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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-Q





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|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------




For the quarterly period ended September 30, 2002





OR





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




For the transition period from
 to





000-31635


(Commission file number)





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ENDWAVE CORPORATION


(Exact name of registrant as specified in its charter)





Delaware

95-4333817(State of incorporation)

(I.R.S. Employer Identification No.)990 Almanor Avenue, Sunnyvale, CA

94085(Address of principal executive offices)

(Zip code)





(408) 522-3100


(Registrants telephone number, including area code)





---




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)  Yes  x  No  ̈ , and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  ̈ .





The number of shares outstanding of the Registrants Common Stock as of October 31, 2002 was 8,944,981 shares.





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ENDWAVE CORPORATION





INDEX





PagePART I.

FINANCIAL INFORMATIONItem 1.

Financial Statements

3Condensed Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001

3Unaudited Condensed Statements of Operations for the three and nine months ended September 30, 2002 and 2001

4Unaudited Condensed Statements of Cash Flows for the nine months ended September 30, 2002 and 2001

5Notes to Condensed Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

11Item 3.

Qualitative and Quantitative Disclosures about Market Risk

16Item 4.

Controls and Procedures

16PART II.

OTHER INFORMATIONItem 6.

Exhibits and Reports on Form 8-K

17SIGNATURE

18CERTIFICATION

19EXHIBITS

21




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PART I.    FINANCIAL INFORMATION





Item 1.    Financial Statements





ENDWAVE CORPORATION


CONDENSED BALANCE SHEETS


(In thousands, except share amounts)





September 30, 2002


December 31, 2001(unaudited)


(1)ASSETSCurrent assets:Cash and cash equivalents

$
14,601


$
21,303Short-term investments


17,062



35,860Accounts receivable, net


2,887



2,794Accounts receivable from related partyTRW, Inc.


65



0Inventories


13,704



17,166Other current assets


97



413Total current assets


48,416



77,536Property, plant and equipment, net


13,506



20,366Other assets, net


251



1,135$
62,173


$
99,037LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
661


$
2,807Accounts payable to related partyTRW Inc.


1,817



3,076Accrued liabilities


8,389



8,817Capital lease obligations, current


1,825



2,712Other current liabilities


491



655Total current liabilities


13,183



18,067Capital lease obligations, less current portion


1,068



2,882Other long-term liabilities


198



959Commitments and contingenciesStockholders equity:Common stock, $0.001 par value per share; 100,000,000 authorized, 8,944,981 and 8,904,377 issued and outstanding,
respectively


9



9Additional paid-in capital


304,932



304,815Deferred stock compensation


(3,490
)


(5,516
)Accumulated deficit


(253,665
)


(222,179
)Treasury stock, at cost, 19,950 shares held at September 30, 2002


(62
)


Total stockholders equity


(47,724
)


77,129$
62,173


$
99,037





|(1) |  | Derived from the Companys audited financial statements as of December 31, 2001.
|--- |  | --------------------------------------------------------------------------------




See accompanying notes.




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ENDWAVE CORPORATION


CONDENSED STATEMENTS OF OPERATIONS


(In thousands, except share and per share amounts)


(unaudited)





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001


2002


2001(As restated)





(As restated)Revenues:Product revenues ($104, $0, $710 and $1,259 from related partyTRW Inc., respectively)

$
4,603


$
6,426


$
15,226


$
26,137Development fees


351







351



619Total revenues


4,954



6,426



15,577



26,756Costs and expenses:Cost of product revenues ($30, $0, $208 and $1,632 from related partyTRW Inc., respectively)


9,782



12,148



23,796



49,777Research and development


2,137



3,674



7,901



10,307Selling, general and administrative


2,233



3,082



6,933



9,317Impairment of long-lived assets














90,411Restructuring charge


4,860



868



7,893



6,743Amortization of goodwill and other intangible assets






595







5,872Amortization of deferred stock compensation


(20
)


856



2,026



5,273Total costs and expenses


18,992



21,223



48,549



177,700Loss from operations


(14,038
)


(14,797
)


(32,972
)


(150,944
)Other income, net


97



504



1,485



2,296Net loss

$
(13,941
)

$
(14,293
)

$
(31,487
)

$
(148,648
)Basic and diluted net loss per share

$
(1.56
)

$
(1.62
)

$
(3.53
)

$
(17.06
)Shares used in computing of basic and diluted net loss per share


8,944,981



8,839,575



8,922,995



8,711,511* Amortization of deferred stock compensation:Cost of product revenues

$
(449
)

$
211


$
140


$
1,552Research and development


178



227



792



1,341Selling, general and administrative


251



418



1,094



2,380$
(20
)

$
856


$
2,026


$
5,273





See accompanying notes.




