UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| /x/QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 2008. | |
| Or | |
/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________. | |
| Commission File No. 0-25662 | |
| ANADIGICS, Inc. | |
| (Exact name of registrant as specified in its charter) | |
| Delaware | 22-2582106 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 141 Mt. Bethel Road, Warren, New Jersey | 07059 |
| (Address of principal executive offices) | (Zip Code) |
| (908) 668-5000 | |
| (Registrant's telephone number, including area code) | |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of shares outstanding of the Registrant’s common stock as of September 27, 2008 was 63,126,124 (excluding 113,761 shares held in treasury).
INDEX
ANADIGICS, Inc.
| PART I | Financial Information |
| Item 1. | Financial Statements (unaudited) |
| Condensed consolidated balance sheets – September 27, 2008 and December 31, 2007 | |
| Condensed consolidated statements of operations and comprehensive (loss) income – Three and nine months ended September 27, 2008 and September 29, 2007 | |
| Condensed consolidated statements of cash flows – Nine months ended September 27, 2008 and September 29, 2007 | |
| Notes to condensed consolidated financial statements – September 27, 2008 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
| Item 4. | Controls and Procedures |
| PART II. | Other Information |
| Item 1. | Legal Proceedings |
| Item 6. | Exhibits |
| Signatures |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ANADIGICS, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| September 27, 2008 | December 31, 2007 | |||||||
| (Unaudited) | (Note 1) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 130,102 | $ | 57,786 | ||||
| Marketable securities | 9,110 | 103,778 | ||||||
| Accounts receivable, net | 36,525 | 45,664 | ||||||
| Inventories | 34,432 | 23,989 | ||||||
| Prepaid expenses and other current assets | 3,826 | 3,277 | ||||||
| Total current assets | 213,995 | 234,494 | ||||||
| Marketable securities | 13,029 | 15,248 | ||||||
| Plant and equipment: | ||||||||
| Equipment and furniture | 198,889 | 165,333 | ||||||
| Leasehold improvements | 40,440 | 38,638 | ||||||
| Projects in process | 28,070 | 23,180 | ||||||
| 267,399 | 227,151 | |||||||
| Less accumulated depreciation and amortization | (160,730 | ) | (151,022 | ) | ||||
| 106,669 | 76,129 | |||||||
| Goodwill and other intangibles, net of amortization | 6,330 | 6,524 | ||||||
| Other assets | 763 | 1,066 | ||||||
| Total assets | $ | 340,786 | $ | 333,461 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 23,228 | $ | 34,184 | ||||
| Accrued liabilities | 13,716 | 7,928 | ||||||
| Total current liabilities | 36,944 | 42,112 | ||||||
| Other long-term liabilities | 3,161 | 3,243 | ||||||
| Long-term debt, less current portion | 38,000 | 38,000 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.01 par value, 144,000 shares authorized, 63,256 and 61,292 issued at September 27, 2008 and December 31, 2007 | 632 | 613 | ||||||
| Additional paid-in capital | 559,793 | 541,940 | ||||||
| Accumulated deficit | (297,586 | ) | (292,095 | ) | ||||
| Accumulated other comprehensive income (loss) | 100 | (94 | ) | |||||
| Treasury stock at cost: 114 shares | (258 | ) | (258 | ) | ||||
| Total stockholders’ equity | 262,681 | 250,106 | ||||||
| Total liabilities and stockholders’ equity | $ | 340,786 | $ | 333,461 | ||||
| See accompanying notes. |
ANADIGICS, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| Three months ended | Nine months ended | |||||||||||||||
| September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
| Net sales | $ | 58,065 | $ | 59,545 | $ | 212,927 | $ | 162,987 | ||||||||
| Cost of sales | 44,790 | 39,387 | 143,127 | 107,637 | ||||||||||||
| Gross profit | 13,275 | 20,158 | 69,800 | 55,350 | ||||||||||||
| Research and development expenses | 12,931 | 12,491 | 42,059 | 33,309 | ||||||||||||
| Selling and administrative expenses | 14,576 | 7,221 | 32,897 | 22,062 | ||||||||||||
| Operating (loss) income | (14,232 | ) | 446 | (5,156 | ) | (21 | ) | |||||||||
| Interest income | 978 | 2,338 | 4,197 | 5,776 | ||||||||||||
| Interest expense | (592 | ) | (592 | ) | (1,774 | ) | (1,872 | ) | ||||||||
| Other (expense) income, net | (1,622 | ) | 173 | (2,758 | ) | 173 | ||||||||||
| (Loss) income from continuing operations | (15,468 | ) | 2,365 | (5,491 | ) | 4,056 | ||||||||||
| Loss from discontinued operations | - | - | - | (965 | ) | |||||||||||
| Net (loss) income | $ | (15,468 | ) | $ | 2,365 | $ | (5,491 | ) | $ | 3,091 | ||||||
| Basic (loss) earnings per share | ||||||||||||||||
| (Loss) income from continuing operations | $ | (0.26 | ) | $ | 0.04 | $ | (0.09 | ) | $ | 0.08 | ||||||
| Loss from discontinued operations | - | - | - | $ | (0.02 | ) | ||||||||||
| Net (loss) income | $ | (0.26 | ) | $ | 0.04 | $ | (0.09 | ) | $ | 0.06 | ||||||
| Diluted (loss) earnings per share | ||||||||||||||||
| (Loss) income from continuing operations | $ | (0.26 | ) | $ | 0.04 | $ | (0.09 | ) | $ | 0.07 | ||||||
| Loss from discontinued operations | - | - | - | $ | (0.02 | ) | ||||||||||
| Net (loss) income | $ | (0.26 | ) | $ | 0.04 | $ | (0.09 | ) | $ | 0.05 | ||||||
| Weighted average common shares outstanding used in computing (loss) earnings per share | ||||||||||||||||
| Basic | 60,509 | 57,505 | 59,949 | 54,114 | ||||||||||||
| Diluted | 60,509 | 60,648 | 59,949 | 57,403 | ||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS)
| Three months ended | Nine months ended | |||||||||||||||
| September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
| Net (loss) income | $ | (15,468 | ) | $ | 2,365 | $ | (5,491 | ) | $ | 3,091 | ||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Unrealized (loss) income on marketable securities | (86 | ) | 93 | (1,410 | ) | 51 | ||||||||||
| Foreign currency translation adjustment | (8 | ) | 25 | 170 | 23 | |||||||||||
| Reclassification adjustment: | ||||||||||||||||
| Net realized loss previously recognized in other comprehensive (loss) income | - | - | 1,434 | 9 | ||||||||||||
| Comprehensive (loss) income | $ | (15,562 | ) | $ | 2,483 | $ | (5,297 | ) | $ | 3,174 | ||||||
| See accompanying notes. |
| ANADIGICS, Inc. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS)
| Nine months ended | ||||||||
| September 27, 2008 | September 29, 2007 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | (5,491 | ) | $ | 3,091 | |||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Loss from discontinued operations | - | 965 | ||||||
| Depreciation | 11,612 | 6,655 | ||||||
| Amortization | 543 | 555 | ||||||
| Stock based compensation | 15,271 | 11,273 | ||||||
| Amortization of discount on marketable securities | (98 | ) | (365 | ) | ||||
| Recognized marketable securities impairment and other | 3,061 | 9 | ||||||
| Gain on disposal of equipment | (295 | ) | - | |||||
| Equipment impairment charge | 849 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 9,139 | (13,367 | ) | |||||
| Inventories | (10,443 | ) | (352 | ) | ||||
| Prepaid expenses and other assets | (595 | ) | (3,866 | ) | ||||
| Accounts payable | (6,439 | ) | 5,816 | |||||
| Accrued liabilities and other liabilities | 5,876 | 752 | ||||||
