical papers and is the editor of a number of technical books. Dr. Katz received his Ph.D. in materials engineering and a B.S. in engineering from Technion-IIT, Israel, and is a graduate of the Israeli Naval Academy. As GigOptix’ co-founder, and the CEO since the inception, Dr. Katz has the benefit of understanding GigOptix’ complete history. This background, together with his extensive executive experience and exceptional technical skills, make Dr. Katz uniquely qualified to serve on GigOptix’ board of directors.

Andrea Betti-Berutto is GigOptix’ Senior Vice President and Chief Technical Officer and has served as GigOptix’ Chief Technical Officer since the inception of GigOptix LLC in May 2007. Mr. Betti-Berutto was a co-founder of GigOptix LLC’s predecessor company, iTerra Communications, LLC, where he served in a variety of capacities from 2000 until July 2007. He also co-founded GigOptix LLC in May 2007. He has more than 20 years of experience in the design of ICs and multichip modules for microwave, millimeter-wave, and RF applications. He is the author of several publications in technical journals in the area of power amplifiers, high-speed ICs, and broadband design for lightwave applications. Mr. Betti-Berutto received his M.S. in electrical engineering from the University of Rome “La Sapienza”.

 

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Julie Tipton serves as GigOptix’ Senior Vice President of Operations since March 2010 following her tenure as GigOptix’ Vice President of Marketing since the inception of GigOptix LLC in July 2007. Previously, Ms. Tipton held numerous management positions at NXP Semiconductors and its predecessor, Philips Semiconductors, predominantly developing and marketing IC solutions for the consumer and mobile telephony segments from September 1985 until June 2007. She was most recently General Manager for Mobile Wireless LAN product line responsible for P&L. Her other positions at the company included Director of Operations for Business Line Connectivity, General Manager of Networking ASICs product line, Vice President and General Manager of Digital Video Interactive product line, Business Development Manager for Consumer ICs North America, and International Product Marketing Manager for Teletext ICs. Ms. Tipton received her B.S. in physics with electronics from the University of Kent at Canterbury and a Diploma in marketing from Chartered Institute of Marketing, both in England.

Kimberly D.C. Trapp has served on GigOptix’ board of directors since December 2008. She previously served as a director of Lumera Corporation from October 2006 and a director of GigOptix LLC from October 2007 until the merger of the two companies in December 2008. From February 2003, she has been an Industry Liaison Officer for the Center of Optical Technologies at Lehigh University, which advances the research and application of optical and electro-optic technologies. The Center supported over 45 industry liaison members and joint partners, and obtained more than $95 million in funding from 2001 through 2010, and in 2007 opened the Smith Family Laboratory for Optical Technologies. Prior to joining Lehigh University, Ms. Trapp spent 23 years in the telecommunications industry, her last position being Director of Marketing Operations for the Agere Systems Optoelectronics Business and was responsible for business operations, customer marketing, technical product support, product engineering and program management of the optoelectronic business and product portfolio. Since 2010, she has been a member of the Cedar Crest College Board of Associates and a member of The Swain School Technology Committee. Ms. Trapp received her B.S. in chemistry from Purdue University, her M.S. in inorganic chemistry from Fairleigh Dickinson University, and has completed an M.B.A. program. Ms. Trapp now serves on the Technology Board of The Swain School and is a member of the Cedar Crest College Board of Associates. From her more than 30 years in the industry, Ms. Trapp brings a tremendous amount of technical expertise, especially in the area of optical and electro-optic technologies, that GigOptix believes makes her well qualified to serve on GigOptix’ board of directors.

Neil J. Miotto has served on GigOptix’ board of directors since December 2008. He is a retired assurance partner of KPMG LLP, where he was a partner for twenty-seven years until his retirement in September 2006. While at KPMG, Mr. Miotto also served as an SEC reviewing partner. He is a member of American Institute of Certified Public Accountants. He holds a B.A. in business administration from Baruch College, of The City University of New York. Mr. Miotto is a member of the board of directors of Micrel Inc., where he serves on the Audit Committee and Nominating/Corporate Governance Committee. GigOptix believes that Mr. Miotto’s extensive experience with public companies and financial accounting matters makes him well-qualified to be on GigOptix’ board of directors.

C. James Judson has served on GigOptix’ board of directors since December 2008. Until the merger with Lumera Corporation and GigOptix LLC in December 2008, Mr. Judson had served as a director of Lumera Corporation since August 2004 and as chairman of its board of directors since March 2007. In 1995, Mr. Judson co-founded Eagle River Investments, LLC, a Kirkland-based venture capital fund focused on communications. Since 1975 through 2010, Mr. Judson has been a business law partner at Davis Wright Tremaine in Seattle, Washington. Mr. Judson has a B.A. from Stanford University in economics and an L.L.B. from Stanford Law School. Mr. Judson currently serves as a director of Garrett and Ring Management Inc., Port Blakely Tree Farms, L.P., The Joshua Green Corporation, Sonata Capital, Airbiquity, Welco Lumber, Eden Rock Communications, Opanga and TSK America Co., Ltd. GigOptix believes Mr. Judson is well qualified to be on GigOptix’ board due to his leadership skills as evidenced by his significant entrepreneurial expertise, his extensive board memberships and more than 40 years of corporate legal practice providing representation to both large and small companies.

 

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Frank W. Schneider joined GigOptix’ board of directors in June 2010. From October 2003 to January 2006, Mr. Schneider served as President and Chief Executive Officer of ION Systems, Inc., a privately-held manufacturer of electrostatic management systems. In January 2006, ION Systems was acquired by MKS Instruments, Inc., where Mr. Schneider served as Vice President and General Manager until his retirement in 2009. Prior to these roles, Mr. Schneider was the President and Chief Executive Officer of GHz Technology, Inc., until its merger with Advanced Power Technology, Inc. Subsequent to the merger, Mr. Schneider served as the Chief Operating Officer for the Radio Frequency business unit of that company. Mr. Schneider also serves on the board of directors of Micrel, Incorporated where he serves as a member of the Audit Committee and as chairman of the Compensation Committee, and has served as a member of the advisory board of Neomagic, Inc. and held various management and executive positions with Sharp Electronics Corporation, Philips Semiconductor and Corning Electronics. Mr. Schneider serves as a member of the Compensation Committee of GigOptix’ board of directors. He holds a B.S. in electrical engineering from West Virginia University and an M.B.A. from Northwestern University’s Kellogg School of Business. GigOptix believes Mr. Schneider is well qualified to serve on GigOptix’ board due to his leadership skills and industry experience, which he has demonstrated through more than 40 years of management and experience in the semiconductor, electronic component and systems industries.

Anticipated Executive Officers of GigOptix Following the Merger

In addition to the existing executive officers of GigOptix identified immediately above, Curt P. Sacks, the current Chief Financial Officer of Endwave, is expected to serve as the Chief Financial Officer of the combined company.

Curt P. Sacks, 41, has served as Endwave’s Chief Financial Officer since June 2009. Prior to that, he served as Vice President of Finance and Corporate Controller of Endwave since February 2006. He joined Endwave in 2004 as Corporate Controller, after serving in this capacity for two successive companies – first, for Com21, Inc., a manufacturer of system solutions for the broadband access market; and next with Finisar, Inc., a manufacturer of high-speed communication equipment for data and storage. Prior to 1998, Mr. Sacks worked in corporate finance at 3Com Corporation and as an auditor for Deloitte & Touche LLP. Mr. Sacks is a C.P.A. (inactive) in California with a B.A. in business-economics from the University of California, Los Angeles.

For information regarding compensation paid to Mr. Sacks by Endwave, see “Information About Endwave Corporation – Executive Officer and Director Compensation” beginning on page 100 of this proxy statement/prospectus.

Nominees for Director

In accordance with the merger agreement, the following individuals would be named to the GigOptix board of directors at the closing of the merger:

John J. Mikulsky, 65, has served as Endwave’s President and Chief Executive Officer since December 1, 2009. From August 2005 until November 2009, Mr. Mikulsky served as Endwave’s Chief Operating Officer and Executive Vice President. From May 2001 until August 2005, Mr. Mikulsky served as Endwave’s Chief Marketing Officer and Executive Vice President, Marketing and Business Development. From May 1996 until April 2001, Mr. Mikulsky served as Endwave’s Vice President of Product Development. From 1993 until 1996, Mr. Mikulsky worked as a Technology Manager for Balazs Analytical Laboratory, a provider of analytical services to the semiconductor and disk drive industries. Prior to 1993, Mr. Mikulsky worked at Raychem Corporation, most recently as a Division Manager for its Electronic Systems Division. Mr. Mikulsky holds a B.S. in electrical engineering from Marquette University, an M.S. in electrical engineering from Stanford University and an S.M. in management from the Sloan School at the Massachusetts Institute of Technology. The GigOptix board of directors believes Mr. Mikulsky’s extensive industry knowledge and experience, including his years of experience at Endwave in both technical and leadership roles, qualify him to serve on GigOptix board of directors.

 

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Joseph J. Lazzara, 59, has served as a director of Endwave since February 2004. From September 2006 to March 2008, Mr. Lazzara served as the Vice Chairman and a director of Omron Scientific Technologies, Inc. (formerly known as Scientific Technologies, Inc. (NASDAQ: STIZ)), a manufacturer of factory automation sensors and machine safeguarding products acquired by Omron Corporation in September 2006. Prior to the acquisition of Scientific Technologies, Mr. Lazzara served as President and Chief Executive Officer between 1993 and 2006, as the President of Scientific Technologies between 1989 and 1993, and as the Treasurer and a director of Scientific Technologies between 1984 and 2006. Mr. Lazzara also served as a Vice President of Scientific Technologies between September 1984 and June 1989. From 2006, Mr. Lazzara also served as the Vice Chairman and Director of Automation Products Group, Inc., a privately held manufacturer of automation sensors. He also served as Treasurer and a director of Scientific Technologies’ parent company, Scientific Technology Incorporation, from 1981 and 2006. Prior to 1981, Mr. Lazzara was employed by Hewlett-Packard Company, a global technology solutions provider, in Process and Engineering Management. Mr. Lazzara received a B.S. in engineering from Purdue University and an M.B.A. from Santa Clara University. The GigOptix board of directors believes that Mr. Lazzara’s extensive business expertise, both as the Chief Executive Officer and Board Member of a publicly traded company as well as his technical background qualify him to serve on GigOptix board.

For information regarding compensation paid to Mr. Mikulsky and Mr. Lazzara by Endwave, see “Information About Endwave Corporation – Executive Officer and Director Compensation” beginning on page 100 of this proxy statement/prospectus.

Arrangements with Directors

Pursuant to the terms of the merger agreement to acquire Endwave, Mr. Mikulsky and Mr. Lazzara will be appointed to the GigOptix board of directors at the closing of the merger.

There are no immediate family relationships between or among any of GigOptix’ executive officers and directors.

Director Independence

GigOptix’ board of directors has determined that Mr. Judson, Mr. Miotto, Mr. Schneider and Ms. Trapp are “independent” directors.

GigOptix uses the independence standards set forth by Rule 5605(a)(2) of the Nasdaq Listing Rules. In reviewing the independence of its directors against these standards, GigOptix considers relationships and transactions between each director and members of the director’s family with GigOptix and its affiliates. Each member of GigOptix’ two standing committees of its board of directors, the Audit Committee and the Compensation Committee, is independent as defined by Rule 5605(a)(2) of the Nasdaq Listing Rules, and each member of GigOptix’ Audit Committee is also independent as defined by Rule 10A-3(b)(1) under the Exchange Act. GigOptix does not have a separately designated Nominating Committee. Directors are nominated by the independent directors of the board of directors.