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ENDWAVE CORPORATION


CONDENSED STATEMENTS OF CASH FLOWS


(In thousands)


(unaudited)





Nine Months Ended September 30,2002


2001(As restated)Operating activities:Net loss

$
(31,486
)

$
(148,648
)Adjustments to reconcile net loss to net cash used by operating activities:Depreciation


3,484



5,024Amortization of goodwill and other intangible assets






5,872Amortization of deferred stock compensation


2,026



5,273Loss on the disposal of equipment


12



194Impairment of long-lived assets






90,411Restructuring charge


7,893



6,743Changes in operating assets and liabilities:Accounts receivable, net


(158
)


7,675Inventories


5,618



4,608Other assets


900



(2,764
)Accounts payable


(2,161
)


(2,144
)Accounts payable, related parties


(1,260
)


(3,966
)Accrued liabilities


(4,304
)


2,093Deferred revenues






(503
)Net cash used in operating activities


(19,436
)


(30,132
)Investing activities:Cash paid for the acquisition of businesses


(3,421
)


(4,000
)Purchases of property and equipment


(378
)


(2,404
)Proceeds on sale of property and equipment


381



399Proceeds on sale (purchases) of short-term investments


18,798



(15,118
)Net cash provided by (used in) investing activities


15,380



(21,123
)Financing activities:Principal payments under capital lease obligations


(2,701
)


(1,868
)Purchase of treasury stock


(62
)


Proceeds from stock issuance


112



403Proceeds from exercises of stock options


5



Net cash used in financing activities


(2,646
)


(1,465
)Net decrease in cash and cash equivalents


(6,702
)


(52,720
)Cash and cash equivalents at beginning of period


21,303



74,061Cash and cash equivalents at end of period

$
14,601


$
21,341Supplemental cash flow information:Cash paid for interest

$
410


$
535Supplemental non-cash investing and financing activity:Property and equipment acquired under capital leases

$



$
538





See accompanying notes.




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ENDWAVE CORPORATION


NOTES TO CONDENSED FINANCIAL STATEMENTS


(unaudited)





1.    Unaudited Interim Financial Information





The accompanying unaudited condensed financial statements of Endwave Corporation (the Company) have been prepared
in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation of the results of the interim periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These condensed
financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2001. The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.





All share and per-share amounts have been restated to reflect the 1 for 4 reverse stock split approved by the Board of Directors on June 26, 2002.





The operating results for the three and nine months ended September 30, 2001 have been restated from the amounts previously presented to reflect a reduction in amortization
of deferred stock compensation of $385,000 for the three months ended September 30, 2001 and $934,000 for the nine months ended September 30, 2001. This reduction in amortization is attributable to the reversal of previously recognized compensation
expense from forfeited unvested options, which expense was recorded in error.





The following table presents the
amortization of deferred stock compensation and net loss and net loss per share as it was previously reported in the Companys Form 10-Q for the three and nine months ended September 30, 2001, and as restated (in thousands):





Three Months Ended September 30, 2001


Nine Months Ended September 30, 2001As previously reported


Restated


As previously reported


RestatedAmortization of deferred stock compensation

$
1,241


$
856


$
6,207


$
5,273Net loss

$
(14,678
)

$
(14,293
)

$
(149,582
)

$
(148,648
)Net loss per share

$
(1.66
)

$
(1.62
)

$
(17.17
)

$
(17.06
)





2.    Accounting for the Impairment of Long-Lived Assets





In accordance with Financial Accounting Standards Board (FASB) Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, the Company recorded write-downs on long-lived assets used in operations when events and circumstances indicated that the assets might be
impaired and the net undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. In those circumstances, the amount of the write down was determined based on the difference between the fair value and the
carrying value of the underlying assets.





The Company reviews long-lived assets, including intangible assets, for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds the fair value of the asset. During the first quarter of 2001, the Company determined that impairment indicators were present and therefore
evaluated the carrying value of the goodwill and other intangible assets related to the March 2000 merger of TRW Milliwave and Endgate. The evaluation was based on a cash flow forecast for five years ending March 31, 2006, and discounted at the rate
of 14%, which represented our weighted average cost of capital. As a result of the evaluation, the Company concluded that unamortized goodwill and other intangible assets of $90.4 million were impaired and accordingly, this amount was charged to
operations in the first quarter of 2001.




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3.    Impact of Recently Issued Accounting Standards





In June 2001, FASB issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial
recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No.
142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill included in the
carrying value of equity method investments no longer be amortized.