| Net cash provided by operating activities | 22,990 | 11,166 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchases of plant and equipment | (47,432 | ) | (24,089 | ) | ||||
| Proceeds from sale of equipment | 209 | - | ||||||
| Purchase of RF group assets | - | (2,415 | ) | |||||
| Purchases of marketable securities | (15,410 | ) | (196,358 | ) | ||||
| Proceeds from sale of marketable securities | 109,358 | 133,762 | ||||||
| Net cash provided by (used in) investing activities | 46,725 | (89,100 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment of capital lease obligations | - | (1,775 | ) | |||||
| Issuance of common stock | 2,601 | 109,597 | ||||||
| Net cash provided by financing activities | 2,601 | 107,822 | ||||||
| Net increase in cash and cash equivalents | 72,316 | 29,888 | ||||||
| Cash and cash equivalents at beginning of period | 57,786 | 13,706 | ||||||
| Cash and cash equivalents at end of period | $ | 130,102 | $ | 43,594 | ||||
| See accompanying notes. |
ANADIGICS, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – SEPTEMBER 27, 2008
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals and adjustments) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 27, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.
The condensed consolidated balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (FAS 157) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FSP FAS 157-2 “Partial Deferral of the Effective Date of Statement 157” (FSP 157-2). FSP 157-2 delays the effective date of FAS 157 for non-financial assets and liabilities that are not measured or disclosed on a recurring basis to fiscal years beginning after November 15, 2008. The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial statements for financial assets and liabilities and any other assets and liabilities carried at fair value. The Company is currently in the process of evaluating the impact of adopting this pronouncement for other non-financial assets or liabilities.
FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). FAS 157 classifies the inputs used to measure fair value into the following hierarchy:
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability |
| Level 3 | Unobservable inputs for the asset or liability |
The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
In October 2008, the FASB issued FSP 157-3 “Determining Fair Value of a Financial Asset in a Market That Is Not Active” (FSP 157-3). FSP 157-3 clarified the application of FAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued.
In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159), which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS 159 is effective for fiscal years beginning after November 15, 2007. As of January 1, 2008, the Company adopted FAS 159. Since the Company has not utilized the fair value option for any allowable items, the adoption of FAS 159 had no impact on the Company’s results of operations or financial position.
In June 2007, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3) that would require nonrefundable advance payments made by the Company for future R&D activities to be capitalized and recognized as an expense as the goods or services are received by the Company. EITF 07-3 is effective with respect to new arrangements entered into beginning January 1, 2008. The Company adopted EITF 07-3, which did not have a material impact on its consolidated financial statements.
In December 2007, the FASB issued FASB Statement No. 141R, “Business Combinations” (FAS 141R), which changes how business acquisitions are accounted. FAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. FAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company has not yet determined the impact FAS 141R may have on its results of operations or financial position.
In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (FAS 160), which establishes new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decrease in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. FAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. The Company has not yet determined the impact FAS 160 may have on its results of operations or financial position.
In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (FAS 161). FAS 161 applies to all derivative instruments and related hedged items accounted for under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". FAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. FAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company has not yet determined the impact FAS 161 may have on its results of operations or financial position.
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets”, (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company has not yet determined the impact FSP 142-3 may have on its results of operations or financial position.
In May 2008, the FASB issued FSP Accounting Principles Board 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP APB 14-1). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company has not yet determined the impact FSP APB 14-1 may have on its results of operations or financial position.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 clarified that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company has not yet determined the impact FSP EITF 03-6-1 may have on its results of operations or financial position.
INCOME TAXES
The Company maintains a full valuation allowance on its deferred tax assets. Accordingly, the Company has not recorded a benefit or provision for income taxes. We recognize interest and penalties related to the underpayment of income taxes in income tax expense. At January 1, 2007, the Company had no unrecognized tax benefits. No unrecognized tax benefits, interest or penalties were accrued at September 27, 2008. The Company’s U.S. federal net operating losses have occurred since 1998 and as such, tax years subject to potential tax examination could apply from that date because carrying-back net operating loss opens the relevant year to audit.
WARRANTY
Based on the examination of historical returns and other information it deems critical, the Company estimates that a current charge to income will need to be provided in order to cover future warranty obligations for products sold during the year. The accrued liability for warranty costs is included in Accrued liabilities in the condensed consolidated balance sheets. Warranty reserve movements in the nine months ended September 27, 2008 included $604 in actual charges and $870 in provisions resulting in the balance of $593 at September 27, 2008. Warranty reserve movements in the nine months ended September 29, 2007 included $412 in actual charges and a $382 increase in the provision.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current presentation.
2. DISCONTINUED OPERATIONS
On April 2, 2007, the Company sold the majority of the operating assets of Telcom Devices Inc. (Telcom, a wholly-owned subsidiary of the Company) to GTRAN Camarillo, Inc. in exchange for $500 and effectively ceased Telcom’s operations. Accordingly, the financial results, position and cashflow of Telcom have been classified as discontinued operations in the accompanying financial statements for the applicable period presented.