 

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Executive Officer and Director Compensation

Executive Officer Compensation

The table below sets forth the compensation earned by GigOptix’ Chief Executive Officer and its two other most highly compensated executive officers for the fiscal years ended December 31, 2010 and 2009 whose compensation exceeded $100,000. These individuals are collectively referred to as GigOptix’ named executive officers.

Summary Compensation Table

 

Name and Principal Position

  Year     Salary     Bonus     Option
Awards (1)
    All Other
Compensation
    Total  
    (b)     (c)     (d)     (f)     (i)     (j)  

Dr. Avi Katz

    2010      $ 300,000      $ 42,000      $ 1,065,382      $ 883      $ 1,408,265   

Chairman of the Board of Directors, Chief Executive Officer and President

    2009      $ 326,190      $ 115,000      $ 328,064      $ 912      $ 770,166   

Andrea Betti-Berutto

    2010      $ 187,000      $ —        $ 382,546      $ 299      $ 569,845   

Senior Vice President and Chief Technology Officer

    2009      $ 203,076      $ 25,000      $ 103,682      $ 312      $ 332,070   

Ron Shelton (2)

    2010      $ 205,700      $ —        $ 233,582      $ 269      $ 439,551   

Senior Vice President and Chief Financial Officer

    2009      $ 15,032      $ —        $ —        $ 23      $ 15,055   

 

(1) The amounts in column (f) represent the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 9 – Stockholders’ Equity, to GigOptix’ audited financial statements for the fiscal year ended December 31, 2010 included in this proxy statement/prospectus.
(2) Ron Shelton, GigOptix’ former Chief Financial Officer, resigned from the company as of February 1, 2011.

Narrative Disclosure to Summary Compensation Table

The Summary Compensation Table sets forth the aggregate compensation earned by each of GigOptix’ named executive officers in 2010 and 2009.

The components of executive compensation consist of salary, annual cash bonuses and equity grants. Annual cash bonuses are awarded in the discretion of the Compensation Committee of the board of directors after a review and evaluation of each executive officer’s performance during the year. Equity grants generally consist of stock options, but in the past warrants have also been issued, and are intended to serve as long-term compensation. The Compensation Committee may also authorize special compensation awards in the form of cash or equity grants to recognize extraordinary efforts or results.

Equity awards are generally granted pursuant to the GigOptix, Inc. 2008 Equity Incentive Plan. Equity grants to GigOptix’ executive officers generally vest as to 25% of the underlying award on the one-year anniversary of the grant date and monthly thereafter for a period of three years. However, certain equity awards to GigOptix’ executive officers vest in accordance with certain performance goals being achieved, as discussed in more detail below in the vesting schedules for such equity awards. In the case of stock options and warrants, the exercise price is set at 100% of the fair market value of the underlying common stock on the date of grant.

GigOptix has entered into a standard employment agreement with each of GigOptix’ executive officers, which governs the standard terms of employment as well as provides for certain payments upon termination of employment. GigOptix has entered into an employment agreement with Dr. Avi Katz, GigOptix’ Chief Executive Officer, for the same purpose but with different terms. Both Dr. Katz’s employment agreement and the standard employment agreement are discussed in more detail below under the caption “Employment Arrangements with Named Executive Officers.”

 

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Outstanding Equity Awards at Fiscal Year-End (2010)

 

     Option Awards  

Name and Principal Position

   Grant
Date
     Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
     Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
     Option
Exercise
Price
($)
     Option
Expiration
Date
 

Dr. Avi Katz

     8/1/07         27,500         —         $ 0.73         8/1/17   

Chairman of the Board of Directors, Chief Executive Officer and President

     8/1/07         6,875         —         $ 0.73         8/1/17   
     8/1/07         10,312         —         $ 0.73         8/1/17   
     8/1/07         137,500         —         $ 0.73         8/1/17   
     11/6/08         37,048         —         $ 6.08         7/16/13   
     12/17/08         290,669         290,669       $ 1.10         12/17/18   
     3/19/09         34,022         43,742       $ 0.95         3/19/19   
     11/9/09         25,235         67,941       $ 3.50         11/9/19   
     11/9/09         9,973         26,851       $ 3.50         11/9/19   
     3/17/10         —           12,695       $ 1.95         3/17/20   
     3/17/10         —           190,305       $ 1.95         3/17/20   
     3/17/10         —           121,100       $ 1.95         3/17/20   
     3/17/10         —           122,100       $ 1.95         3/17/20   
     3/17/10         —           56,800       $ 1.95         3/17/20   
     10/27/10         —           348,344       $ 2.40         10/27/20   

Andrea Betti-Berutto

     8/1/07         44,412         —         $ 0.73         8/1/17   

Senior Vice President and Chief Technology Officer

     8/1/07         68,200         —         $ 0.73         8/1/17   
     11/6/08         22,900         —         $ 6.08         7/16/13   
     12/17/08         119,457         119,456       $ 1.10         12/17/18   
     3/19/09         15,761         20,264       $ 0.95         3/19/19   
     11/9/09         10,295         27,716       $ 3.50         11/9/19   
     3/17/10         —           61,500       $ 1.95         3/17/20   
     3/17/10         —           40,000       $ 1.95         3/17/20   
     3/17/10         —           43,000       $ 1.95         3/17/20   
     3/17/10         —           17,500       $ 1.95         3/17/20   
     10/27/10         —           139,554       $ 2.40         10/27/20   

Ron Shelton

     3/17/10         —           100,000       $ 1.95         5/5/11   

Senior Vice President and Chief Financial Officer (1)

     3/17/10         —           20,000       $ 1.95         5/5/11   
     3/17/10         —           20,000       $ 1.95         5/5/11   
     3/17/10         —           17,000       $ 1.95         5/5/11   
     10/27/10         —           36,744       $ 2.40         5/5/11   

 

(1) Ron Shelton, GigOptix’ former Chief Financial Officer, resigned from the company as of February 1, 2011.

 

Grant Date

  

Vesting Schedule for Dr. Katz

10/27/10    The vesting of 116,115 shares of the grant of 348,344 stock options is subject to GigOptix’ meeting certain financial goals for the first two quarters of 2011, and if these goals are met, then 29,029 shares of the underlying award will vest on July 27, 2011, and an additional 87,086 shares will vest on a monthly basis thereafter over a 39 month period, and if these goals are not met, 116,115 shares of the underlying award will be cancelled; in addition and irrespective of GigOptix’ meeting these certain financial goals, 58,057 shares of the underlying award will vest on October 27, 2011, and the remaining 174,172 shares of the stock options will vest on a monthly basis thereafter over a 36 month period.

 

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Grant Date

  

Vesting Schedule for Dr. Katz

3/17/10    The grant of 203,000 stock options vests as to 25% of the underlying award on the first anniversary of the grant date and as to 1/36 of the remaining options every month thereafter for three years. An additional 121,100 options will vest on April 1, 2011 if the average closing price of the GigOptix’ common stock during March 2011 is equal to or greater than $2.50; if not, then these options will be cancelled; an additional 122,100 options will vest on April 1, 2012 if the average closing price of the GigOptix’ common stock during March 2012 is equal to or greater than $3.50; if not, then these options will be cancelled; and an additional 56,800 options will vest on April 1, 2013 if the average closing price of the GigOptix’ common stock during March 2013 is equal to or greater than $5.00; if not, then these options will be cancelled.
11/9/09    The grant of 93,176 stock options vested as to 25% of the underlying award on the first anniversary of the grant date and as to 1/36 of the underlying award every month thereafter for three years. The grant of 36,824 stock options vested as to 25% of the underlying award on the first anniversary of the grant date and as to 1/36 of the underlying award every month thereafter for three years.
3/19/09    The grant of 77,764 stock options vested as to 25% of the underlying award on the first anniversary of the grant date and as to 1/36 of the underlying award every month thereafter for three years.
12/17/08    Grant of 581,338 stock options vests as to 25% of the underlying award on the one year anniversary of the grant date and as to 1/36 of the underlying award every month thereafter for three years.
11/6/08    Warrant to purchase 37,048 shares was fully vested as of the grant date.
8/1/007    The grant of 137,500 stock options vested as to 25% of the underlying award on the first anniversary of the grant date and as to 1/36 of the underlying award every month thereafter for three years, and then 50% of the unvested options were fully vested upon the closing of the GigOptix LLC merger with Lumera Corporation and the other 50% will be vested on 12/31/2009. The grant of 10,313 stock options, which was to vest upon the schedule closing of a financing event, fully vested upon the closing of the GigOptix LLC merger with Lumera Corporation. The grants of 27,500 stock options and 6,875 stock options were fully vested on the grant date.

 

Grant Date

  

Vesting Schedule for Mr. Betti-Berutto

10/27/10    The vesting of 46,518 shares of the grant of 139,554 stock options is subject to GigOptix’ meeting certain financial goals for the first two quarters of 2011, and if these goals are met, then 11,630 shares of the underlying award will vest on July 27, 2011, and an additional 34,888 shares will vest on a monthly basis thereafter over a 39 month period, and if these goals are not met, 46,518 shares of the underlying award will be cancelled; in addition and irrespective of GigOptix’ meeting these certain financial goals, 23,259 shares of the underlying award will vest on October 27, 2011, and the remaining 69,777 shares of the stock options will vest on a monthly basis thereafter over a 36 month period.
3/17/10    The grant of 61,500 stock options vests as to 25% of the underlying award on the first anniversary of the grant date and as to 1/36 of the remaining options every month thereafter for three years. An additional 40,000 options will vest on April 1, 2011 if the average closing price of the GigOptix’ common stock during March 2011 is equal to or greater than $2.50; if not, then these options will be cancelled; an additional 43,000 options will vest on April 1, 2012 if the average closing price of the GigOptix’ common stock during March 2012 is equal to or greater than $3.50; if not, then these options will be cancelled; and an additional 17,500 options will vest on April 1, 2013 if the average closing price of the GigOptix’ common stock during March 2013 is equal to or greater than $5.00; if not, then these options will be cancelled.
11/9/09    The grant of 38,011 stock options vests as to 25% of the underlying award on the one year anniversary of the grant date and as to 1/36 of the underlying award every month thereafter for three years.
3/19/09    The grant of 36,025 stock options vests as to 25% of the underlying award on the one year anniversary of the grant date and as to 1/36 of the underlying award every month thereafter for three years.

 

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Grant Date

  

Vesting Schedule for Mr. Betti-Berutto

12/16/08    The grant of 238,913 stock options vests as to 25% of the underlying award on the one year anniversary of the grant date and as to 1/36 of the underlying award every month thereafter for three years.
11/6/08    Warrant to purchase 22,900 shares was fully vested as of the grant date.
8/1/07    The grant of 68,200 stock options vested as to 25% of the underlying award on the first anniversary of the grant date and as to 1/36 of the underlying award every month thereafter for three years, and then 50% of the unvested option were fully vested upon the closing of the GigOptix LLC merger with Lumera Corporation and the other 50% will be vested on 12/31/2009. The grant of 44,412 stock options was fully vested on the grant date.

 

Grant Date

  

Vesting Schedule for Mr. Shelton

10/27/10    The vesting of 12,248 shares of the grant of 36,744 stock options is subject to GigOptix’ meeting certain financial goals for the first two quarters of 2011, and if these goals are met, then 3,062 shares of the underlying award will vest on July 27, 2011, and an additional 9,186 shares will vest on a monthly basis thereafter over a 39 month period, and if these goals are not met, 116,115 shares of the underlying award will be cancelled; in addition and irrespective of GigOptix’ meeting these certain financial goals, 6,124 shares of the underlying award will vest on October 27, 2011, and the remaining 18,372 shares of the stock options will vest on a monthly basis thereafter over a 36 month period.
3/17/10    The grant of 100,000 stock options vests as to 25% of the underlying award on the first anniversary of the grant date and as to 1/36 of the remaining options every month thereafter for three years. An additional 20,000 options will vest on April 1, 2011 if the average closing price of the GigOptix’ common stock during March 2011 is equal to or greater than $2.50; if not, then these options will be cancelled; an additional 20,000 options will vest on April 1, 2012 if the average closing price of the GigOptix’ common stock during March 2012 is equal to or greater than $3.50; if not, then these options will be cancelled; and an additional 17,000 options will vest on April 1, 2013 if the average closing price of the GigOptix’ common stock during March 2013 is equal to or greater than $5.00; if not, then these options will be cancelled.