The Company adopted SFAS No. 142 on January
1, 2002. The following pro forma information reflects the impact on net loss and net loss per share assuming the adoption of SFAS No. 142 had occurred on January 1, 2001 (in thousands):





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001 (Pro forma)


2002


2001 (Pro forma)Reported net loss

$
(13,941
)

$
(14,293
)

$
(31,487
)

$
(148,648
)Amortization of goodwill and intangible assets with indefinite lives






595







5,872Pro forma net loss

$
(13,941
)

$
(13,698
)

$
(31,487
)

$
(142,776
)Basic and diluted net loss per share:Reported net loss

$
(1.56
)

$
(1.62
)

$
(3.53
)

$
(17.06
)Adjustment related to amortization of goodwill and intangible assets with indefinite lives






0.07







0.67Pro forma net loss per share

$
(1.56
)

$
(1.55
)

$
(3.53
)

$
(16.39
)





In October 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASBs new rules on asset impairment supersede SFAS No 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of APB Opinion 30, Reporting the Results of Operations. This standard provides a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair
value and carrying amount. This Standard also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required.





The Company adopted SFAS No. 144 on January 1, 2002. There was no material impact on the Companys financial
position or results of operations as a result of this adoption.





In July 2002, the Financial Accounting Standards
Board issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is incurred as opposed to EITF Issue No. 94-3 that required a liability for an exit cost to be recognized at the date of an entitys commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The principal difference between Statement 146 and Issue 94-3 relates to Statement 146s
requirements for recognition of a liability for a cost associated with an exit or disposal activity. The Company does not expect the adoption of SFAS 146 to have a material impact on its financial position or results of operations.




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4.    Restructuring Charge





On January 29, 2001, the Companys Board of Directors approved a restructuring plan related to the transition of all manufacturing
activities from the Companys Sunnyvale, California facility to its Diamond Springs, California facility. In connection with the transition, 170 of the Companys employees were terminated, and the Company provided severance payments and
benefits to these employees commensurate with their positions. All severance and benefit payments were completed by December 31, 2001.





In the first quarter of 2001, the Company recorded restructuring costs of $3.7 million in conjunction with the restructuring plan. These costs related primarily to severance and benefits of $400,000 and non-cash costs of
$3.3 million for impairment of fixed assets. In addition, the Company recognized a $9.4 million charge for excess and obsolete inventory related primarily to inventory for the point-to-multipoint market that the Company decided to exit. The
inventory charge was recorded as a cost of product revenues in the Companys statement of operations.





An
additional restructuring charge of $1.5 million primarily related to retention bonuses and benefits and $1.6 million for excess leased facilities in Sunnyvale, California was recognized in the last three quarters of 2001. Also in the fourth quarter,
the Company reached an agreement to settle its claims in relation to the inventory it had acquired to fulfill sales orders with one of the Companys point-to-multipoint customers that was charged to earnings in the first quarter. This
settlement resulted in a $2.6 million benefit that was recorded as a reduction to cost of product revenues in the Companys statement of operations.





As a result of a continued decline in overall economic conditions and further reductions in capital spending by telecommunications service providers, on February 28, 2002, the Company announced an
additional restructuring plan designed to reduce operating expenses in order to further align resources with long-term growth opportunities. This plan, implemented in the second quarter, included the elimination of 107 positions, consolidation of
excess facilities and charges related to excess property and equipment.





During the first quarter of 2002, a
restructuring charge of $3.0 million was taken, the components of which were $1.1 million for severance payments, $310,000 for lease cancellations and non cash payments of $2.1 million for excess equipment, offset by $490,000 resulting from
settlement of lease obligations. The Company settled its obligation for vacated leased space in Sunnyvale, California. During the nine months ended September 30, 2002, 107 positions were eliminated and cash payments of $958,000 were made under this
first quarter plan. The distribution of the 107 positions that were eliminated were, 67 in operations, 33 in engineering and 7 in sales, general and administration. The majority of the severance benefits reserve balance of $201,000 is anticipated to
be paid in the fourth quarter of 2002. Below is a table summarizing activity relating to the first quarter of 2002 plan (in thousands):





Severance Benefits


Lease Cancellations and
Other Exit CostsBalance at December 31, 2001

$



$
1,141Settlement of contractual obligations:Cash payments






(651
)Adjustment






(490
)Q1 2002 restructuring reserve


1,159



310Cash payments


(11
)


Balance at March 31, 2002


1,148



310Cash payments


(650
)


(19
)Balance at June 30, 2002


498



291Cash payments


(297
)


(19
)Balance at September 30, 2002

$
201


$
272Current

$
201


$
74Noncurrent






198$
201


$
272




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During the third quarter of 2002, a restructuring charge of $4.9 million was
taken, the components of which were $1.8 million for severance payments, and for a non-cash charge of $3.1 million for excess equipment. During the third quarter, 102 positions were eliminated and cash payments of $ 353,000 were made under the plan.
The distribution of the 102 positions that were eliminated were, 77 in operations, 14 in engineering and 11 in sales, general and administration. The plan will be executed by the end of 2002, and severance payments will be substantially complete by
the end of 2003.