Summarized operating results and loss on sale of discontinued operations through March 31, 2007 included with the nine months ended September 29, 2007 were as follows:
| Nine months ended | ||||
| September 29, 2007 | ||||
| Revenue | $ | 559 | ||
| Operating loss | (479 | ) | ||
| Interest income | 4 | |||
| Loss on sale of discontinued operations | (490 | ) | ||
| Loss from discontinued operations | $ | (965 | ) | |
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist of the following:
| September 27, 2008 | December 31, 2007 | |||||||
| Raw materials | $ | 10,513 | $ | 8,915 | ||||
| Work in process | 21,051 | 15,256 | ||||||
| Finished goods | 8,927 | 4,055 | ||||||
| 40,491 | 28,226 | |||||||
| Reserves | (6,059 | ) | (4,237 | ) | ||||
| Total | $ | 34,432 | $ | 23,989 | ||||
4. (LOSS) EARNINGS PER SHARE
The reconciliation of shares used to calculate basic and diluted (loss) earnings per share consists of the following:
| Three months ended | Nine months ended | |||||||||||||||
| September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
| Weighted average common shares for basic (loss) earnings per share | 60,509 | 57,505 | 59,949 | 54,114 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
Stock options (*) | - | 1,624 | - | 1,703 | ||||||||||||
Unvested restricted shares (*) | - | 1,519 | - | 1,586 | ||||||||||||
| Adjusted weighted average shares for diluted (loss) earnings per share | 60,509 | 60,648 | 59,949 | 57,403 | ||||||||||||
| * | Incremental shares from restricted shares and stock options are computed using the treasury stock method. |
For the three and nine month periods ended September 27, 2008 and September 29, 2007, potential additional dilution arising from any of the Company's outstanding stock options, unvested restricted shares or units, or shares potentially issuable upon conversion of the Convertible notes are detailed below. Such potential dilution was excluded as their effect was anti-dilutive.
| Three months ended | Nine months ended | |||||||||||||||
| September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
| Convertible notes | 7,600 | 7,600 | 7,600 | 7,600 | ||||||||||||
| Stock options | 2,944 | 434 | 2,944 | 1,732 | ||||||||||||
| Unvested restricted shares and units | 2,895 | - | 2,895 | 10 | ||||||||||||
5. REVENUE SOURCES
The Company classifies its revenues based upon the end application of the product in which its integrated circuits are used. Net sales by end application are regularly reviewed by the chief operating decision maker and are as follows:
| Three months ended | Nine months ended | |||||||||||||||
| September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
| Broadband | $ | 28,799 | $ | 25,570 | $ | 83,097 | $ | 76,233 | ||||||||
| Wireless | 29,266 | 33,975 | 129,830 | 86,754 | ||||||||||||
| Total | $ | 58,065 | $ | 59,545 | $ | 212,927 | $ | 162,987 | ||||||||
The Company primarily sells to three geographic regions: Asia, USA and Canada, and Other. The geographic region is determined by the destination of the shipped product. Net sales to each of the three geographic regions are as follows:
| Three months ended | Nine months ended | |||||||||||||||
| September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
| Asia | $ | 37,844 | $ | 40,946 | $ | 137,850 | $ | 110,549 | ||||||||
| USA and Canada | 13,143 | 16,213 | 57,354 | 45,310 | ||||||||||||
| Other | 7,078 | 2,386 | 17,723 | 7,128 | ||||||||||||
| Total | $ | 58,065 | $ | 59,545 | $ | 212,927 | $ | 162,987 | ||||||||
6. LONG-TERM DEBT
On September 24, 2004, the Company issued $38,000 aggregate principal amount of 5% Convertible Senior Notes (“2009 Notes”) due October 15, 2009. The 2009 Notes are convertible into shares of the Company’s common stock at any time prior to their maturity, at an initial conversion rate, subject to adjustment, of 200 shares for each $1,000 principal amount, which is equivalent to a conversion price of $5.00 per share (7,600 shares contingently issuable). Interest on the 2009 Notes is payable semi-annually in arrears on April 15 and October 15 of each year.
7. MARKETABLE SECURITIES
The following is a summary of available-for-sale securities presented in accordance with FAS 157:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||
| Security Type | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Non-auction Corporate Debt securities | $ | 6,097 | $ | 6,097 | $ | - | $ | - | ||||||||
| Government sponsored enterprise debt securities | 3,013 | 3,013 | - | - | ||||||||||||
| Auction Rate Securities | ||||||||||||||||
| Corporate Debt | 4,640 | - | 2,640 | 2,000 | ||||||||||||
| Preferred Equity | 6,178 | - | - | 6,178 | ||||||||||||
| State and Municipal | 2,211 | - | - | 2,211 | ||||||||||||
| Total | $ | 22,139 | $ | 9,110 | $ | 2,640 | $ | 10,389 | ||||||||
Auction rate securities (ARS) are generally long-term debt instruments that provided liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, generally every 28 days. The mechanism generally allowed existing investors to rollover their holdings while continuing to own their respective securities or liquidating their holdings by selling their securities at par value. The Company generally invested in these securities for short periods of time as part of its cash management program. During the second half of 2007, certain auction rate debt and preferred securities failed to auction due to sell orders exceeding buy orders. In February 2008, liquidity issues in the global credit markets resulted in failures of the auction process for a broader range of ARS, including substantially all of the auction rate corporate, state and municipal debt and preferred equity securities the Company holds. In the period April to August, 2008 certain issuers redeemed certain of the ARS held by the Company with a carrying value of $8,295. The related issuers redeemed such ARS at par resulting in proceeds of $8,750. The funds associated with the remaining failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or an issuer redeems its security.
At September 27, 2008, there was insufficient observable ARS market information available to determine the fair value of certain of the Company’s investments in ARS. Therefore, the Company estimated Level 3 fair values for these securities by incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions included credit quality, final stated maturity, impact due to extended periods of maximum auction rates and estimates of the probability of the issue being called or becoming liquid prior to the final maturity. The devaluation of the Company’s ARS holdings was determined to be other-than-temporary and the Company has recorded $1,627 and $3,064 in other expense, net of recoveries, for the three and nine month periods ended September 27, 2008, respectively.
Classification of marketable securities as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions. If management intends to hold the securities for longer than one year as of the balance sheet date, they are classified as non-current. Since these marketable securities are classified as available-for-sale securities, changes in fair value will flow through other comprehensive income, with amounts reclassified out of other comprehensive income into earnings upon sale or other-than-temporary impairment.