Employment Arrangements with Named Executive Officers

GigOptix does not have deferred compensation plans, pension plans or other similar arrangements or plans for GigOptix’ executive officers, except a tax-qualified 401(k) Plan, which is available generally to all of GigOptix’ employees.

On February 3, 2011, GigOptix entered into a new employment agreement with Dr. Katz, GigOptix’ Chief Executive Officer. The term of the agreement is through December 31, 2014, and it establishes his annual salary, bonuses and eligibility for health benefits, among other provisions. The agreement also provides for severance payments under certain circumstances. In the event that he terminates his employment by reason of death or disability, Dr. Katz (or his estate) is entitled to his annual bonus (pro rata based on amount of time employed), six months of continued salary and continued health benefits (or the cash value in the case of death). If Dr. Katz is terminated without cause (as defined in the agreement) or terminates his employment for good reason (as defined in the agreement), he is entitled to his annual bonus (pro rata based on amount of time employed), six months of continued salary, a lump sum equal to 18 months of his salary, vesting of 75% of his outstanding unvested equity awards and continued health benefits. In the event of termination in connection with a change in control (as defined in the agreement), Dr. Katz is be entitled to his annual bonus (pro rata based on amount of time employed), three years of his annual salary and bonus, vesting of all of his outstanding unvested equity awards and continued health benefits.

GigOptix has entered into a standard employment agreement with all of GigOptix’ other executive officers. The standard employment agreement sets forth certain provisions regarding annual salary, bonuses and eligibility

 

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for health benefits among other provision. According to the terms of the agreement, if the executive officer’s employment terminates because of death or disability, he (or his estate) is entitled to his annual bonus (pro rata based on amount of time employed), six months of continued salary and continued health benefits (or the cash value in the case of death). In the event of termination by us for reasons other than cause (as defined in the agreement) or termination by the executive officer for good reason (as defined in the agreement), the executive officer is entitled to his annual bonus (pro rata based on amount of time employed), six months of continued salary, vesting of 25% of the executive officer’s outstanding unvested equity awards and continued health benefits. The standard employment agreement has no special provisions for terminations in connection with a change in control.

The GigOptix, Inc. 2008 Equity Incentive Plan contains certain provisions for change in control transactions. In the event of a Covered Transaction (as defined in the plan), the outstanding awards must either be assumed or substituted by the successor company or will be fully accelerated prior to the closing of the Covered Transaction.

Director Compensation

The following table sets forth the compensation earned for services performed for GigOptix as a director by each member of GigOptix’ board of directors, other than any directors who are also GigOptix’ named executive officers, during the fiscal year ended December 31, 2010.

2010 Director Compensation Table

 

Name

   Fees Earned
or Paid in Cash
($)
     Option Awards
($) (1)
     Total ($)  

C. James Judson

     —         $ 64,683       $ 64,683   

Kimberly D.C. Trapp

     —         $ 59,086       $ 59,086   

Neil J. Miotto

     —         $ 64,683       $ 64,683   

Frank Schneider

      $ 117,036       $ 117,036   

Dr. Joseph J. Vallner (2)

     —         $ 22,387       $ 22,387   

 

(1) The amounts represent the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 9, “Stockholders’ Equity ,” to GigOptix’ audited financial statements for the fiscal year ended December 31, 2010 included in this proxy statement/prospectus.
(2) Dr. Joseph J. Vallner resigned as a member of GigOptix’ board of directors effective June 7, 2010.

As of December 31, 2010, each director held option awards as follows:

 

Name

   Aggregate Number of Shares
Underlying Stock Options
(#)
 

C. James Judson

     113,125   

Kimberly D.C. Trapp

     97,001   

Neil J. Miotto

     106,000   

Frank Schneider

     65,000   

Related Person Transactions

As a result of the acquisition of ChipX on November 9, 2009, National Instruments Corporation, a former stockholder of ChipX, currently holds 1,066,265 shares of GigOptix’ common stock or 8.7% of GigOptix’ common stock. GigOptix generated revenue of $1.6 million and $231,000 from sales to National Instruments Corporation during the years ended December 31, 2010 and 2009, respectively.

 

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GIGOPTIX’ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with GigOptix’ consolidated financial statements and the related notes included elsewhere in this proxy statement/prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. GigOptix’ actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under “Risk Factors” beginning on page 19 of this proxy statement/prospectus and GigOptix’ consolidated financial statements and related notes appearing elsewhere in this proxy statement/prospectus. GigOptix assumes no obligation to update the forward-looking statements or such risk factors. Please see “Special Cautionary Note Regarding Forward-Looking Statements” on page 49 of this proxy statement/prospectus.

Overview

GigOptix is a leading supplier of electronic and electro-optical components that enable high-speed telecommunications and data-communications networks globally. GigOptix’ strategy is to apply GigOptix’ core technical expertise in optical, electro-optical and high speed analog technology to develop products that address high growth product and market opportunities.

The following sets forth GigOptix’ significant corporate and product milestones:

 

   

In 2007, GigOptix LLC was formed and received initial funding.

 

   

GigOptix LLC acquired the assets of iTerra Communications LLC in July 2007 and Helix Semiconductors AG in January 2008.

 

   

In March 2008, GigOptix, Inc. was formed to facilitate a combination with Lumera Corporation. The combined company began trading on the OTCBB under the symbol GGOX in December 2008.

 

   

In November 2009, GigOptix acquired ChipX, a leading high speed analog semiconductor manufacturer specializing in Analog and Mixed Signal custom ASICs.

 

   

In January 2010, GigOptix announced that GigOptix had shipped GigOptix’ one millionth production chip for multichannel optical interconnects.

 

   

In March 2010, GigOptix announced that it intends to commercialize GigOptix’ proprietary polymer based modulator for all 40Gbps and 100Gbps modulation formats during 2010.

 

   

In July 2010, GigOptix completed a follow on public offering of GigOptix’ common stock resulting in gross proceeds to GigOptix of approximately $4.8 million, before deducting underwriting discounts and commissions and offering expenses.

 

   

In February 2011, GigOptix entered into its merger agreement with Endwave.

GigOptix focuses on the specification, design, development and sale of analog semiconductor ICs, MCMs, polymer modulators, and analog and mixed signal custom ASICs. GigOptix believes that it is an industry leader in the fast growing market for electronic solutions that enable high-bandwidth optical connections found in telecom systems, data-com and storage systems, and, increasingly, in CE and computing systems.

GigOptix’ products fall into the following main categories:

 

   

Laser and modulator Driver ICs and MCMs;

 

   

Transimpedance and Limiting Amplifier ICs;

 

   

Optical Modulators;

 

   

Broadband Radio Frequency Amplifiers; and

 

   

Custom analog and mixed signal ASICs.

 

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These products are capable of performing in various applications, demanding a wide range of data processing speeds, from consumer electronics, which perform at data processing speeds of 3Gbps to 10Gbps, to sophisticated ultra-long haul submarine telecommunications systems, which require performance at data processing speeds from 10Gbps and 40Gbps to 100Gbps.

GigOptix has incurred negative cash flows from operations since inception. For the years ended December 31, 2010 and 2009, GigOptix incurred net losses of $4.4 million and $10.0 million respectively, and cash outflows from operations of $3.8 million and $4.1 million, respectively. As of December 31, 2010 and 2009, GigOptix had an accumulated deficit of $73.4 million and $69.0 million, respectively.

GigOptix’ fiscal year ends on December 31. The consolidated financial statements include GigOptix’ accounts and GigOptix’ wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

GigOptix markets and sells GigOptix’ products in North America, Asia and Europe and other locations through GigOptix’ direct sales force, distributors and sales representatives. The percentage of GigOptix’ revenue generated from shipments outside North America was approximately 49% and 51% in fiscal 2010 and fiscal 2009, respectively. GigOptix measures sales location by the shipping destination, even if the customer is headquartered in the U.S. GigOptix anticipates that sales to international customers will continue to represent a significant percentage of GigOptix’ revenue. The percentages of GigOptix’ revenue by region are set forth in the following table:

 

     2010     2009  

North America

     51     49

Asia

     25        24   

Europe

     24        27   
                

Total

     100 %     100 %
                

Customer purchase orders are generally used to establish terms of sales. Because industry practice allows customers to reschedule or cancel orders on relatively short notice, backlog may not be a good indicator of GigOptix’ future sales. Cancellations of customer orders or changes in product specifications could result in the loss of anticipated sales without allowing GigOptix sufficient time to reduce its inventory and operating expenses.

Since a significant portion of GigOptix’ revenue is from the digital consumer electronics market, GigOptix’ business may be subject to seasonality, with increased revenues in the third and fourth calendar quarters of each year, when customers place orders to meet year-end holiday demand. However, due to the complex nature of the markets GigOptix serves and the broad fluctuations in economic conditions in the U.S. and other countries, it is difficult for GigOptix to assess the impact of seasonal factors on GigOptix’ business.

GigOptix is subject to the risks of conducting business internationally, including economic conditions in Asia, particularly Taiwan and China, changes in trade policy and regulatory requirements, duties, tariffs and other trade barriers and restrictions, the burdens of complying with foreign laws and, possibly, political instability. Most of GigOptix’ foundries and all of GigOptix’ assembly and test subcontractors are located in Asia. Although GigOptix’ international sales are largely denominated in U.S. dollars, GigOptix also enters into sales transactions in New Taiwan dollars, in Hong Kong dollars and in Chinese renminbi. In addition, GigOptix has foreign operations where expenses are generally denominated in the local currency. Such transactions expose GigOptix to the risk of exchange rate fluctuations. GigOptix monitors its exposure to foreign currency fluctuations, but has not adopted any hedging strategies to date. There can be no assurance that exchange rate fluctuations will not harm GigOptix’ business and operating results in the future.

 

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Due to the continued uncertain economic conditions, GigOptix’ current or potential customers may delay or reduce purchases of GigOptix’ products, which would adversely affect GigOptix’ revenues and harm GigOptix’ business and financial results. GigOptix expects its business to be adversely impacted by any future downturn in the U.S. or global economies. In the past, industry downturns have resulted in reduced demand and declining average selling prices for GigOptix’ products which adversely affected GigOptix’ business.  GigOptix expects to continue to experience these adverse business conditions in the event of further downturns.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses GigOptix’ consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to product returns, bad debts, inventories, asset impairments, deferred tax assets, accrued warranty reserves, restructuring costs, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, affect GigOptix’ more significant judgments and estimates used in the preparation of GigOptix’ consolidated financial statements.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. GigOptix also has other key accounting policies that are less subjective, and, therefore, their application would not have a material impact on GigOptix’ reported results of operations. The following is a discussion of GigOptix’ critical accounting policies, as well as the estimates and judgments involved.

Revenue Recognition

Revenue from sales of optical modulator drivers and receivers, MCMs, and other products is recognized when persuasive evidence of a sales arrangement exists, transfer of title occurs, the sales price is fixed or determinable and collection of the resulting receivable is reasonably assured. Revenue for product shipments is recognized upon shipment of the product to the customer. Provisions are made for warranties at the time revenue is recorded.