Below is a table summarizing the activity relating to the third quarter of 2002 plan (in
thousands):





Severance BenefitsBalance at June 30, 2002

$
Q3 2002 restructuring reserve


1,750Cash payment


(353
)Balance at September 30, 2002

$
1,397Current

$
1,333Noncurrent


64$
1,397





5.    Inventories





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





September 30, 2002

December 31, 2001Raw materials

$
11,236

$
11,747Work in process


2,006


1,459Finished goods


462


3,960$
13,704

$
17,166





6.    Property, plant and equipment





Property, plant and equipment consists of the following (in thousands):





September 30, 2002


December 31, 2001Land

$
391


$
391Building


3,894



3,903Software


325



1,170Leasehold improvements


180



158Machinery and equipment


14,958



24,39319,748



30,015Less accumulated depreciation and amortization (including amortization of assets held under capital lease)


(6,242
)


(9,649
)Property, plant and equipment, net

$
13,506


$
20,366




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7.    Net Loss Per Share





Basic net loss per share is computed by dividing the net loss applicable to common stockholders for the period by the weighted average
number of shares of common stock outstanding during the period.





Common equivalent shares from the assumed
exercise of stock options, warrants and convertible securities have been excluded from the net loss per share calculations as their effect would be anti-dilutive due to the Companys reported net loss.





8.    Comprehensive Income (Loss)





The Company had no items of other comprehensive income (loss) during the three and nine months ended September 30, 2002 and 2001, and accordingly, comprehensive income (loss) is the same as the net
loss.





9.    Segment Disclosures





The Company operates in a single segment. The Companys product sales by geographic location for the three and nine months ended September 30, 2002 and 2001 were as
follows (in thousands and as a percentage of net sales):





Three Months Ended September 30,2002


2001United States

$
1,334

26.9
%

$
1,541

24.0
%Finland


3,523

71.1



4,818

75.0Other


97

2.0



67

1.0Total

$
4,954

100.0
%

$
6,426

100.0
%Nine Months Ended September 30,2002


2001United States

$
4,264

27.4
%

$
8,205

31.4
%Finland


11,002

70.6



16,425

62.8Other


311

2.0



1,507

5.8Total

$
15,577

100.0
%

$
26,137

100.0
%





For the three months ended September 30, 2002, Nokia and Lockheed
Martin accounted for 71% and 10% of total sales listed above, respectively, and for the nine months ended September 30, 2002, Nokia accounted for 71% of total sales listed above. Nokia, located in Finland, was the only customer in Finland in 2002
and 2001. No other customer accounted for more than 10% of the Companys revenues in the aggregate or in the three geographical areas listed above.





10.    Treasury Stock





In January 2002, we announced a plan to
repurchase up to an aggregate of 750,000 shares of the companys common stock. The repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. During the nine months
ended September 30, 2002, the Company repurchased 19,950 shares of the outstanding common stock for approximately $62,000. Treasury stock is carried at cost in the condensed balance sheets.





11.    Stock Option Exchange Offer





On April 26, 2002, upon completion of a stock option exchange offer, the Company issued options to purchase 493,323 shares of Common Stock with an exercise price of $3.20 per share to active employees who participated in the program.
The new options vest over three years, with 25% of the options vesting on the date of grant and the remaining 75% vesting quarterly, thereafter subject to forfeiture in the event the employee leaves the Company.





12.    Purchase of Assets from Signal Technology Corporation





On September 24, 2002, we acquired the assets of the Fixed Wireless division of Signal Technology Corporation for $3.6 million, comprised of cash of $3.4 million and
accrued expenses of $200,000. The assets acquired were inventory, equipment, product designs and related intellectual property, and customer contracts. In addition, we hired 13 former employees of Signal Technology Corporation to support the ongoing
business with existing customers.




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Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations





Managements Discussion and Analysis of Financial Condition and Results of Operations contained in this report on Form 10-Q contains forward-looking statements that involve risks and
uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. The following discussion should be read together with our financial statements and notes to those financial statements included
elsewhere in this Form 10-Q. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could
differ materially from those described in our forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to
fluctuate in the future.