Management has the ability and intent, if necessary, to liquidate certain of its marketable securities in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, certain securities with contractual maturities greater than one year from year-end were classified as short-term. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
As further required by FAS 157, provided below is a reconciliation of the beginning and ending balances for each type of security valued using a Level 3 valuation during the three months ended September 27, 2008.
| ($ in 000’s) | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Three months ended September 27, 2008 | |||||||||||||||
| State & Municipal Securities | Corporate Debt Securities | Preferred Equity Securities | Total | |||||||||||||
| Beginning balance | $ | 3,799 | $ | 5,921 | $ | 6,710 | $ | 16,430 | ||||||||
Total gains or losses realized/unrealized | ||||||||||||||||
Included in (loss) earnings | 187 | (281 | ) | (532 | ) | (626 | ) | |||||||||
Included in other comprehensive (loss) income | - | - | - | - | ||||||||||||
Purchases, issuances, and settlements | (1,775 | ) | - | _ | (1,775 | ) | ||||||||||
Transfers in and/or out of Level 3 | - | (3,640 | ) | - | (3,640 | ) | ||||||||||
| Ending Balance | $ | 2,211 | $ | 2,000 | $ | 6,178 | $ | 10,389 | ||||||||
| The amount of total gains or losses for the period included in (loss) earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date | $ | - | $ | (281 | ) | $ | (532 | ) | $ | (813 | ) | |||||
For the nine month period ended September 27, 2008, the table below provides a reconciliation of the beginning and ending balances for each type of security valued using a Level 3 valuation.
| ($ in 000’s) | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Nine months ended September 27, 2008 | |||||||||||||||
| State & Municipal Securities | Corporate Debt Securities | Preferred Equity Securities | Total | |||||||||||||
| Beginning balance | $ | - | $ | 2,324 | $ | 2,344 | $ | 4,668 | ||||||||
Total gains or losses realized/unrealized | ||||||||||||||||
Included in (loss) earnings | (389 | ) | (324 | ) | (991 | ) | (1,704 | ) | ||||||||
Included in other comprehensive (loss) income | - | - | - | - | ||||||||||||
Purchases, issuances, and settlements | (3,900 | ) | - | (4,650 | ) | (8,550 | ) | |||||||||
Transfers in and/or out of Level 3 | 6,500 | - | 9,475 | 15,975 | ||||||||||||
| Ending Balance | $ | 2,211 | $ | 2,000 | $ | 6,178 | $ | 10,389 | ||||||||
The amount of total gains or losses for the period included in (loss) earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date | $ | (389 | ) | $ | (324 | ) | $ | (991 | ) | $ | (1,704 | ) | ||||
8. THIRD QUARTER 2008 CHARGES
In the three months ended September 27, 2008 the Company recorded charges for certain management separations, equipment purchase cancellation and impairment charges and inventory reserve charges associated with reduced demand in the amounts of $6,026, $1,860 and $849 and $1,210, respectively. Of the total $9,945 aforementioned charges, $4,216 related to Cost of sales and $5,729 related to Selling and administrative expenses. The unpaid balance at September 27, 2008 was $4,768.
The management separation charge primarily arose from the resignation of our former Chief Executive Officer, Dr. Bastani, and included separation pay, accelerated vesting of equity awards and certain other costs. During the quarter ended September 27, 2008, the Company cancelled certain manufacturing equipment purchase obligations and recorded a charge associated with these cancellations. In addition, certain surplus equipment was identified for sale and adjusted to its fair value. The inventory reserve charge was recorded after an abnormal decrease in demand for certain products.
9. STOCK-BASED COMPENSATION
Equity Compensation Plans
The Company had 4 equity compensation plans under which equity securities are authorized for issuance to employees and/or directors:
| § | The 1995 Long-Term Incentive and Share Award Plan for Officers and Directors (terminated February 28, 2005) (1995 Plan); |
| § | The 1997 Long Term Incentive and Share Award Plan (1997 Plan); |
| § | The 2005 Long Term Incentive and Share Award Plan (2005 Plan, collectively with the 1995 Plan and the 1997 Plan, the Plans); and |
| § | The Employee Stock Purchase Plan (ESP Plan). |
Employees and outside directors have been granted restricted stock and options to purchase shares of common stock under stock option plans adopted in 1995, 1997 and 2005. An aggregate of 4,913, 5,100 and 11,550 shares of common stock were reserved for issuance under the 1995 Plan, the 1997 Plan and the 2005 Plan, respectively. The Plans provide for the granting of stock options, stock appreciation rights, restricted stock shares and units (collectively, restricted stock) and other share based awards to eligible employees and directors, as defined in the Plans. Option grants have terms of ten years and become exercisable in varying amounts over periods of up to three years. To date, no stock appreciation rights have been granted under the Plans.
In 1995, the Company adopted the ESP Plan under Section 423 of the Internal Revenue Code. All full-time employees of ANADIGICS, Inc. and part-time employees, as defined in the ESP Plan, are eligible to participate in the ESP Plan. An aggregate of 4,194 shares of common stock were reserved for offering under the ESP Plan. Offerings are made at the commencement of each calendar year and must be purchased by the end of that calendar year. Pursuant to the terms of the ESP Plan, shares purchased and the applicable per share price were 236 and $7.95, respectively for the year ended December 31, 2007.
The table below summarizes stock based compensation by source and by financial statement line item for the three and nine month periods:
| Three months ended | Nine months ended | |||||||||||||||
| September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
| Amortization of restricted stock | $ | 5,191 | $ | 2,742 | $ | 13,345 | $ | 9,050 | ||||||||
| Amortization of ESP Plan | - | 200 | 400 | 600 | ||||||||||||
| Amortization of stock option awards | 733 | 615 | 1,526 | 1,668 | ||||||||||||
| Total stock based compensation | $ | 5,924 | $ | 3,557 | $ | 15,271 | $ | 11,318 | ||||||||
| By Financial Statement line item | ||||||||||||||||
| Cost of sales | $ | 697 | $ | 736 | $ | 2,449 | $ | 2,487 | ||||||||
| Research and development expenses | 1,470 | 1,446 | 5,271 | 4,338 | ||||||||||||
| Selling and administrative expenses | 3,757 | 1,375 | 7,551 | 4,448 | ||||||||||||
| Loss from discontinued operations | - | - | - | 45 | ||||||||||||
No tax benefits have been recorded due to the Company’s full valuation allowance position.