Customer purchase orders are generally used to determine the existence of an arrangement. Transfer of title and risk of ownership occur based on defined terms in customer purchase orders, and generally pass to the customer upon shipment, at which point goods are delivered to a carrier. There are no formal customer acceptance terms or further obligations, outside of GigOptix’ standard product warranty. GigOptix assesses whether the sales price is fixed or determinable based on the payment terms associated with the transaction. Collectability is assessed based primarily on the credit worthiness of the customer as determined through ongoing credit evaluations of the customer’s financial condition, as well as consideration of the customer’s payment history.

Revenue generated from engineering product development projects and research and development cost reimbursement contracts, cost plus fixed fee type contracts, for the United States government is recorded in

 

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accordance with accounting guidance for contract accounting, using the percentage of completion method measured on a cost-incurred basis. Changes in contract performance, contract conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. In the quarter ended December 31, 2009, GigOptix recorded a reserve of $1.3 million associated with a change in estimated rates under which GigOptix could bill for the work GigOptix performed under various government contracts during fiscal 2009. Profit incentives are included in revenue when realization is assured. Losses, if any, are recognized in full as soon as identified. Losses occur when the estimated direct and indirect costs to complete the contract exceed the unrecognized revenue on the contract. GigOptix evaluates the reserve for contract losses on a contract-by-contract basis. No losses have been incurred on any contracts to date.

Contract Estimates

GigOptix estimates contract costs based on the experience of its professional researchers, the experience GigOptix has obtained in internal research efforts, and GigOptix’ performance on previous contracts. GigOptix believes this allows it to reasonably estimate the tasks required and the contract costs; however, there are uncertainties in estimating these costs, such as the ability to identify precisely the underlying technical issues hindering development of the technology; the ability to predict all the technical factors that may affect successful completion of the proposed tasks; and the ability to retain researchers having enough experience to complete the proposed tasks in a timely manner. Should actual costs differ materially from GigOptix’ estimates, GigOptix may have to adjust the timing and amount of revenue it recognizes. To date, GigOptix has mitigated the risk of failing to perform under these contracts by negotiating best efforts provisions, which do not obligate GigOptix to complete contract deliverables.

Inventories

Inventories are stated at the lower of cost or market value, with cost computed on an average-cost basis. Cost includes labor, material and overhead costs, including product and process technology costs. Determining fair market value of inventories involves numerous judgments, including projecting average selling prices and sales volumes for future periods and costs to complete products in work in process inventories. As a result of this analysis, when fair market values are below GigOptix’ costs, GigOptix records a charge to cost of revenue in advance of when the inventory is scrapped or sold.

GigOptix evaluates its ending inventories for excess quantities and obsolescence on a quarterly basis. This evaluation includes analysis of historical and forecasted sales quantities by product. Inventories on hand in excess of forecasted demand are written down. In addition, GigOptix writes off inventories that are considered obsolete. Obsolescence is determined from several factors, including competitiveness of product offerings, market conditions and product life cycles when determining obsolescence. Increases to the provision for excess and obsolete inventory are charged to cost of revenue. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If this lower-cost inventory is subsequently sold, the related provision is matched to the movement of related product inventory, resulting in lower costs and higher gross margins for those products.

GigOptix’ inventories include high-technology parts that may be subject to rapid technological obsolescence and which are sold in a highly competitive industry. If actual product demand or selling prices are less favorable than GigOptix’ estimates, it may be required to take additional inventory write-downs.

Long-Lived Assets and Intangible Assets

Long-lived assets include equipment, furniture and fixtures, leasehold improvements and intangible assets. When events or changes in circumstances indicate that the carrying amount of long-lived assets may not be

 

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recoverable, GigOptix tests for recoverability based on an estimate of undiscounted cash flows as compared to the asset’s carrying amount. If the carrying value exceeds the estimated future cash flows, the asset is considered to be impaired. The amount of impairment is measured as the difference between the carrying amount and the fair value of the impaired asset. Factors GigOptix considers important that could trigger an impairment review include continued operating losses, significant negative industry trends, significant underutilization of the assets and significant changes in the way GigOptix plans to use the assets.

The estimation of future cash flows involves numerous assumptions, which require GigOptix’ judgment, including, but not limited to, future use of the assets for GigOptix’ operations versus sale or disposal of the assets, future-selling prices for GigOptix’ products and future production and sales volumes. In addition, GigOptix must use its judgment in determining the groups of assets for which impairment tests are separately performed.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination and is not subject to amortization. GigOptix evaluates goodwill for impairment on an annual basis or whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. GigOptix operates in one reporting unit.

Income Taxes

As part of the process of preparing GigOptix’ consolidated financial statements, GigOptix is required to estimate GigOptix’ income taxes in each of the jurisdictions in which it operates. This process involves estimating GigOptix’ current tax exposure and assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities. GigOptix then assess the likelihood that GigOptix’ deferred tax assets will be recovered from future taxable income and to the extent GigOptix establishes a valuation allowance or increase this allowance in a period, GigOptix will include an additional tax provision in GigOptix’ consolidated statement of operations.

In June 2006, the Financial Accounting Standards Board, or FASB, issued accounting guidance which provides for a two-step approach to recognize and measure uncertain tax positions. GigOptix considers many factors when evaluating and estimating GigOptix’ tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Whether the more-likely-than-not recognition threshold is met for a tax position is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence.

Stock-based Compensation

Stock-based compensation is measured at the date of grant, based on the fair value of the award. GigOptix amortizes the compensation costs on a straight-line basis over the requisite service period of the option, which is generally the option vesting term of four years. The benefits of tax deductions in excess of recognized compensation expense must be reported as a financing cash flow, rather than as an operating cash flow. This may reduce future net cash flows from operations and increase future net financing cash flows.

 

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GigOptix estimates the fair value of stock options granted using a Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, along with certain policy elections, including the options’ expected life and the price volatility of GigOptix’ underlying stock options. Actual volatility, expected lives, interest rates and forfeitures may be different from GigOptix’ assumptions, which would result in an actual value of the options being different from estimated. This fair value of stock option grants is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

From time to time GigOptix also issues stock option grants to directors and employees that have a market condition. In such cases stock options will vest only if the average price of our stock is at or exceeds a certain price threshold during a specific, previously defined period of time. To the extent that the market condition is not met, the options do not vest and are cancelled. In these cases, GigOptix cannot use the Black-Scholes model; GigOptix must use a Monte Carlo simulation. GigOptix engages a third party valuation firm to support management’s valuation of these options using Monte Carlo simulation techniques that incorporate assumptions as provided by management for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized until such time as the market condition is either met or not met. Certain stock options granted on March 17, 2010 were classified as option grants having a market condition.

GigOptix also issues stock options which have company specific financial performance criteria. In this case, GigOptix makes a determination regarding the probability of the performance criteria being achieved and use a Black-Scholes model to value the options incorporating assumptions as provided by management for the expected holding period, risk-free interest rate, stock price volatility and dividend yield. Compensation expense is recognized until such time as the performance criteria is met or not met. Certain stock options granted on October 27, 2010 were classified as option grants having a performance condition.

Expected Term—GigOptix’ expected term used in the Black-Scholes valuation method represents the period that GigOptix’ stock options are expected to be outstanding and is derived from the historical expected terms of “guideline” companies selected based on similar industry and product focus.

Expected Volatility—GigOptix’ expected volatility used in the Black-Scholes valuation method is derived from a combination of historical and implied volatility of “guideline” companies selected based on similar industry and product focus.

Expected Dividend—GigOptix has never paid dividends and currently do not intend to do so, and accordingly, the dividend yield percentage is zero for all periods.

Risk-Free Interest Rate—GigOptix bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury constant maturities issued with a term equivalent to the expected term of the option.

GigOptix makes an estimate of expected forfeitures and recognizes compensation costs only for those equity awards expected to vest. When estimating forfeitures, GigOptix considers voluntary termination behavior as well as an analysis of actual option forfeitures.

Recent Accounting Pronouncements

In April 2010, the FASB updated its guidance related to the milestone method of revenue recognition. The update provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. A vendor can recognize consideration that is contingent upon achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The updated guidance became effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. We do not expect adoption to have a material impact on our consolidated results of operations or financial condition.

 

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In July 2010, the 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 adoption of these standards will not have a material impact on our consolidated financial statements.

In December 2010, the FASB updated its guidance related to when to perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. The updated guidance requires that for any reporting unit with a zero or negative carrying amount, and entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The updated guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We do not expect adoption to have a material impact on our consolidated results of operations or financial condition.

In December 2010, the FASB updated its guidance related to disclosure of supplementary pro forma information for business combinations. The updated guidance requires that if comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period only. The updated guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010, with early adoption permitted. We will adopt the updated guidance and we do not expect adoption to have an impact on our consolidated results of operations or financial condition as the updated guidance only affects disclosures related to future business combinations.

 

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Results of Operations

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

The following table sets forth GigOptix’ consolidated results of operations for the fiscal years ended December 31, 2010 and December 31, 2009, and the year-over-year increase (decrease) in GigOptix’ results, expressed both in dollar amounts (thousands) and as a percentage of total revenues, except where indicated:

 

     Years ended December 31,  
     2010     2009     Change  
     (Thousands)     %     (Thousands)     %     (Thousands)     %  

Revenue

            

Product

   $ 23,070        86      $ 11,290        76      $ 11,780        104   

Government contract

     3,806        14        4,811        32        (1,005     (21

Effect of change in estimated billing rates under government contracts

     —          —          (1,275     (8     1,275        100   
                              

Total revenue

     26,876        100        14,826        100        12,050        81   

Cost of revenue

            

Product

     11,629        43        5,996        40        5,633        94   

Government contract

     922        4        2,137        15        (1,215     (57
                              

Total cost of revenue

     12,551        47        8,133        55        4,418        54   
                              

Gross profit

     14,325        53        6,693        45        7,632        114   
                              

Research and development expense

     8,659        32        6,264        42        2,395        38   

Selling, general and administrative expense

     8,889        33        9,922        67        (1,033     (10

Restructuring expense

     388        1        884        6        (496     (56
                              

Total operating expenses

     17,936        66        17,070        115        866        5   
                              

Loss from operations

     (3,611     (13     (10,377     (70     6,766        65   

Interest expense, net

     (450     (2     (68     0        (382     (562

Other income (expense), net

     (248     (1     335        2        (583     (174
                              

Loss before benefit from income taxes

     (4,309     (16     (10,110     (68     5,801        57   

Benefit from (provision against) income taxes

     (51     0        69        0        (120     (174
                              

Net loss

   $ (4,360     (16   $ (10,041     (68   $ 5,681        57   
                              

Revenue

Revenue for the periods reported was as follows (in thousands, except percentages):

 

     Years ended
December 31,
 
     2010     2009  

Product

   $ 23,070      $ 11,290   

Government contract

     3,806        4,811   

Effect of change in estimated billing rates under government contracts

     —          (1,275
                

Total revenue

   $ 26,876      $ 14,826   

Increase in total revenue period over period

   $ 12,050     

Percentage increase in total revenue, period over period

     81 %  

Revenue for the year ended December 31, 2010 was $26.9 million, an increase of $12.1 million or 81% compared with $14.8 million for the year ended December 31, 2009. Revenue increased in 2010 primarily due to sales of products related to our acquisition of ChipX in November 2009, as well as an 8% increase in revenue related to contracts with the U.S. Government. Government contract revenue was reduced in 2009 due to a change in estimated billing rates.