The following discussion should be read together with our financial statements, and
notes to those financial statements included elsewhere in this Form 10-Q, as well as the information contained under Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the
notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2001.





The rapid and severe
downturn for the United States economy and the telecommunications industry beginning in late 2000 has reduced the demand for our customers products and by extension our products. In addition to the weak domestic economic environment, the
worldwide telecommunications market is experiencing reduced demand. This decreased demand has led to fluctuating order forecasts from many of our customers. There can be no certainty as to the degree of the severity or duration of this economic
downturn or the decline in the telecommunications industry. We also cannot predict the extent and timing, if any, of the impact of the economic downturn in the United States and the worldwide downturn for the telecommunications industry on economies
in Canada, Europe, Asia and other countries and geographic regions.





We depend, and expect to remain dependent, on
a small number of wireless systems integrators, original equipment manufacturers, and major government contractors for sales of our products. For the three months ended September 30, 2002, sales attributable to Nokia and Lockheed Martin accounted
for 71% and 10%, respectively, of our net sales during the period. For the nine months ended September 30, 2002, sales attributable to Nokia accounted for 71% of our net sales during the period.





In January 2002, we announced a plan to repurchase up to an aggregate of 750,000 shares of our stock. The repurchases will be made from time to time on the open market
at prevailing market prices or in negotiated transactions off the market. During the first quarter of 2002, we repurchased 17,125 shares for approximately $54,000 and repurchased 2,825 shares for approximately $7,700 in the second quarter of 2002
under this repurchase program. There were no repurchases of shares during the third quarter of 2002.





In March
2002, we executed a renewal to our master supply agreement with TRW through December 31, 2005. This renewal expands the Companys access to TRWs custom wafer processing services, state-of-the-art gallium arsenide technologies, products
operating at lower frequency bands for wireless infrastructure applications, and indium phosphide products for advanced applications and includes guaranteed pricing and purchase commitments.





During the first quarter of 2002, we commenced the implementation of an on-site inventory management location with Nokia. This program provides storage of Endwave products
at Nokias factory and allows Nokia to draw against this inventory based on their manufacturing needs. Revenue is recognized as Nokia draws the inventory from this stocking location. The inventory program was operational during the second
quarter of 2002.





On June 26, 2002, the Board of Directors approved a 1 for 4 reverse stock split of our common
stock. All share numbers have been adjusted to reflect the reverse stock split, for all periods presented.





In
June 2002, we announced that we had entered into a contract with Lockheed Martin Missiles and Fire Control Company to design the RF Receiver unit for the Comanche Radar system used in the Boeing RAH-66 Comanche Helicopter. The contract with Lockheed
Martin, a primary sub-contractor to The Boeing Company for the Comanche Radar program, calls for us to design the Radar RF Receiver unit, and to manufacture and deliver prototype and evaluation units that will be used in qualification trials within
the complete radar system.




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On September 24, 2002, we acquired the assets of the Fixed Wireless division of
Signal Technology Corporation for $3.6 million, comprised of cash of $3.4 million and accrued expenses of $200,000. The assets acquired were inventory, equipment, product designs and related intellectual property, and customer contracts. In
addition, we hired 13 former employees of Signal Technology Corporation to support the ongoing business with existing customers.





Critical Accounting Policies





For a discussion of our critical accounting policies, see our
Annual Report on Form 10-K for the year ended December 31, 2001.





Results of Operations





Three months ended September 30, 2002 and 2001 and nine months ended September 30, 2002 and 2001





Revenues





Product revenues.    Product revenues were $4.6 million for the three months ended September 30, 2002, a 28% decrease from $6.4 million for the same period in 2001. Product revenues were $15.2
million for the nine months ended September 30, 2002, a 42% decrease from $26.1 million for the same period in 2001. The decrease in product revenues for both the three and nine months ended September 30, 2002 primarily reflects the overall
slow-down in the global telecommunications industry. More specifically, there was a decrease in the number of transceiver products sold to Nokia and other customers for three and nine months ended September 30, 2002 as compared to the same periods
in 2001.





Development fees.    Development fees are generated by developing product
prototypes and custom products pursuant to development agreements that provide for payment of a portion of our research and development or other expenses. Development fees were $351,000 and $0 for the three months ended September 30, 2002 and
September 30, 2001, respectively. The increase was attributable to development fees paid by Lockheed Martin for a portion of the costs associated with the design of the Comanche Radar System. Development fees for the nine months ended September 30,
2002 and September 30, 2001, were $351,000 and $619,000, respectively. The decrease in development fees is attributable to fewer new development programs in 2002, as a result of the overall downturn in the telecommunications industry. We do not
expect development fees to be a significant portion of our revenues in the near future.