Stock based compensation for the three and nine months ended September 27, 2008 includes $2,065 for equity awards associated with the management separation charge recorded during the three months ended September 27, 2008.
Restricted Stock and Stock Option Awards
Commencing in August 2004, the Company began granting restricted stock shares under the Plans and in July 2008 began granting restricted stock units, including 600 in the three months ended September 27, 2008. The value of restricted stock grants are fixed upon the date of grant and amortized over the related vesting period of one to three years. Restricted stock is subject to forfeiture if employment terminates prior to vesting. The Company estimates that approximately 2.5% of its restricted stock grants are forfeited annually (exclusive of LTI’s, as described below). The restricted stock shares carry voting and dividend rights commencing upon grant, whereas restricted stock units do not. Neither restricted stock shares nor restricted stock units may be traded or transferred prior to vesting. Grant, vest and forfeit activity and related weighted average price per share for restricted stock and for stock options during the period from January 1, 2007 to September 27, 2008 is presented in tabular form below:
| Restricted Stock | Stock Options | |||||||||||||||
| Quantity | Weighted average price | Issuable upon exercise | Weighted average exercise price | |||||||||||||
| Grants outstanding at January 1, 2007 | 3,138 | $ | 6.23 | 5,669 | $ | 8.36 | ||||||||||
| Granted | 1,185 | 12.40 | 182 | 11.48 | ||||||||||||
| Shares vested/options exercised | (1,916 | ) | 6.07 | (2,135 | ) | 5.73 | ||||||||||
| Forfeited/expired | (195 | ) | 7.21 | (225 | ) | 15.29 | ||||||||||
| Balance at December 31, 2007 | 2,212 | 9.61 | 3,491 | 9.68 | ||||||||||||
| Granted | 2,402 | 8.28 | - | - | ||||||||||||
| Shares vested/options exercised | (1,536 | ) | 8.79 | (384 | ) | 6.78 | ||||||||||
| Forfeited/expired | (183 | ) | 14.02 | (163 | ) | 13.26 | ||||||||||
| Balance at September 27, 2008 | 2,895 | $ | 8.66 | 2,944 | $ | 9.86 | ||||||||||
Included within the restricted stock shares granted in the nine months ended September 27, 2008 are 357 shares granted pursuant to long-term incentive awards (LTI) issued to management contingent upon the Company’s performance using multi-year adjusted earnings per share and revenue targets measured over a three-year period ending December 31, 2010. The number of shares issuable pursuant to the LTI award can vary upon actual performance to such targets and range from 50% to 150% of the base share award. Upon Dr. Bastani’s resignation, 27 shares of the 357 LTI shares were released and 81 shares were forfeited.
| As of September 27, 2008 | ||||
| Unrecognized stock based compensation cost | ||||
Option plans | $ | 2,418 | ||
Restricted stock | $ | 16,718 | ||
| Weighted average remaining recognition period | ||||
Option plans | 1.3 years | |||
Restricted stock | 1.3 years | |||
Stock options outstanding at September 27, 2008 are summarized as follows:
| Range of exercise prices | Outstanding Options at September 27, 2008 | Weighted average remaining contractual life | Weighted average exercise price | Exercisable at September 27, 2008 | Weighted average exercise price | |||||||||||||||||
| $ | 1.39 - $2.89 | 311 | 4.3 | $ | 2.63 | 311 | $ | 2.63 | ||||||||||||||
| $ | 2.93 - $7.27 | 931 | 3.6 | $ | 6.73 | 928 | $ | 6.73 | ||||||||||||||
| $ | 7.65 – $8.84 | 868 | 7.1 | $ | 8.84 | 540 | $ | 8.84 | ||||||||||||||
| $ | 9.00 - $53.48 | 834 | 3.2 | $ | 17.09 | 763 | $ | 17.42 | ||||||||||||||
Valuation Method for ESP Plan and Stock Option Awards
The fair value of these equity awards was estimated at the date of grant using a Black-Scholes option pricing model. The weighted average assumptions for stock based compensation grants used for the nine month periods ended September 27, 2008 and September 29, 2007 were:
| Nine months ended | ||||||||
| September 27, 2008 | September 29, 2007 | |||||||
| Stock option awards: | ||||||||
| Risk-free interest rate | N/A | 4.7 | % | |||||
| Expected volatility | N/A | 0.71 | ||||||
| Average expected term (in years) | N/A | 4.75 | ||||||
| Expected dividend yield | N/A | 0.0 | % | |||||
| Weighted average fair value of options granted | N/A | $ | 6.44 | |||||
| ESP Plan: | ||||||||
| Risk-free interest rate | 1.8 | % | 4.1 | % | ||||
| Expected volatility | 1.00 | 0.54 | ||||||
| Average expected term (in years) | 1.00 | 1.00 | ||||||
| Expected dividend yield | 0.0 | % | 0.0 | % | ||||
| Weighted average fair value of purchase option | $ | 1.44 | $ | 2.85 | ||||
For equity awards with expected terms of one year or less, the assumption for expected volatility is solely based on the Company’s historical volatility.
10. STOCKHOLDERS’ EQUITY
In March, 2007, The Company completed an underwritten public offering of 8,625 shares of common stock, generating net proceeds to the Company of $98,955.
ANADIGICS, Inc.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
ANADIGICS, Inc. (“we” or the “Company”) is a leading provider of semiconductor solutions in the rapidly growing broadband wireless and wireline communications markets. Our products include power amplifiers (PAs), tuner integrated circuits, active splitters, line amplifiers and other components, which can be sold individually or packaged as integrated radio frequency (RF) and front end modules. We believe that we are uniquely positioned to capitalize on the rapidly-growing voice, data and video segments of the broadband wireless and wireline communications markets. We offer third generation (3G) products that use the Wideband Code-Division Multiple Access (W-CDMA) and Enhanced Data Rates for Global System for Mobile Communication (GSM) Evolution (EDGE) standards and combinations of W-CDMA and EDGE platforms (WEDGE), beyond third generation (3.5G) products that use the High Speed Packet Access (inclusive of downlink and uplink) and Evolution Data Optimized standards, fourth generation (4G) products for Worldwide Interoperability for Microwave Access (WiMAX) inclusive of WiBRO systems, Wireless Fidelity (WiFi) products that use the 802.11 a/b/g and 802.11 n (Multiple Input Multiple Output) standards, cable television (CATV) cable modem and set-top box products, CATV infrastructure products and Fiber-To-The-Premises products.