 

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Gross Profit

Gross profit consists of revenue, less cost of revenue, which includes amortization of certain identified intangible assets. Cost of revenue consists primarily of the costs to manufacture saleable chips, including outsourced wafer fabrication and testing. Amortization expense of identified intangible assets, namely existing technology, is also presented within cost of revenue, as the intangible assets were determined to be directly attributable to revenue generating activities.

Cost of revenue and gross profit for the periods presented were as follows (in thousands, except percentages):

Cost of Revenue

 

     Years ended
December 31,
 
     2010     2009  

Product

   $ 11,629      $ 5,996   

Government contract

     922        2,137   
                

Total cost of revenue

   $ 12,551      $ 8,133   

Percentage of revenue

     47 %     55 %

Increase in total cost of revenue period over period

   $ 4,418     

Percentage increase in total cost of revenue, period over period

     54 %  

Gross Profit

 

     Years ended December 31,  
     2010     % of
Revenue
   
2009
     % of
Revenue
 

Product

   $ 11.441        50   $ 5,294         47

Government contract

     2,884        76     1,399         40
                     

Total gross profit

   $ 14,325        53   $ 6,693         45

Increase in gross profit, period over period

   $ 7,632          

Percentage increase in gross profit, period over period

     114 %       

Gross profit for the year ended December 31, 2010 was $14.3 million, or 53% of revenue, an increase of $7.6 million or 114% as compared to a gross profit of $6.7 million, or 45% of revenue, for the year ended December 31, 2009. The increase in gross profit in 2010 from 2009 resulted primarily from a full year of revenue resulting from products acquired from ChipX in November 2009, increased gross profit related to billings on contracts to the U.S. government and a reduction in intangible amortization classified as cost of revenue. Gross profit in 2009 was reduced due to a change in estimated billing rates on government contracts. Gross profit on contracts with the U.S. Government increased in 2010 compared to 2009 as GigOptix began to charge only those direct costs related to government contracts to cost of revenue.

Research and Development Expense

Research and development expenses are expensed as incurred. Research and development costs consist primarily of employee compensation, consulting and engineering design, non-capitalized tools and equipment and equipment depreciation.

 

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Research and development expense for the periods presented was as follows (in thousands, except percentages):

 

      Years ended
December 31,
 
     2010     2009  

Research and development expense

   $ 8,659      $ 6,264   

Percentage of revenue

     32 %     42 %

Increase in research and development expense, period over period

   $ 2,395     

Percentage increase in research and development expense, period over period

     38 %  

Research and development expense for the year ended December 31, 2010 was $8.7 million compared to $6.3 million for the year ended December 31, 2009, an increase of $2.4 million or 38%. The increase in research and development expense primarily resulted from an increase in payroll of $1.9 million, an increase in stock-based compensation of $0.3 million, and increased expense related to outside services of $0.2 million.

Selling, General and Administrative Expense

Selling, general and administrative expenses consist primarily of salaries and benefits for management, marketing and administration personnel, as well as fees for consultants supporting the sales, marketing and administrative functions.

Selling, general and administrative expense for the periods presented was as follows (in thousands, except percentages):

 

     Years ended
December 31,
 
     2010     2009  

Selling, general and administrative expense

   $ 8,889      $ 9,922   

Percentage of revenue

     33 %     67 %

Decrease in selling, general and administrative expense, period over period

   $ (1,033  

Percentage decrease in selling, general and administrative expense, period over period

     (10 )%  

Selling, general and administrative expense for the year ended December 31, 2010 was $8.9 million compared to $9.9 million for the year ended December 31, 2009, a decrease of $1.0 million or (10)%. This decrease is primarily due to reduced professional fees, including legal, accounting and auditing services of $1.4 million, a decrease in facility costs of $0.2 million, a decrease in the amortization of employment escrow of $0.1 million, and a decrease in investor relations costs of $0.1 million, offset by increases in payroll expense, including stock-based compensation, of $0.8 million.

Restructuring Expense

Restructuring expense for the periods presented was as follows (in thousands):

 

     Years ended
December 31,
 
     2010      2009  

Restructuring Expense

   $ 388       $ 884   

In the first quarter of 2010, GigOptix decided to close its R&D design center in Haifa, Israel which was acquired as part of the merger with ChipX in 2009. GigOptix took a restructuring charge of $388,000 to account for employee severance of $156,000, future facility rent expense of $61,000 for the remainder of the lease term

 

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through the end of fiscal 2010, a write-down of fixed assets of $121,000, and accounting and legal expenses of $50,000. At December 31, 2010, GigOptix’ remaining accrued restructuring liability relating to closing the design center in Israel was $34,000.

In December 2009, GigOptix adopted a plan to reduce the size of GigOptix’ facilities in Bothell, Washington, from approximately 32,000 square feet to approximately 12,000 square feet and took a restructuring charge of $424,000 to reflect the proportionate share of remaining lease expense GigOptix will incur for the unoccupied space of the facility and costs associated with improvements needed to segregate the facility. Of this amount, $396,000 was paid out in 2010 and the remaining $28,000 balance will be paid in 2011. The existing lease on the facility expires in 2014. Although GigOptix made available for sublease approximately 20,000 square feet, it did not receive any sublease income associated with this space prior to expiration of the reduction in space, which occurred in February 2011.

In October 2009, in anticipation of its acquisition by GigOptix, ChipX incurred severance costs of $0.4 million in connection with a reduction in its work force. GigOptix recognized this expense in GigOptix’ consolidated statement of operations after the acquisition date as a restructuring expense. All amounts were paid in 2009.

Other (Expense) Income

Other expense, net and interest expense, net for the periods presented were as follows (in thousands, except percentages):

 

     Years ended
December 31,
 
     2010     2009  

Interest expense, net

   $ (450   $ (68

Other income (expense), net

     (248     335   
                

Total other (expense) income

   $ (698   $ 267   
                

Interest expense, net for the year ended December 31, 2010 increased by $0.4 million primarily due to interest expense associated with GigOptix’ line of credit and term loan with Silicon Valley Bank, interest incurred on loans with Bridge Bank and Agility Capital during the first two quarters of fiscal 2010 and interest incurred on a capital lease for engineering design software. Other income of $0.3 million in 2009 changed by $0.6 million in 2010 to a recognized expense of $0.3 million. The expense recognized during 2010 was due primarily to the change in fair value related to warrants accounted for under liability accounting. The $0.3 million of income recognized in 2009 was primarily related to the sale of the assets of GigOptix’ Plexera Bioscience LLC subsidiary, including all patents and trademarks related to the Plexera business, on February 17, 2009. The assets were sold “as is” to Plexera, LLC, a newly formed company, for $0.3 million and GigOptix recorded a gain of $0.3 million. GigOptix does not expect to receive any further consideration from the sale of the Plexera assets.

Income Taxes

Provision for income taxes was approximately $51,000 in the year ended December 31, 2010, and the benefit from income taxes was $69,000 in the year ended December 31, 2009. The effective tax rate was (1.18)% and 0.68% for the years ended December 31, 2010 and 2009, respectively. Income taxes during 2010 primarily relate to ASC740 reserves and state tax true ups. Income taxes during 2009 relate primarily to the amortization of a deferred tax liability, established upon the acquisition of GigOptix’ Swiss subsidiary in 2008, partially offset by current taxes payable related to a foreign subsidiary.

 

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Liquidity and Capital Resources

Cash and cash equivalents and cash flow data for the periods presented were as follows (in thousands):

 

     December 31,  
     2010     2009  

Cash and cash equivalents

   $ 4,502      $ 3,583   
     Years ended
December 31,
 
     2010     2009  

Net cash used in operating activities

   $ (3,785   $ (4,099

Net cash (used in) provided by investing activities

     (907     1,294   

Net cash provided by (used in) financing activities

     5,583        (482

In April 2010, GigOptix entered into a loan and security agreement with Silicon Valley Bank. Pursuant to the loan and security agreement, GigOptix is entitled to borrow from Silicon Valley Bank up to $3.0 million, based on net eligible accounts receivable after an 80% advance rate and subject to limits based on GigOptix’ eligible accounts as determined by Silicon Valley Bank. Interest on extensions of credit under this revolving loan is equal to the prime rate of Silicon Valley Bank, which at December 31, 2010 was 4.0% per annum, plus 1.5% per annum, or the applicable rate. In addition, a monthly collateral handling fee of 0.30% per each gross financed account receivable shall apply, or the collateral handling fee. If GigOptix achieves certain quarterly financial performance targets as stated in the loan and security agreement, the applicable rate and the collateral handling fee shall be reduced to the prime rate of Silicon Valley Bank plus 1.0% per annum and 0.20%, respectively. This revolving loan was used by GigOptix to replace its revolving accounts receivable credit line with Bridge Bank. With the initial funding by Silicon Valley Bank of the revolving loan, GigOptix terminated its loan and security agreement with Bridge Bank, which is discussed below, as having been fully performed by GigOptix. The loan and security agreement also contains events of default customary for credit facilities of this type, including, among other things, nonpayment of principal or interest when due. The loan and security agreement will expire on April 23, 2012. The amount outstanding on GigOptix’ line of credit on December 31, 2010 was $3.0 million.

Pursuant to the loan and security agreement, Silicon Valley Bank is making available a term loan in an amount up to $400,000, subject to the satisfaction of terms and conditions of the loan and security agreement, which can be drawn down one time for the purpose of refinancing GigOptix’ outstanding obligations to Agility Capital. The term loan is repayable in eighteen equal monthly installments and interest is fixed at a rate per annum of 9.0%. GigOptix used the proceeds of the term loan to pay off its loan and terminate its loan agreement with Agility Capital. The amount outstanding on the term loan on December 31, 2010 was $0.2 million. The weighted average interest rate on GigOptix’ loans outstanding on December 31, 2010 is 5.7%.

The loan and security agreement with Silicon Valley Bank is secured by all of GigOptix’ assets, including all accounts, equipment, inventory, receivables and intangibles. The loan and security agreement contains certain restrictive covenants that will impose significant operating and financial restrictions on GigOptix’ operations, including, but not limited to:

 

   

Merge or consolidate, or permit any of GigOptix’ subsidiaries to merge or consolidate, with or into any other business organization, or acquire, or permit any of GigOptix’ subsidiaries to acquire, all or substantially all of the capital stock or property of another person;

 

   

Create, incur, assume or be liable for any indebtedness, other than certain indebtedness permitted under the loan and security agreement; or

 

   

Pay any dividends or make any distribution or payment on, or redeem, retire, or repurchase, any capital stock.

 

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The receipt of Silicon Valley Bank’s prior written approval of the proposed merger with Endwave is a condition to Endwave’s obligation to effect the closing of the merger.

In connection with the loan and security agreement, GigOptix granted Silicon Valley Bank (i) a warrant to purchase 125,000 shares of GigOptix’ common stock at an exercise price equal to $4.00 per share, or the Warrant, and (ii) a warrant to purchase a second tranche of up to 100,000 shares of GigOptix’ common stock which shall vest 15,000 shares per month incrementally beginning September 1, 2010 (although the last monthly incremental vesting amount shall be 10,000 shares) at an exercise price equal to the closing market price on each date of vesting, or the Second Tranche Warrant. In the event that either GigOptix closes an equity investment of at least $4.0 million or it has been EBITDA positive for the preceding three months, then vesting shall cease, and all unvested shares under the Second Tranche Warrant shall lapse. In July 2010, GigOptix satisfied the requirements of closing an equity investment of at least $4.0 million and the Second Tranche Warrant expired. The Warrant includes anti-dilution provisions and “piggy-back” registration rights permitting registration in a future public offering by GigOptix. The shares underlying the Warrant were registered on a Registration Statement on Form S-1 that was declared effective by the Securities and Exchange Commission on July 2, 2010. The Warrant may either be (i) converted, on a cashless, net settlement basis, based on the fair market value as determined pursuant to the terms of the Warrant, or (ii) exercised by delivering a duly executed notice of exercise. The Warrant has a term of seven years; the fair value of the Warrant has been determined using a Black-Scholes option pricing model. The full fair value of the warrant has been classified as a non-current asset and as equity on the balance sheet and is being amortized over two years. GigOptix has recorded interest expense of $0.1 million during fiscal 2010 related to these warrants. The balance of the asset is $0.2 million as of December 31, 2010.