Costs and Expenses





Cost of product revenues.    Cost of product revenues consists primarily of
the costs of direct materials and labor utilized to assemble and test our products, costs associated with procurement, production control, quality assurance and manufacturing engineering, maintenance of our manufacturing facilities, transition to
offshore manufacturing vendors, building and equipment depreciation, and costs associated with warranty returns. Cost of product revenues for the three months ended September 30, 2002 was $9.8 million, a 19% decrease from $12.1 million for the same
period in 2001. Cost of product revenues for the three and nine months ended September 30, 2002, included a $3.1 million charge for excess and obsolete inventory taken in the third quarter after reviewing then-current inventory against the projected
future demand for these components. Cost of product revenues for the nine months ended September 30, 2002 was $23.8 million, a 52% decrease from $49.8 million for the same period in 2001. Cost of product revenues for the nine months ended September
30, 2001 included a charge of $10.0 million for excess and obsolete inventory associated with a decline in demand of customers in the point-to-multipoint market. The decrease in cost of product revenues for both the three and nine months ended
September 30, 2002 correlate to the decrease in product revenues and associated cost reduction efforts, including the benefits of cost reduced designs and elimination of excess manufacturing capacity. We expect cost of product revenues as a
percentage of sales to continue to decrease in the coming quarter as we introduce cost reduced designs into production, and move a significant portion of our manufacturing activities to an offshore vendor.




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Research and development expenses.    Research and
development expenses primarily include the costs of engineering personnel, outside services, prototyping materials and equipment depreciation. Research and development expenses for the three months ended September 30, 2002 were $2.1 million, a 43%
decrease from $3.7 million for the same period in 2001. Research and development expenses for the nine months ended September 30, 2002 were $7.9 million, a decrease of 23% from $10.3 million for the same period in 2001.The decrease for both
the three and nine months ended September 30, 2002 was primarily attributable to cost containment efforts, work force reductions, and fewer development programs for technology and products. We expect research and development expenses to decrease in
the next quarter as our restructuring plans continue to be implemented.





Selling, general and administrative
expenses.    Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales, marketing, finance, accounting, information technology, facilities and human resources
personnel, professional fees and promotional activities. Selling, general and administrative expenses for the three months ended September 30, 2002 were $2.2 million, a 29% decrease from $3.1 million for the same period in 2001. Selling,
general and administrative expenditures for the nine months ended September 30, 2002 were $6.9 million, a 26% decrease from $9.3 million for the same period in 2001. The decrease for both the three and nine month periods ended September 30, 2002 was
primarily attributable to cost reduction efforts and reduced staffing in each of the functional areas. We expect selling, general and administrative expenses to decrease in the next quarter as our restructuring plans continue to be implemented.





Impairment of long-lived assets.    During the first quarter of 2001, we evaluated the
carrying value of the goodwill and other intangible assets acquired in business combinations that were recorded using the purchase method of accounting. As a result, we determined that the unamortized goodwill and other intangible assets remaining
of $90.4 million were impaired and this same amount was charged to operations in the first quarter of 2001. There have been no other impairment charges taken in periods presented.





Restructuring charge.    As a result of a continued decline in overall economic conditions and further reductions in capital spending by
telecommunications service providers, on February 28, 2002, the Company announced a restructuring plan, designed to reduce operating expenses in order to align resources with long-term growth opportunities. This plan included the reduction of 107
positions, consolidation of excess facilities and charges related to excess property and equipment. As a result, a restructuring charge of approximately $3.0 million was recorded in the first quarter of 2002, the components of which were $1.1
million for severance payments, $310,000 for lease cancellations and $2.1 million for excess equipment offset by $490,000 resulting from settlement of lease obligations.





During the first quarter of 2002, a restructuring charge of $3.0 million was taken, the components of which were $1.1 million for severance payments, $310,000 for lease
cancellations and non cash payments of $2.1 million for excess equipment, offset by $490,000 resulting from settlement of lease obligations. The Company settled its obligation for vacated leased space in Sunnyvale, California. During the nine months
ended September 30, 2002, 107 positions were eliminated and cash payments of $958,000 were made under this first quarter plan. The distribution of the 107 positions that were eliminated were, 67 in operations, 33 in engineering and 7 in sales,
general and administration. The majority of the severance benefits reserve balance of $201,000 is anticipated to be paid in the fourth quarter of 2002.