Our business strategy focuses on developing RF front end solutions and partnering with industry-leading wireless chipset providers to incorporate our solutions into their reference designs. Our integrated solutions enable our customers to improve RF performance, power efficiency, reliability, time-to-market and the integration of chip components into single packages, while reducing the size, weight and cost of their products. We have established longstanding relationships with several of the industry-leading chipset suppliers and tier-one customers. For example, our relationships with Qualcomm Inc., Intel Corporation, Cisco Systems, Inc. and Motorola, Inc. have enabled us to develop RF products used in 3G, 3.5G, 4G WiMAX, WiFi and CATV products and to be a key supplier with respect to such partners and customers. Other leading chipset suppliers and tier-one customers with whom we are engaged include Beceem Communications, Inc, Broadcom Corporation, High Tech Computer Corp., Huawei Technologies Co., Ltd., KYOCERA Corporation, LG Electronics Inc., Marvell Technology Group Ltd., Murata Manufacturing Co., Ltd., Novatel Wireless, Inc., NXP Semiconductors, Palm, Inc., Research In Motion Limited, Samsung Electronics Co., Ltd., Sierra Wireless, Inc., Texas Instruments Incorporated and ZTE Corporation.
As reflected in our results for the three months ended September 27, 2008, we experienced a reduction in revenue from the immediately preceding quarter due primarily to our inability to meet some customers' demand for our products. This was a direct result of inefficiencies in our wafer fabrication operations caused by new equipment and personnel added rapidly as we attempted to increase our capacity consistent with our unprecedented growth during the last several quarters. Failure to satisfy customers' demand also caused some of our customers to use second sources of supply, which contributed to loss of market share. In light of the decrease in revenue and the uncertain marcoeconomic environment, we have delayed spending, including non-essential capacity-expansion capital projects, and are in the process of realigning our cost structure without compromising new product development.
We focus on leveraging our technological advantage to remain a leading supplier of semiconductor solutions for broadband wireless and wireline communications. We believe our patented InGaP-plus technology, which combines the bipolar technology of a PA (HBT PA) with the surface device technology of an RF active switch on the same die, provides us with a competitive advantage in the marketplace. Additionally, we believe our InGaP-plus process and design technologies such as High Efficiency at Low Power provide a competitive advantage by enabling us to provide PAs that consume less battery power and extend talk time for products in the 3G, 3.5G and 4G markets.
On April 2, 2007, we sold the majority of the operating assets of Telcom Devices Inc. (Telcom, a wholly-owned subsidiary of the Company) to GTRAN Camarillo, Inc. in exchange for $0.5 million and effectively ceased Telcom’s operations. Accordingly, the financial results, position and cashflow of Telcom have been classified as discontinued operations in the accompanying financial statements for the applicable period presented.
We were incorporated in Delaware in 1984. Our corporate headquarters are located at 141 Mt. Bethel Road, Warren, New Jersey 07059, and our telephone number at that address is 908-668-5000.
RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated statements of operations data as a percent of net sales for the periods presented:
| Three months ended | Nine months ended | |||||||||||||||
| September 27, 2008 | September 29, 2007 | September 27, 2008 | September 29, 2007 | |||||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of sales | 77.1 | % | 66.1 | % | 67.2 | % | 66.0 | % | ||||||||
| Gross margin | 22.9 | % | 33.9 | % | 32.8 | % | 34.0 | % | ||||||||
| Research and development expenses | 22.3 | % | 21.0 | % | 19.8 | % | 20.5 | % | ||||||||
| Selling and administrative expenses | 25.1 | % | 12.1 | % | 15.4 | % | 13.5 | % | ||||||||
| Operating (loss) income | (24.5 | )% | 0.8 | % | (2.4 | )% | - | |||||||||
| Interest income | 1.7 | % | 3.9 | % | 1.9 | % | 3.5 | % | ||||||||
| Interest expense | (1.0 | )% | (1.0 | )% | (0.8 | )% | (1.1 | )% | ||||||||
| Other (expense) income | (2.8 | )% | 0.3 | % | (1.3 | )% | 0.1 | % | ||||||||
| Loss (income) from continuing operations | (26.6 | )% | 4.0 | % | (2.6 | )% | 2.5 | % | ||||||||
| Loss from discontinued operations | - | - | - | (0.6 | )% | |||||||||||
| �� | ||||||||||||||||
| Net (loss) income | (26.6 | )% | 4.0 | % | (2.6 | )% | 1.9 | % | ||||||||
NET SALES. Net sales decreased 2.5% during the third quarter of 2008 to $58.1 million from $59.5 million in the third quarter of 2007. For the nine months ended September 27, 2008, net sales were $212.9 million, a 30.6% increase from net sales of $163.0 million for the nine months ended September 29, 2007.
Sales of integrated circuits for wireless applications decreased 13.9% during the third quarter of 2008 to $29.3 million from $33.9 million in the third quarter of 2007. For the nine months ended September 27, 2008, net sales of integrated circuits for wireless applications increased 49.7% to $129.8 million from $86.8 million for the nine months ended September 29, 2007. The decrease in sales of integrated circuits for wireless applications in the three month period was primarily due to decreased demand for our GSM PAs, where revenue decreased by $3.2 million. The increase in sales of integrated circuits for wireless applications in the nine month period was primarily due to increased demand for our 3G (EDGE, WEDGE, CDMA2000 1X applications & WCDMA) PAs where revenue rose by $42.5 million.
Sales of integrated circuits for broadband applications increased 12.6% during the third quarter of 2008 to $28.8 million from $25.6 million in the third quarter of 2007. For the nine months ended September 27, 2008, net sales of integrated circuits for broadband applications increased 9.0% to $83.1 million from $76.2 million for the nine months ended September 29, 2007. The increase in sales in the three and nine month periods was primarily due to an increase in demand for wireless LAN and tuner products, with combined increases of $4.7 million and $14.0 million in the related periods, partially offset by lower infrastructure demand in the amounts of $1.3 million and $8.1 million in the respective periods.
GROSS MARGIN. Gross margin during the third quarter of 2008 decreased to 22.9% of net sales from 33.9% of net sales in the third quarter of 2007. For the nine months ended September 27, 2008, gross margin decreased to 32.8% from 34.0% for the nine months ended September 29, 2007. The third quarter of 2008 included charges of $3.9 million associated with production equipment purchase cancelation charges, equipment impairment charges and inventory reserve charges, which the Company considers an anomaly of the period. In addition, during the three months ended September 27, 2008, depreciation expense increased by $1.5 million over the year earlier period.