In November 2009, GigOptix entered into a loan and security agreement with Bridge Bank under which it could borrow up to $4.0 million, based on net eligible accounts receivable. Borrowings under the line of credit bore interest at the bank’s prime rate plus 2.50% (6.50% as of December 31, 2009), provided that in no event would the prime rate be less than 4.0%. Borrowings under the line were collateralized by a security interest in all of GigOptix’ assets. On April 28, 2010, GigOptix paid Bridge Bank approximately $1.6 million to fully repay GigOptix’ liabilities covering principal, accrued interest and various fees related to GigOptix’ line of credit. At this time the loan and security agreement with Bridge Bank was cancelled. At December 31, 2009 GigOptix had an outstanding balance on GigOptix’ line of credit of approximately $1.5 million which was offset by a loan discount of $152,000.

On January 29, 2010, GigOptix entered into a loan agreement for a secured line of credit facility with Agility Capital, LLC, or Agility Capital, to pay for transaction expenses incurred by GigOptix in GigOptix’ acquisition of ChipX. The secured credit facility provided that GigOptix may borrow one advance of up to $500,000 and had a maturity date of December 1, 2010. Borrowings incurred interest at 14.0% per annum. Beginning March 1, 2010, and on the first day of each month thereafter, $50,000 plus accrued but unpaid interest was to be paid to Agility Capital, and all amounts outstanding on December 1, 2010 were due and payable at that time. In the event of a default, the interest rate will be increased to 5.0% above the rate that would otherwise apply, and in addition, Agility would receive a fee of $5,000, with an additional fee of $5,000 on each thirtieth day thereafter for so long as the event of default continues. Under the terms of this secured credit facility, GigOptix paid Agility Capital a $20,000 fee. On April 28, 2010, GigOptix paid Agility Capital $0.4 million to fully repay GigOptix’ liabilities covering principal and accrued interest related to GigOptix’ short-term loan. At this time this secured credit facility was cancelled.

Operating Activities

Operating activities used cash of $3.8 million in the year ended December 31, 2010. This resulted primarily from a net loss of $4.4 million, an increase in accounts receivable of $1.6 million, an increase in inventories of $0.2 million, a decrease in accounts payable and accrued expenses of $2.6 million, and a decrease in other non-current liabilities of $0.5 million. These uses were partially offset by the following non-cash expenses:

 

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depreciation and amortization of $2.4 million, stock-based compensation of $1.5 million, change in fair value of warrants recorded as a liability of $0.1 million, amortization of a discount on a loan of $0.4 million, warrant expense recorded in equity of $0.1 million, amortization of an acquisition related payment of $0.6 million, and the write-down of certain fixed assets and inventories of $0.2 million. The net loss decreased in 2010 from 2009 as a result of an 81% increase in revenues in 2010 compared to 2009. GigOptix was also able to reduce its accounts payable and current liabilities as a result of GigOptix’ equity raise in the third quarter of 2010.

Operating activities used cash in the year ended December 31, 2009 of $4.1 million, a result of a net loss of $10.0 million, decreases in inventories, prepaid expenses and other current assets totaling $0.7 million, partially offset by non-cash expenses for depreciation and amortization, stock-based compensation and intangible asset impairment of $1.1 million, $0.9 million and $0.4 million, respectively, an increase of $1.4 million in accrued and other current liabilities and an increase in accounts payable of $0.8 million.

Investing Activities

Net cash used in investing activities for the year ended December 31, 2010 was $0.9 million and consisted of purchases of fixed assets of $1.2 million offset by refunds of restricted cash of $0.3 million related to GigOptix’ leased facilities in Bothell, WA. GigOptix reduced its square footage in Bothell by approximately 63% resulting in lower facility rent expense which led to a reduction in required restricted cash.

Net cash provided by investing activities for the year ended December 31, 2009 was $1.3 million and primarily consisted of net cash acquired in the acquisition of ChipX of $1.7 million, the sale of assets of Plexera for $0.3 million, and refunds of restricted cash of $0.1 million, offset by purchases of property and equipment of $0.8 million.

Financing Activities

Net cash provided by financing activities was $5.6 million during the year ended December 31, 2010 and consisted of $4.1 million in proceeds from the issuance of common stock and the exercise of stock options, proceeds of $3.4 million from a line of credit and term loan from Silicon Valley Bank and Agility Capital, offset by repayments of loans to Bridge Bank, Agility Capital, and Silicon Valley Bank and the repayment of a capital lease obligation for engineering design software.

Net cash used in financing activities during the year ended December 31, 2009 was $0.5 million and consisted of $1.0 million in proceeds from the issuance of common stock and warrants, net proceeds from the line of credit of $2.1 million, offset by repayments under the line of credit and capital lease obligations of $3.5 million and $0.1 million, respectively.

GigOptix has incurred negative cash flows from operations since inception. For the years ended December 31, 2010 and 2009, GigOptix incurred net losses of $4.4 million and $10.0 million, respectively, and cash outflows from operations of $3.8 million and $4.1 million respectively. As of December 31, 2010 and 2009, GigOptix had an accumulated deficit of $73.4 million and $69.0 million, respectively. GigOptix has incurred significant losses since inception, attributable to GigOptix’ efforts to design and commercialize GigOptix’ products. GigOptix has managed GigOptix’ liquidity during this time through a series of cost reduction initiatives and through increasing GigOptix’ line of credit with Silicon Valley Bank. GigOptix’ ability to continue as a going concern is dependent on many events outside of GigOptix’ direct control, including, among other things; obtaining additional financing either privately or through public markets and consumers’ purchasing GigOptix’ products in substantially higher volumes. During 2010, GigOptix raised approximately $3.9 million in additional equity capital from institutional investors which stabilized GigOptix’ cash position. GigOptix has used that cash to substantially reduce its outstanding accounts payable and accrued expenses balances. In addition, GigOptix has access to a line of credit with Silicon Valley Bank which enables GigOptix to borrow up to $3 million based on 80% of eligible invoiced amounts to customers. GigOptix also was close to breakeven, incurring a loss of

 

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$97,000, on an operating income basis in the fourth quarter of 2010. Additionally, GigOptix’ pending merger with Endwave upon closing will provide GigOptix with additional cash and equivalents which should mitigate near-term liquidity issues. Based on these events and factors, GigOptix believes it can continue as a going concern over the next 12 months.

Off-Balance Sheet Arrangements

GigOptix does not use off-balance-sheet arrangements with unconsolidated entities or related parties, nor does it use other forms of off-balance-sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, GigOptix is not exposed to any financing or other risks that could arise if it had such relationships.

 

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INFORMATION ABOUT ENDWAVE CORPORATION

Introduction

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

 

   

Endwave’s semiconductor product line consists of a wide variety of MMICs, including amplifiers, voltage controlled oscillators, up and down converters, variable gain amplifiers, voltage variable attenuators, fixed attenuators and filters. These types of devices are widely used in telecommunications, satellite, defense, security, instrumentation, scientific and consumer systems. While Endwave has developed, produced and sold such devices for several years as components of Endwave’s module products, Endwave first offered them for sale as stand-alone products in the latter part of 2009 and they have not yet become a significant source of revenue for Endwave.

 

   

Endwave’s integrated transceiver modules combine several electronic functions into a single RF sub-system. Historically, Endwave’s main customers for these products have been telecommunication network OEMs, and system integrators that utilize them in digital microwave radios. More recently Endwave has identified and pursued uses for these products in additional product areas; however these alternate applications have not yet become a significant source of revenue for Endwave.

Endwave was originally incorporated in California in 1991 and reincorporated in Delaware in 1995. In March 2000, Endwave merged with TRW Milliwave Inc., a RF sub-system supplier that was a wholly-owned subsidiary of TRW Inc. In connection with the merger, Endwave changed its name from Endgate Corporation to Endwave Corporation. On October 17, 2000, Endwave successfully completed the initial public offering of its common stock. Endwave’s principal executive offices are located at 130 Baytech Drive, San Jose, CA 95134 and its main telephone number is (408) 522-3100.

Industry Background and Markets

High-Frequency RF Technology

The applications of RF technology are broad, extending from terrestrial AM radio at the low end of the frequency spectrum, which is less than 1 MHz, to atmospheric monitoring applications at the high end of the frequency spectrum, which is around 100 GHz. Microwave technology refers to technology for the transmission of signals at high frequencies, from approximately 1 GHz to approximately 20 GHz and millimeter wave technology refers to technology for the transmission of signals at very high frequencies, from approximately 20 GHz to beyond 100 GHz. Endwave’s products employ both microwave and millimeter wave technology. The term microwave, however, is commonly understood in the industries Endwave serves, and that term is used in this prospectus/proxy statement as meaning both microwave and millimeter wave.

Endwave’s products are typically designed to operate at frequencies between 1 GHz and 100 GHz, which are referred to in this report as high-frequency RF. Due to their physical attributes, these frequencies are well-suited for numerous applications requiring the transmission of data at high speeds, detection of physical movement, imaging of inorganic and organic objects and various other types of physical measurements.

Telecommunication Networks

High-frequency transceiver modules and their key constituent components, MMICs, are an integral part of microwave radios, which in turn play a key role in many telecommunication networks. Microwave radio links have a number of applications:

Cellular Telephone Backhaul. The communication link between the cellular base station site and the overall telephone network is referred to as cellular backhaul. This is the most common use of microwave radios. In most

 

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parts of the world, cellular backhaul is typically accomplished through the use of microwave radios either because of their ease of deployment and low overall cost relative to available wireline options or because adequate wireline facilities are not available. While in the United States and Canada cellular backhaul has typically been accomplished through the use of wireline facilities, there is a growing trend to migrate to microwave backhaul because wireline systems are not a practical alternative to provide the extremely high backhaul data rates necessitated by contemporary “smart phones” and similar devices.

Carrier Class Trunking. To deploy their networks, communications carriers require high capacity links, or trunk circuits, between major voice and data switching centers. While fiber optic cables are the most common type of trunk circuit facility, microwave radios are often used for portions of these circuits when the intervening terrain, such as mountains or bodies of water, is difficult to traverse or as redundant backup links for the fiber optic network.

Private Voice and Data Networks. When private users, such as companies and universities, deploy stand-alone campus area or metropolitan area voice and data networks, they often encounter situations where it is not possible to access a direct physical path between their facilities due to distance or intervening structures and roads. If third-party wireline facilities are not available or cost-effective, a microwave radio link is often used to provide the network connection. In addition, companies often implement microwave facilities as redundant backup links for their wireline facilities.

Fixed Wireless Access Network Backhaul. Similar to the situation in cellular telephone networks, fixed wireless access networks require a backhaul infrastructure to move the data from individual access points to an internet portal. Various approaches are being considered for the widespread implementation of fixed wireless access networks, including the IEEE 802.16 WiMAX standard and LTE technology. Regardless of the underlying access technology, all such fixed wireless access networks will face the technological and cost issues associated with connecting individual access points to the wireline network infrastructure. Endwave believes this need for backhaul represents an opportunity for microwave radios, particularly because the anticipated high bandwidth requirements of fixed wireless access networks are served more cost-effectively by microwave radios than by wireline alternatives.