During the third quarter of 2002, a restructuring charge of $4.9 million was taken, the components of which were $1.8 million for severance payments, and for a non-cash charge of $3.1 million for
excess equipment. During the third quarter, 102 positions were eliminated and cash payments of $ 353,000 were made under the plan. The distribution of the 102 positions that were eliminated were, 77 in operations, 14 in engineering and 11 in sales,
general and administration. The plan will be executed by the end of 2002, and severance payments will be substantially complete by the end of 2003.





Amortization of intangible assets.    The March 2000 merger between TRW Milliwave and Endgate was recorded using the purchase method of accounting. In connection with the
purchase, we recorded goodwill of $80.2 million and other intangible assets of $23.6 million. Amortization of intangibles for the three and nine months ended September 30, 2001 was $595,000 and $5.9 million, respectively. There was no amortization
of intangible assets for the three and nine months ended September 30, 2002 due to the impairment determination described above.




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Amortization of deferred stock
compensation.    Deferred stock compensation charges consist of charges related to the difference between deemed fair market values on the date of employee option grants and the option price. Amortization of deferred stock
compensation for the three months ended September 30, 2002 was a benefit of $20,000 and a charge of $856,000 for the same period in 2001. Amortization of deferred stock compensation for the nine months ended September 30, 2002 was $2.0 million and
$5.3 million for the same period in 2001. The decrease is primarily due to using an accelerated method to amortize deferred stock compensation that results in higher expense in earlier periods and the forfeiture of options by terminated employees.
Amortization of deferred stock compensation will continue to decline each quarter, until it is fully amortized in June 2004.





Other income, net





Net interest income consists primarily of interest income earned
on our cash, cash equivalents and short-term investments offset by interest expense on capital equipment leases. Interest income for the three months ended September 30, 2002 was $200,000, a 68% decrease from $629,000 for the same period in 2001.
Interest income for the nine months ended September 30, 2002 was $804,000, a 72% decrease from $2.9 million for the same period in 2001. The decrease in interest income for both the three and nine month comparable periods was primarily attributable
to lower interest rates, lower average invested cash balances and lower yields on interest-bearing investments. Interest expense represented interest on capital leases. Interest expense decreased to $100,000 for the three months ended September 30,
2002, from $143,000 for the three months ended September 30, 2001 as a result of a decreased number of capital equipment leases. For the nine months ended September 30, 2002, interest expense decreased to $410,000 from $535,000 for the same period
in 2001 as a result of a decreased number of capital equipment leases. Other income included $1.2 million from the gain on contract termination offset by cost of $66,000 for capital lease termination.





Recent Accounting Pronouncements





In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that
these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill included in the carrying value of
equity method investments no longer be amortized. The Company adopted SFAS No. 142 on January 1, 2002. There was no material impact on the Companys financial position or results of operations as a result of adoption.





The Company adopted SFAS No. 142 on January 1, 2002. The following pro forma information reflects the impact on net loss and net loss per
share assuming the adoption of SFAS No. 142 had occurred on January 1, 2001 (in thousands):





Three Months Ended September 30,


Nine Months Ended September 30,2002


2001 (Pro forma)


2002


2001 (Pro forma)Reported net loss

$
(13,941
)

$
(14,293
)

$
(31,487
)

$
(148,647
)Amortization of goodwill and intangible assets with indefinite lives






595







5,872Pro forma net loss

$
(13,941
)

$
(13,698
)

$
(31,487
)

$
(142,775
)Basic and diluted net loss per share:Reported net loss

$
(1.56
)

$
(1.62
)

$
(3.53
)

$
(17.06
)Adjustment related to amortization of goodwill and intangible assets with indefinite lives






0.07







0.67Pro forma net loss per share

$
(1.56
)

$
(1.55
)

$
(3.53
)

$
(16.39
)




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In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASBs new rules on asset impairment supersede FASB Statement 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and portions of APB Opinion 30, Reporting the Results of Operations. This standard provides a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair
value and carrying amount. This Standard also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required.





The Company adopted SFAS No. 144 on January 1, 2002. There was no material impact on the Companys financial
position or results of operations as a result of this adoption.





In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred as opposed to EITF Issue No. 94-3 that required a liability for an exit cost to be recognized at the date of an entitys commitment to an exit plan. The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early application encouraged. The principal difference between SFAS No. 146 and Issue 94-3 relates to SFAS No. 146s requirements for recognition of a liability for a cost
associated with an exit or disposal activity. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its financial position or results of operations.