RESEARCH AND DEVELOPMENT. Company sponsored research and development expenses increased 3.5% during the third quarter of 2008 to $12.9 million from $12.5 million during the third quarter of 2007. Company sponsored research and development expenses for the nine month period ended September 27, 2008 increased 26.3% to $42.1 million from $33.3 million during the nine month period ended September 29, 2007. The increase in the three and nine months periods ended September 27, 2008 was primarily due to increased headcount and support of our R&D product and process development efforts.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses increased 101.9% to $14.6 million during the third quarter of 2008 from $7.2 million during the third quarter of 2007. Selling and administrative expenses for the nine month period ended September 27, 2008 increased 49.1% to $32.9 million from $22.1 million during the nine month period ended September 29, 2007. The third quarter of 2008 included charges of $5.7 million associated with the departure of our former Chief Executive Officer, including $2.2 million of stock based compensation upon accelerated vesting of certain equity awards. The remaining increase in the three and nine month periods ended September 27, 2008 was primarily driven by increased staff and outside advisors costs in the respective periods.
INTEREST INCOME. Interest income decreased 58.2% to $1.0 million during the third quarter of 2008 from $2.3 million during the third quarter of 2007. For the nine months ended September 27, 2008, interest income decreased 27.3% to $4.2 million from $5.8 million in the nine month period ended September 29, 2007. The decreases were primarily due to lower interest rates in the second and third quarters of 2008.
OTHER (EXPENSE) INCOME. Other (expense) income of $1.6 million and $2.8 million in the three and nine month periods ended September 27, 2008 include provisions, net of recoveries, for other-than-temporary declines in value on certain auction rate securities held by the Company of $1.6 million and $3.1 million in the respective periods. The nine month period ended September 27, 2008 included $0.3 million gain on sale of equipment.
LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations relating to Telcom was $1.0 million during 2007 and included the $0.5 million loss on sale of discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
As of September 27, 2008, we had $130.1 million in cash and cash equivalents and $22.1 million in marketable securities. As of September 27, 2008, we had outstanding $38.0 million aggregate principal amount of our 2009 Notes.
Operating activities provided $23.0 million in cash during the nine month period ended September 27, 2008, primarily as a result of our operating results adjusted for non-cash expenses. Investing activities, consisting principally of net proceeds received from the sale of marketable securities of $93.9 million, partly offset by purchases of fixed assets of $47.4 million, provided $46.7 million of cash during the nine month period ended September 27, 2008. Financing activities provided $2.6 million of cash, consisting of proceeds received from stock option exercises.
We had unconditional purchase obligations at September 27, 2008 of approximately $10.9 million, of which $8.1 million relates to capital equipment purchase requirements primarily over the next three to six months. Such capital purchase requirements relate to our New Jersey manufacturing operations.
Additionally, in early 2007, the Company signed an agreement with the Kunshan New and Hi-Tech Industrial Development Zone (KSND) in China to jointly construct a wafer fabrication facility. The agreement requires the Company to invest approximately $50.0 million over a ten-year period, inclusive of $16.7 million required by January 31, 2010, of which approximately $10.9 million has been paid or accrued as of September 27, 2008. In the event we decide unilaterally not to proceed with the agreement with KSND, our maximum obligation under the agreement with KSND is to pay KSND $16.7 million, reduced by payments made to the date of cancellation.
We held a total of $13.0 million of auction rate securities (ARS) within our $22.1 million in marketable securities at September 27, 2008. ARS are generally long-term debt instruments that provided liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, generally every 28 days. This mechanism generally allowed existing investors to rollover their holdings while continuing to own their respective securities or liquidate their holdings by selling their securities at par value. We generally invested in these securities for short periods of time as part of our cash management program. During the second half of 2007, certain auction rate debt and preferred securities failed to auction due to sell orders exceeding buy orders. In February 2008, liquidity issues in the global credit markets resulted in failures of the auction process for a broader range of ARS, including substantially all of the auction rate corporate, state and municipal debt and preferred equity securities we hold. In the period April to August, 2008 certain issuers redeemed certain of the ARS held by the Company with a carrying value of $8.3 million. The related issuers redeemed such ARS at par resulting in proceeds of $8.7 million. The funds associated with the remaining failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or an issuer redeems its security.
At September 27, 2008, there was insufficient observable ARS market information available to determine the fair value of certain of our investments in ARS. Therefore, we estimated Level 3 fair values for these securities by incorporating assumptions that market participants would use in their estimates of fair value. Some of these assumptions included credit quality, final stated maturity, impact due to extended periods of maximum auction rates and estimates of the probability of the issue being called or becoming liquid prior to the final maturity. The ARS’ September 27, 2008 carrying value has been adjusted downward to fair value by the amounts of $1.6 million and $3.1 million in the three and nine month periods ended September 27, 2008, respectively. The charges in the three and nine months periods ended September 27, 2008 were partially offset by $0.2 million and $0.4 million, respectively, recovered upon redemption of ARS that were previously written down. While we believe these securities will again become liquid, the timing is uncertain. We currently have the ability and intent to hold these auction rate securities until a recovery of the auction process, early redemption or until maturity.
We believe that our existing sources of capital, including our existing cash and marketable securities, will be adequate to satisfy both operational and capital needs for the next twelve months. We may elect to finance all or part of our anticipated operational and capital needs, which may include acquisitions of complementary businesses or technologies, investments in other companies or repurchases of our outstanding debt or equity, through additional equity or debt financing. Our ability to pay principal and interest on our outstanding 2009 Notes due in October 2009, our other debt and to fund our planned capital expenditures depends on our future operating performance and the liquidity of our ARS.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (FAS 157) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FSP FAS 157-2 “Partial Deferral of the Effective Date of Statement 157” (FSP 157-2). FSP 157-2 delays the effective date of FAS 157 for non-financial assets and liabilities that are not measured or disclosed on a recurring basis to fiscal years beginning after November 15, 2008. The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial statements for financial assets and liabilities and any other assets and liabilities carried at fair value. The Company is currently in the process of evaluating the impact of adopting this pronouncement for other non-financial assets or liabilities.
FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). FAS 157 classifies the inputs used to measure fair value into the following hierarchy:
| Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
| Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability |
| Level 3 | Unobservable inputs for the asset or liability |
The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
In October 2008, the FASB issued FSP 157-3 “Determining Fair Value of a Financial Asset in a Market That Is Not Active” (FSP 157-3). FSP 157-3 clarified the application of FAS No. 157 in an inactive market. It demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued.
In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159), which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. FAS 159 is effective for fiscal years beginning after November 15, 2007. As of January 1, 2008, the Company adopted FAS 159. Since the Company has not utilized the fair value option for any allowable items, the adoption of FAS 159 had no impact on the Company’s results of operations or financial position.
In June 2007, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3) that would require nonrefundable advance payments made by the Company for future R&D activities to be capitalized and recognized as an expense as the goods or services are received by the Company. EITF 07-3 is effective with respect to new arrangements entered into beginning January 1, 2008. The Company adopted EITF 07-3, which did not have a material impact on its consolidated financial statements.
In December 2007, the FASB issued FASB Statement No. 141R, “Business Combinations” (FAS 141R), which changes how business acquisitions are accounted. FAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. FAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company has not yet determined the impact FAS 141R may have on its results of operations or financial position.
In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (FAS 160), which establishes new standards governing the accounting for and reporting of noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCIs (previously referred to as minority interests) be treated as a separate component of equity, not as a liability; that increases and decrease in the parent’s ownership interest that leave control intact be treated as equity transactions, rather than as step acquisitions or dilution gains or losses; and that losses of a partially owned consolidated subsidiary be allocated to the NCI even when such allocation might result in a deficit balance. This standard also requires changes to certain presentation and disclosure requirements. FAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The provisions of the standard are to be applied to all NCIs prospectively, except for the presentation and disclosure requirements, which are to be applied retrospectively to all periods presented. The Company has not yet determined the impact FAS 160 may have on its results of operations or financial position.
In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (FAS 161). FAS 161 applies to all derivative instruments and related hedged items accounted for under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". FAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The fair value of derivative instruments and their gains and losses will need to be presented in tabular format in order to present a more complete picture of the effects of using derivative instruments. FAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company has not yet determined the impact FAS 161 may have on its results of operations or financial position.
In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets”, (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company has not yet determined the impact FSP 142-3 may have on its results of operations or financial position.
In May 2008, the FASB issued FSP Accounting Principles Board 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP APB 14-1). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The Company has not yet determined the impact FSP APB 14-1 may have on its results of operations or financial position.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP EITF 03-6-1). FSP EITF 03-6-1 clarified that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008. The Company has not yet determined the impact FSP EITF 03-6-1 may have on its results of operations or financial position.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains projections and other forward-looking statements (as that term is defined in the Securities Exchange Act of 1934, as amended). These projections and forward-looking statements reflect the Company’s current views with respect to future events and financial performance and can generally be identified as such because the context of the statement will include words such as “believe”, “anticipate”, “expect”, or words of similar import. Similarly, statements that describe our future plans, objectives, estimates or goals are forward-looking statements. No assurances can be given, however, that these events will occur or that these projections will be achieved, and actual results and developments could differ materially from those projected as a result of certain factors. Important factors that could cause actual results and developments to be materially different from those expressed or implied by such projections and forward-looking statements include, but are not limited to, the following risks which are described in greater detail in the Company’s Annual Report on Form 10-K referred to below: (i) our ability to respond to a significant increase in demand from our customers; (ii) our history of recent losses and the possibility that we may continue to incur losses; (iii) our dependence on a small number of customers; (iv) sources for certain components, materials and equipment are limited, which could result in delays or reductions in product shipments; (v) we may face interruptions in our manufacturing processes; (vi) the variability of our manufacturing yields may affect our gross margins; (vii) our dependence on foreign semiconductor assembly and test operations contractors could lead to delays in product shipments; (viii) the existence of intense competition in the markets for our products, which could result in a decrease in our products’ prices and sales; (ix) our need to keep pace with rapid product and process development and technological changes as well as product cost reductions to be competitive; (x) our gallium arsenide semiconductors may cease to be competitive with silicon alternatives; (xi) our operating results may be harmed if we fail to sell a high volume of products; (xii) the short life cycles of some of our products may leave us with obsolete or excess inventories; (xiii) our results of operations can vary significantly due to the cyclical nature of the semiconductor industry and our end markets; (xiv) our products have experienced rapidly declining unit prices; (xv) our marketable securities’ liquidity and valuation could be affected by disruption in financial markets; (xvi) capital required for our business may not be available when we need it; (xvii) our success depends on our ability to attract and retain qualified personnel; (xviii) risks due to our international customer base and our subcontracting operations; (xix) stringent environmental laws and regulations both domestically and abroad; (xx) any failure to protect our intellectual property rights or avoid claims that we have infringed on the intellectual property rights of others; (xxi) any pursuit of selective acquisitions and alliances which dilute the ownership of our current shareholders and the management and integration of additional operations which may be expensive and divert management time; (xxii) we have had significant volatility in our stock price and it may fluctuate in the future; (xxiii) certain provisions in our governing documents, our shareholders’ rights agreement and of Delaware law could deter, delay or prevent a third party from acquiring us and prevent shareholders from realizing a takeover premium. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included herein or detailed from time to time in our reports filed with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not changed significantly for the risks disclosed in Item 7A of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our interim Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 27, 2008. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported as specified within the SEC’s rules and forms.
There was no change in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
ANADIGICS, Inc.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to litigation arising in the ordinary course out of the operation of our business. We believe that the ultimate resolution of such litigation should not have a material adverse effect on our financial condition, results of operations or liquidity.
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Gilles Delfassy, Chairman of the Board and Interim President and Chief Executive Officer of ANADIGICS, Inc.
| 31.2 Rule 13a-14(a)/15d-14(a) Certification of Thomas C. Shields, Executive Vice President and Chief Financial Officer of ANADIGICS, Inc. |
| 32.1 Section 1350 Certification of Gilles Delfassy, Chairman of the Board and Interim President and Chief Executive Officer of ANADIGICS, Inc. |
| 32.2 Section 1350 Certification of Thomas C. Shields, Executive Vice President and Chief Financial Officer of ANADIGICS, Inc. |
SIGNATURES
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.
ANADIGICS, INC.
| By: | /s/ Thomas C. Shields |
| Thomas C. Shields | |
Executive Vice President and Chief Financial Officer | |
Dated: November 3, 2008