While transient economic conditions and changing deployment schedules may cause short-term market fluctuations, Endwave believes the long-term prospects for the use of its products and technology in telecommunications networks are good. The continued deployment of mobile networks in developing countries, the continued enhancement of networks in developed regions and the ongoing rate of increases in data traffic all work to increase demand for the types of products Endwave offers.

Defense Systems

High-frequency RF technology is an integral part of various defense systems. Key applications in these markets include:

Radar Systems. Traditional radar systems are configured to detect large objects at significant distances. To add to this capability, many new systems employ complementary high frequency RF radar systems designed to detect small vehicles and personnel. These new systems often use these higher frequencies in order to provide greater resolution. A further use of high frequency radar is airborne imaging equipment that allows pilots to see through low-lying haze and dust much in the same way night vision goggles permit one to see in the dark.

Signal Intelligence Systems. Information about an opposing force can be gathered by monitoring their electronic communications. Systems that gather such information utilize a variety of RF and microwave components to monitor and interpret information over a broad spectrum of potential frequencies that a hostile force might use.

 

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High Capacity Communications. A modern, widely-dispersed military or security force requires communication systems to transmit voice, video and data wherever and whenever it is needed. Many military or security communication systems, whether terrestrial, airborne or satellite, employ microwave technology to meet these requirements. As the data rates in these systems increase, the systems must be able to operate at higher frequencies to take advantage of the transmission bandwidth that is available at those frequencies.

Security Systems

Because millimeter wave energy is both emitted by and reflected off of the human body, various sensors and imaging systems can be constructed to enhance the capability of personnel security systems.

Long Distance Personnel Detection. High-frequency RF signals can be used to detect the presence of humans at significant distances, much in the same way lower frequency radar systems can detect metal objects at a distance. This phenomenon can be employed as a “radar fence” to detect intrusion along lengthy security perimeters such as airport runways, secure compounds and international borders.

Security Portals. Using high-frequency RF signals and holographic image processing techniques, it is possible to create images of the human body through garments and thus detect if the individual is carrying contraband objects or weapons. These systems are used in airport security lanes and for the interdiction of contraband or controlled materials in or out of secure facilities.

Security Cameras. Utilizing security cameras that are capable of detecting and forming images with the high-frequency RF energy emitted by the human body it is possible to observe large areas in search of contraband objects or weapons in a stand-off mode that does not require one to pass through a security portal. These systems are used for loss prevention in warehouse facilities and in large public spaces to protect against terrorist activities.

The increasing concern over terrorist attacks in various public spaces is driving demand for these types of security systems and Endwave believes is creating new opportunities for its products.

Other Applications

Scientific Sensors. Various sorts of physical phenomena can be detected and measured using high-frequency RF signals. In particular, they can detect earth movements, both seismic and volcanic, through cloud cover and can also be used to measure atmospheric disturbances at upper altitudes to aid in weather prediction.

Through-wall Imagers. High-frequency RF energy has the capability to see through common building materials and detect if hidden obstructions, electrical lines, pipes or conduits exist inside of a wall. Devices employing this technology are used to avoid disruptions caused by damaging these hidden items during subsequent construction activities.

Automotive Radar. Advanced automotive radar systems utilize high-frequency RF energy to detect road hazards, other vehicles and roadway barriers and signal the power train to take appropriate action to reduce the risk of a collision or other hazardous event.

The range and breadth of applications for high-frequency RF systems continues to grow. Thus, Endwave believes there will be significant market opportunities for its products and technologies going forward.

Endwave’s Business Approach

Historically, when OEMs and other system integrators incorporated high-frequency RF technology into their products, they designed and manufactured all the requisite hardware internally. However, when faced with the

 

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need to generate cost efficiencies and technological innovations with fewer resources, OEMs and system integrators frequently look to suppliers for these items. Endwave believes there are several key characteristics that define an attractive supply partner for fulfilling these requirements, including:

Technical Depth. OEMs and system integrators seek suppliers that have significant experience in and understanding of the overall system design. This depth and breadth of understanding is crucial to optimizing the system design and making appropriate overall system level tradeoffs, thereby enabling the OEM or system integrator to design and deploy its systems more cost-effectively.

Innovative Technology. New technology is the key to providing enhanced performance and continued cost reduction. Thus, OEMs and system integrators value this capability and prefer partners that create new technologies offering additional functionality, higher reliability, lower cost and better performance.

Semiconductor Devices. Beyond seeking complete hardware sub-systems, OEMs and system integrators may seek technologically advanced and cost effective semiconductor devices including custom design capabilities that meet their unique technological needs on existing or next generation hardware platforms.

Low Cost. OEMs and system integrators are under increasing pricing pressure from their customers and expect effective and persistent cost-reduction programs from their suppliers. These cost-reduction programs require suppliers to mount a comprehensive effort at multiple levels, including integration of multiple functions, efficient manufacturing, effective supply chain management, streamlined life cycle support and use of low cost sub-contractors.

Flexible Supply Chain Capabilities. Volatility of demand is common in the markets Endwave serves. Therefore OEMs and system integrators need suppliers that can accommodate fluctuations in the demand, whether in mix and/or quantity, and that can flexibly scale their manufacturing to match these fluctuating demands.

Endwave believes that few suppliers comprehensively address all of these requirements. Many of the suppliers that populate the industry are small and lack the requisite operational strength and technical capability to address these extensive needs and requirements. Further, many suppliers use labor-intensive assembly and test methods that limit their ability to produce high-frequency RF products in high volumes and at a low cost. Others do not possess the breadth of component-to-system expertise that is desired by OEMs and system integrators. In contrast, Endwave believes that it possesses several key strengths that enable it to provide its customers with superior products and services. These strengths include:

Extensive Technical Expertise. Endwave has extensive experience in all aspects of high frequency design and manufacturing. Its body of intellectual property and a highly-skilled technical team are critical when dealing with the higher frequencies required by emerging applications. Endwave’s technical team has broad expertise in device physics, semiconductor device and circuit design, system engineering, test engineering and other critical disciplines. In addition, its large library of proprietary designs enables it to introduce new products rapidly and cost-effectively. Endwave believes the depth and breadth of its technical expertise differentiates it from many of its competitors, enabling it to optimize its products for critical performance factors and to assist its customers in developing an optimal overall design.

A Commitment to Develop Next-Generation Technology. A key component of Endwave’s value proposition is providing its customers with powerful and cost-effective technologies that offer them a major technical and economic advantage. Endwave has invested in the development of next-generation circuit and packaging technologies that allow it to provide its customers with high-performance and low-cost solutions. Its ability to develop semiconductor devices on a custom basis provides Endwave greater flexibility to optimize product designs for its customers and their specific applications. Endwave intends to continue to invest in research and development, maintain a team of talented engineers, and build on its manufacturing technologies.

 

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Comprehensive Approach to Cost-Effective Manufacturing. Endwave has taken a comprehensive approach to developing a cost-effective, outsourced manufacturing capability that allows it to compete on a worldwide basis and to offer its customers product solutions at attractive prices:

 

   

Endwave designs its products to be readily manufacturable and able to tolerate a wide range of material and manufacturing process variations. This speeds the flow of work, reduces the required level of touch labor and minimizes rework.

 

   

Semiconductors are both a critical technical element and a major cost component of Endwave’s products. Endwave’s ability to custom design these devices allows it to optimize them for cost and performance and to achieve significant cost savings by having them fabricated in low cost, third-party foundries.

 

   

For many of its products, Endwave has implemented automated assembly techniques that reduce labor content and enhance both product uniformity and quality.

 

   

Testing is a large part of the manufacturing process and Endwave has developed extensive automated testing capabilities that speed this process and differentiate Endwave from the labor-intensive methods often used in its industry. Endwave uses state of the art information technology systems to store, analyze and transmit test data.

 

   

Because Endwave’s products are highly manufacturable, it has been able to contract with third-party, primarily offshore, manufacturers for even greater cost savings. Endwave began the transition to outsourced manufacturing in 2002, most notably to HANA Microelectronics Co., Ltd., or HANA, a Thailand-based contract manufacturer, and today almost all of its manufacturing operations utilize an outsourced approach. This transition has significantly improved Endwave’s product margins and enables it to adjust rapidly, efficiently and flexibly to its customers’ varying quantity and product mix requirements, which are often created by unexpected needs and variations in demand.

 

   

The cost of raw materials and components employed in high frequency devices and products are a major part of the overall manufacturing cost. Endwave has reduced the cost of these items by re-designing them, leveraging its purchasing power and selecting more cost-effective suppliers. As an outgrowth of its operational presence in Asia, Endwave continues to identify low-cost, high-quality Asian-based suppliers for several of the raw materials and components used in its products.

Products and Technology

Integrated Transceiver Sub-system Modules

Integrated transceiver sub-system modules combine several functional RF blocks, such as amplifiers, mixers, switches or oscillators, with various types of control and support circuitry, such as a microprocessor or a power supply, to form a stand-alone transceiver sub-system. These complex modules, generally comprising hundreds of individual components, combine RF functions with sophisticated analog and digital system interface and control capabilities.

Within these modules, the core RF functions are performed with one of two circuit technologies:

 

   

MMIC (Monolithic Microwave Integrated Circuit). In this RF semiconductor technology, individual devices, components and interconnects are patterned onto a semiconductor substrate (typically gallium arsenide, or GaAs) in a manner similar to industry standard integrated circuit fabrication techniques. Endwave has developed a large repertoire of custom designed MMICs that have been optimized for cost, performance and manufacturability.

 

   

MLMS™ (Multi-Lithic Micro System). This is a proprietary RF semiconductor circuit technology that Endwave has developed to overcome the shortcomings of conventional circuit technologies. This technology consists of a small multi-layer RF substrate onto which individual devices (transistors and diodes) are attached and electrically connected without the use of bond wires. The features of this

 

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technology include reduced design difficulty, elimination of individual tuning, low cost substrate materials, automated manufacture, use of multiple semiconductor technologies in the same circuit (i.e. multi-lithic), integrated passive circuit elements and the ability to provide a complete “system on a chip” functionality.

In high-frequency RF modules, the circuit packaging technology also significantly impacts cost and performance. Many of Endwave’s newer products employ a unique packaging technology named Epsilon™. In this approach, MMIC or MLMS circuits are directly mounted to a composite printed wiring board and then enclosed with a metalized molded plastic or machined cover. The composite wiring board consists of a top RF circuit layer built on a low loss substrate with lower layers of the board consisting of conventional printed wiring board substrates for power and control circuitry. This approach reduces the size, weight and cost of the packaging components.

Semiconductor Devices

As noted above, in the course of developing several different transceiver module variants to meet a range of customer requirements, Endwave has designed a broad range of semiconductor devices including a large number of MMIC devices. The breadth and depth of this repertoire is such that Endwave can fulfill the requirements for most circuit functions in the frequency range of 10 GHz to 100 GHz. Endwave’s motivation to design these circuits has been to both achieve superior electrical performance and to reduce costs through vertical integration. Once designed, these devices are fabricated in several merchant foundries throughout the world. By using a mixture of foundries, Endwave is able to select the best foundry and fabrication process to achieve the desired performance in the most cost-effective manner. Endwave’s devices have been particularly designed to meet the high frequency and high bandwidth requirements of contemporary systems. In addition to the core devices, Endwave has developed a range of device packaging technologies that allow its circuits to be installed using industry standard surface mount technology, or SMT, assembly processes. Endwave has extended this technology such that devices operating at frequencies up to 50 GHz can be assembled in the SMT format, thus facilitating ease of downstream assembly of the sub-system module. In addition to supporting its transceiver product line, Endwave now offer these devices as stand-alone products to the various markets and applications noted above.