Liquidity and Capital Resources





Our principal source of
liquidity as of September 30, 2002 consisted of approximately $31.7 million in cash, cash equivalents and short-term investments. In the nine months ended September 30, 2002, we used $19.4 million for operating activities, as compared to $30.1
million for the same period in 2001. The decrease in the use of cash in operations was primarily due to a decreased operating loss resulting from cost reduction efforts, including a 72% reduction in workforce from January 1, 2001.





Investing activities provided $15.4 million of cash in the nine months ended September 30, 2002, as compared to using $21.1
million in the same period in 2001. Cash provided by investing activities in the nine months ended September 30, 2002 was due primarily to proceeds from sales of short-term investments of $18.8 million, and the proceeds from the sale of
manufacturing equipment of $381,000, offset by the purchase of assets from Signal Technology Corporation for $3.4 million and the purchase of manufacturing equipment, building improvements and computer software for $378,000. Of the $21.1 million
used in investing activities in the nine months ended September 30, 2001, $4.0 million was associated with the acquisition of assets used in M/A-Com Tech, Inc.s broadband wireless business, $15.1 million was for the purchase of short-term
investments and $2.4 million for capital equipment, partially offset by $399,000 in proceeds from the sale of equipment.





Financing activities in the nine months ended September 30, 2002 used $2.6 million of cash, as compared to $1.5 million in cash in the same period in 2001. The net cash used in financing activities for the nine months ended September
30, 2002, consisted primarily of payments under capital lease obligations of $2.7 million and the repurchase of 19,950 shares of the Companys common stock for approximately $62,000, offset by $117,000 in proceeds from the exercise of employee
stock options and shares purchased under the employee stock purchase plan. Financing activities in the nine months ended September 30, 2001, included $403,000 in proceeds from the exercise of employee stock options and shares purchased under the
employee stock purchase plan, and payments under capital lease obligations of $1.9 million.





We believe that our
existing cash and investment balances and anticipated cash flows from operations will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, we could be required, or could elect, to raise additional
funds during that period and we may need to raise additional capital in the future. Additional capital may not be available at all, or may only be available on terms unfavorable to us.




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Item 3.    Qualitative and Quantitative Disclosures about Market Risk





We believe that there have been no material changes in our market risks as discussed in our annual report on Form 10-K for the year ended December 31, 2001 under the heading corresponding to that set forth above. Our exposure to
market risk is limited to interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, as our investments in cash equivalents include investment grade commercial paper and government securities. We place our
investments with high-quality issuers and attempt to limit when possible the amount of credit exposure to any one issuer. Due to the nature of our short-term investments, we do not believe we are subject to any material market risk exposure. We do
not have any material equity investments, or foreign currency or other derivative financial instruments.





Item 4.    Controls and Procedures





Based on their evaluation as of a
date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Companys chief executive officer and chief financial officer have concluded that the Companys disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.





There were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies
or material weaknesses, and therefore there were no corrective actions taken.




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PART II.    OTHER INFORMATION





Item 6.    Exhibits and Reports on Form 8-K





(a)    Exhibits.





10.27

Extension of the Validity of the Purchase Agreement, dated September 9, 2002, between Endwave Corporation and Nokia Corporation.99.1

Certification by Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.99.2

Certification by Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.





(b)    Reports on Form 8-K





The company did not file a report on Form 8-K during the quarter ended September 30, 2002.




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##### Table of Contents




SIGNATURE





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





ENDWAVE CORPORATIONDate:    November 14, 2002



By:

/s/    Julianne M. BiaginiJulianne M. Biagini Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)




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##### Table of Contents




CERTIFICATION





I, Edward A. Keible, certify that:





|1. |  | I have reviewed this quarterly report on Form 10-Q of Endwave Corporation;
|-- |  | --------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date:    November 14, 2002








/s/    EDWARD A. KEIBLE, JR.


Edward A. Keible, Jr.


President and Chief Executive
Officer


(Principal Executive Officer)




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##### Table of Contents




CERTIFICATION





I, Julianne M. Biagini, certify that:





|1. |  | I have reviewed this quarterly report on Form 10-Q of Endwave Corporation;
|-- |  | --------------------------------------------------------------------------




|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




|6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date:    November 14, 2002








/s/    JULIANNE M. BIAGINI


Julianne M. Biagini


Senior Vice President and Chief
Financial Officer


(Principal Financial and Accounting Officer)




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Index of Exhibits and Reports on Form 8-K





(a)    Exhibits.





10.27

Extension of the Validity of the Purchase Agreement, dated September 9, 2002, between Endwave Corporation and Nokia Corporation.99.1

Certification by Chief Executive Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.99.2

Certification by Chief Financial Officer pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002.




21