Sales and Marketing

Endwave sells its products through direct sales efforts, a network of independent domestic and international representatives and a domestic distributor of semiconductor devices. For each of its major customers, Endwave assigns a technical account manager, who has responsibility for developing and expanding Endwave’s relationship with that customer. Endwave’s direct, representative and distributor sales efforts are augmented by traditional marketing activities, including advertising, participation in industry associations and presence at major trade shows.

Endwave’s products are highly technical and the sales cycle can often be long. Endwave’s sales efforts typically involve a collaborative and iterative process with its customers to determine their specific requirements, verify a product design and develop an effective manufacturing approach matched to the application. Depending on the product type and market, the sales cycle can typically take anywhere from 2 to 24 months.

Customers

In 2010, revenues from Endwave’s telecom OEM customers comprised nearly all of its total revenues. In 2010, three customers each accounted for greater than 10% of Endwave’s total revenues and combined they accounted for 93% of Endwave’s total revenues, the largest of which was Nokia Siemens Networks, which accounted for 52% of Endwave’s total revenues. Endwave expects revenues from its telecom OEM customers to comprise the large majority of its revenues in the immediate future. In the telecom market, Endwave’s revenues are attributable to a limited number of telecom OEMs and Endwave expects this pattern to remain for the foreseeable future.

 

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Competition

The markets for Endwave’s products are extremely competitive, are characterized by rapid technological change and continuously evolving customer requirements and many of its competitors have significantly greater resources than Endwave does.

Among suppliers of transceiver modules in the telecommunication network market, Endwave competes with Compel Electronics SpA, Filtronic plc, Microelectronics Technology Inc., and Remec Broadband Wireless, Inc., among others. In addition to these companies, there are telecom OEMs, such as Ericsson and NEC Corporation, that use their own captive resources for the design and manufacture of transceiver modules, rather than using suppliers such as Endwave. While Endwave has limited opportunities to supply transceiver modules to these telecom OEMs, it believes that it has opportunities to supply them semiconductor devices for their captive products.

In the case of Endwave’s semiconductor product line, it competes with Avago Technologies, Ltd., Hittite Microwave Corp., MIMIX Broadband, Inc., RF Micro Devices, Inc., TriQuint Semiconductor, Inc. and United Monolithic Semiconductors, S.A.S., among others.

Endwave believes that the principal competitive factors in its industry are:

 

   

Product pricing and the ability to offer low-cost solutions;

 

   

Technical leadership and product performance;

 

   

Strong customer relationships;

 

   

Product breadth;

 

   

Time-to-market in the design and manufacturing of products; and

 

   

Logistical flexibility, manufacturing capability and scalable capacity.

Research and Development

Endwave directs its research efforts towards developing advanced device, circuit and packaging technologies, creating new proprietary circuit designs and integrating these technologies and designs into the semiconductor devices it provides to its customers. Endwave’s product development activities focus on designing products to meet specific customer and market needs and introducing these products to manufacturing.

Endwave’s technical approach emphasizes the following capabilities:

Semiconductor Design Capabilities. Endwave’s ability to design semiconductor devices allows it to optimize and reduce the cost of designs beyond what is possible with standard off-the-shelf semiconductor devices.

Breadth of Expertise. Endwave is experienced in a broad range of technical disciplines and possesses the know-how to design products at multiple levels of integration.

Computer Modeling Capabilities. Endwave’s extensive computer modeling capabilities allow it to create designs quickly and to minimize the number of iterations required to develop specification compliant, cost-effective designs.

Extensive Library of Designs. Endwave’s extensive library of device, circuit and sub-system designs enables it to generate new products and produce prototypes quickly to meet its customers’ time-to-market demands.

Automated Testing Processes. High-frequency RF products require extensive testing after assembly to verify compliance with customer specifications. Endwave uses high speed, custom-designed, automated test sets that

 

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are capable of rapidly testing devices and modules. This increases throughput in the manufacturing process and reduces the skill level required to conduct the tests. Concurrently with the development of these test methods, Endwave develops data analysis and reporting tools to facilitate rapid communication of test data to its customers.

Endwave’s investment in research and development and related engineering projects has resulted in research and development expenses from continuing operations of $6.8 million, $5.5 million and $4.6 million in 2008, 2009 and 2010, respectively.

Patents and Intellectual Property Rights

Endwave’s success depends, in part, on its ability to protect its intellectual property. Endwave relies primarily on a combination of patent, copyright, trademark and trade secret laws to protect its proprietary technologies and processes. As of December 31, 2010, Endwave had 43 United States patents issued, many with associated foreign filings and patents. Endwave’s issued patents include those relating to basic circuit and device designs, semiconductors, MLMS technology and system designs. Endwave’s United States patents expire between 2013 and 2028. Endwave does not anticipate the expiration of patents over the near term to have a significant impact on its research and development or operations. Endwave also licenses technology from other companies, including Northrop Grumman Corporation. There are no limitations on Endwave’s rights to make, use or sell products Endwave may develop in the future using the technology licensed to it by Northrop Grumman Corporation.

Endwave maintains a vigorous technology development program that routinely generates potentially patentable intellectual property. Its decisions as to whether to seek formal patent protection, and the countries in which to seek it, are taken on a patent-by-patent basis and are based on the economic value of the intellectual property, the anticipated strength of the resulting patent, the cost of pursuing the patent and an assessment of using a patent as an implement to protect the underlying intellectual property. With regard to Endwave’s pending patent applications, it is possible that no patents may be issued as a result of these or any future applications or the allowed patent claims may be of reduced value and importance. Further, any existing or future patents may be challenged, invalidated or circumvented thus reducing or eliminating their commercial value.

To protect its intellectual property, Endwave enters into confidentiality and assignment of rights to inventions agreements with its employees, and confidentiality and non-disclosure agreements with its strategic partners, and generally controls access to and distribution of its documentation and other proprietary information. These measures may not be adequate in all cases to safeguard the proprietary technology underlying Endwave’s products. It may be possible for a third party to copy or otherwise obtain and use Endwave’s products or technology without authorization, develop similar technology independently or attempt to design around its patents. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited outside of the United States, Europe and Japan.

Operations

All of Endwave’s manufacturing operations are located in Lamphun, Thailand and utilize the facilities of its contract manufacturing partner, HANA. Under its manufacturing contract, HANA supplies the physical plant, direct labor, basic assembly equipment and warehousing functions. Endwave supplements those activities with its own full-time, in-country staff consisting of 15 people who provide production planning, process engineering, test engineering, product support, design engineering and quality assurance support. Endwave owns certain assets held securely in HANA’s factory, including specialized test and assembly equipment and various raw material and product inventories. Endwave’s arrangement with HANA allows it to reduce its labor and facility expenses while maintaining tight control of process and quality. To reduce its costs further, Endwave has identified lower cost Asian sources for various raw materials, especially basic metal and circuit board components. Endwave’s manufacturing agreement with HANA currently expires in October 2011, but will renew automatically for

 

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successive one-year periods unless either party notifies the other of its desire to terminate the agreement at least one year prior to the expiration of the term. In addition, either party may terminate the agreement without cause upon 365 days prior written notice to the other party, and either party may terminate the agreement if the non-terminating party is in material breach and does not cure the breach within 30 days after notice of the breach is given by the terminating party. There can be no guarantee that HANA will not seek to terminate its agreement with Endwave.

Endwave uses both industry-standard and Endwave-designed semiconductor devices. Endwave obtains industry-standard devices from various suppliers of these parts and contracts with various third-party foundries to produce Endwave’s own designs. Endwave’s use of third-party foundries for custom designed devices gives it the flexibility to use the process technology that is best suited for each application and eliminates the need for Endwave to invest in and maintain its own semiconductor facilities. While the loss of Endwave’s relationship with or Endwave’s access to any of the semiconductor foundries it currently uses, and any resulting delay or reduction in the supply of semiconductor devices to Endwave, would severely impact Endwave’s ability to fulfill customer orders and could damage its relationships with its customers, Endwave estimates that it could shift production to a new foundry within six months. Endwave currently uses the foundry services of Global Communication Semiconductors, Inc., M/A-COM Technology Solutions Inc., Northrop Grumman Space Technology, TriQuint Semiconductors and WIN Semiconductors Corp.

All of the manufacturing facilities Endwave operates or uses worldwide are registered under ISO 9001-2000, an international certification standard of quality for design, development and business practices. Additionally, Endwave is certified under AS-9100 in support of its defense industry market initiatives. Endwave maintains comprehensive quality systems at all of its facilities to ensure compliance with customer specifications, configuration control, documentation control and supplier quality conformance.

Endwave maintains raw materials, work-in-process and finished goods inventory in Thailand at HANA’s plant. In order to maintain and enhance its competitive position, Endwave must be able to satisfy its customers’ short lead-times and rapidly-changing needs. Meeting this requirement necessitates that Endwave maintain significant raw material and finished goods inventories. Maintaining these inventories is costly and requires significant working capital and may increase Endwave’s capital needs in the future.

Backlog

Endwave’s backlog at January 15, 2011 for shipments expected to occur through December 31, 2011 was approximately $8.0 million. By comparison, Endwave’s backlog as of February 19, 2010 for shipments expected to occur through December 31, 2010 was approximately $23.4 million.

Endwave’s order backlog consists of a combination of conventional purchase orders and formal forecasts given to it under annual and multi-year agreements. Typically, the forecast portion of the backlog is the significantly larger amount. The forecasts Endwave receives normally have a firm commitment portion of one to three months in duration that obligate the customer to accept at least some portion of the amount forecasted for that period, with the remainder of the forecast including no such obligation. These forecasts are subject to change on a regular basis and Endwave has experienced significant forecast variations in both unit volumes and product mix. As a result, Endwave does not believe that backlog is a reliable indicator of future revenues.

Governmental Regulation

Government regulations indirectly affect Endwave’s business. The frequencies at which wireless systems transmit and receive data are dictated by government licensing agencies in the location where they are deployed. Unexpected difficulties in obtaining licenses or changes in the operating frequencies allowed can halt or delay microwave radio deployments and therefore halt or delay the need for Endwave’s products. Both national and international regulatory bodies have set stringent standards on the performance of microwave radios, especially

 

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spurious emissions and their potential to cause interference in other systems. Meeting these regulations is technologically challenging and changes in the regulations could require a re-design of Endwave’s products to achieve compliance. Also, on occasion Endwave is required to obtain various export permissions from the U.S. government to ship product to overseas customers.

Executive Officer and Director Compensation

Specified Executive Officer Compensation

The following table provides information regarding all plan and non-plan compensation awarded to, earned by or paid to the Chief Executive Officer and Chief Financial Officer of Endwave for all services rendered in all capacities to Endwave during 2008, 2009 and 2010. Endwave refers to these executive officers as Endwave’s specified executive officers. Mr. Mikulsky and Mr. Sacks are specified in this proxy statement/prospectus because they are expected to serve as a director and as an executive officer, respectively, of GigOptix, upon consummation of the merger.

Summary Compensation Table

 

Name and Principal Position

   Year
(1)
     Salary      Bonus      Stock
Awards (2)
     Non-Equity
Incentive Plan
Compensation
     All Other
Compensation
(3)
     Total
Compensation
 

John J. Mikulsky

     2010       $ 282,000         0       $  267,504       $ 0       $  9,496       $ 559,000   

President and Chief Executive Officer

     2009       $ 282,000         0       $ 130,576       $ 0       $ 2,618       $ 415,194   
     2008       $ 280,385         0       $ 222,316       $ 42,300       $ 7,287       $ 552,288   

Curt P. Sacks

     2010       $ 213,462         0       $ 77,128       $ 0       $ 1,471       $ 292,061   

Senior Vice President and Chief Financial Officer

     2009       $ 199,615         0       $ 112,430       $ 0       $ 9,718       $ 321,763