UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| /x/ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009. | |
| Or | |
| / /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. | |
| 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) | |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
The above securities are registered on the NASDAQ Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes / / No /X/
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes / / No /X/
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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes / / No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated in Part III of this Form 10-K or any amendment to this Form 10-K. / /
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one): Large accelerated filer / / Accelerated filer / X / Non-accelerated filer (Do not check if a smaller reporting company) / / Smaller reporting company / /
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes / / No /X/
The aggregate market value of the voting common equity held by non-affiliates of the registrant as of July 4, 2009 was approximately $254 million, based upon the closing sales price of the registrant’s common equity as quoted on the NASDAQ Global Market on such date.
The number of shares outstanding of the registrant's common stock as of February 28, 2010 was 65,156,283 (excluding 114,574 shares held in treasury).
Documents incorporated by reference: Definitive proxy statement for the registrant’s 2010 annual meeting of shareholders (Part III).
TABLE OF CONTENTS
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| PART II | |
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| PART III | |
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| PART IV | |
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PART I
Overview
ANADIGICS, Inc. (“we” or the “Company”) is a leading provider of semiconductor solutions in the 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 well-positioned to capitalize on the high growth 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 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 (HSPA, inclusive of downlink and uplink) and Evolution Data Optimized (EVDO) standards, fourth generation (4G) products for Worldwide Interoperability for Microwave Access (WiMAX) and Long Term Evolution (LTE), Wireless Fidelity (WiFi) products that use the 802.11 a/b/g and 802.11 n (Multiple Input Multiple Output (MIMO)) standards, cable television (CATV) cable modem and set-top box products, CATV infrastructure products and Fiber-To-The-Premises (FTTP) products.
Our business strategy focuses on developing RF front end solutions for our customers and partnering with industry-leading wireless and wireline 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 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.
We believe our business will benefit in the long-term from two key factors: (1) fast growth in the markets for 3G, 3.5G, 4G, WiFi and CATV products and (2) an increased dollar content of our solutions within the products in these end markets. We believe that the combination of these factors will enable us to outpace the overall end product unit growth in these broadband wireless and wireline communications markets. For example, additional PAs with higher performance levels and integration are required in 3G and 3.5G wireless handsets as compared to prior standards. The complexity of 3G, 3.5G and 4G designs coupled with our selection in several leading reference designs allows us to capitalize on the growth in the 3G, 3.5G and 4G markets. In the WiFi market, our business will benefit from both increasing shipments of WiFi-enabled handheld devices as well as the growing adoption of dual-band 802.11 a/b/g solutions and the 802.11 n MIMO standard, which commonly use multiple PAs with each chipset. We are positioning our CATV set-top box business to capitalize on the growth of home gateway products, which provide multi-function capabilities such as digital video recording (DVR), high definition television (HDTV) reception, multi-room access and Internet connectivity, by expanding our offering of active splitter products. In addition, we believe that the new generation of cable modems based on the Data Over Cable Service Interface Specification 3.0 (DOCSIS-3.0) standard will increase the addressable market for our upstream amplifiers. We anticipate that our new hybrid line amplifier products will expand our addressable share of the CATV infrastructure market and we further believe that our infrastructure business will continue to benefit from the adoption of 1 GHz CATV systems worldwide and from RF amplifiers being used in FTTP optical networks such as Verizon Communication Inc.’s (Verizon) FiOS.
We continue to focus on leveraging our technological advantages to remain a leading supplier of innovative 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 (pHEMT) on the same die, provides us with a competitive advantage in the marketplace. Additionally, we believe technologies such as High Efficiency at Low Power (HELP-TM, HELP2-TM and HELP3-TM, collectively HELP) power amplifiers provide our customers a competitive advantage by enabling their 3G, 3.5G and 4G devices to consume less battery power and deliver longer talk time than comparable products in their markets.
Our six-inch diameter Gallium Arsenide (GaAs) wafer fabrication facility (fab) located at our corporate headquarters in Warren, New Jersey, has been operational since 1999. During 2009, we announced a hybrid manufacturing strategy whereby we entered into a strategic foundry agreement with WIN Semiconductors to supplement our existing wafer fabrication capability and allows for additional and flexible capacity without the requisite capital investment.
Industry Background
Wireless 3 and 3.5 G Market
The number of wireless handsets designed for 3G and 4G standards like CDMA/EVDO, WCDMA/HSPA and LTE is expected to grow faster than the overall market as these standards become dominant over the next several years. According to Allied Business Intelligence (ABI), annual shipments of 3G and 4G handsets forecast to grow from 503 million units in 2009 to 883 million units by 2013, a 75% increase in four years. Shipments of 3G and 4G wireless modems and other mobile broadband data devices are forecast to grow even more rapidly, from 60 million units in 2009 to 239 million units in 2013, a four-fold increase in four years. As a qualified PA supplier to top-tier handset manufacturers such as Research in Motion (“RIM”), LG Electronics (“LGE”) and Samsung Electronics Co., Ltd we believe we are well positioned to benefit from the continuing transition to 3G and 4G technologies.
Traditionally, the chipset in a wireless handset required one or two power amplifiers. As wireless operators gained additional frequency licenses to deploy 3G and 4G networks, requirements for mobile devices that can operate in multiple bands has increased demand for power amplifiers in handsets, datacards and wireless modems. These wireless devices also require PAs with higher power and better linearity to meet more demanding performance specifications.
The key drivers of growth in the wireless handset market are:
| · | Deployment of 3G and 4G networks and services. |
| · | New subscriber additions in emerging markets. |
| · | New features and applications to drive replacements in established markets. |
| · | Convergence of voice, data and video services. |
Wireless handsets and mobile data devices utilize a semiconductor chipset to enable communication with the network. Key components of a wireless semiconductor chipset include a baseband, transceiver and one or more power amplifiers (PAs). Each PA boosts the transmitter RF output to deliver enough signal power to enable connection with the radio access network for voice and data throughput. As additional features and functionality are incorporated into wireless handsets to leverage the higher network data rates to enable applications such as high speed data and streaming video services, increasing demands are placed on the handset battery, thereby reducing battery life. The high-performance PA is a critical component in the handset because it directly affects battery life and, consequently, available talk time. We believe our differentiated InGaP-plus process and design technologies such as HELP™ provide a competitive advantage by enabling us to provide PAs that consume less battery power and extend talk time.
In addition to wireless handsets and data cards, 3G and 3.5G capabilities are increasingly being embedded in notebook computers. We are a leading participant in this market through the use of our power amplifiers in Qualcomm reference designs, and in embedded wireless modules manufactured by leading providers to this growing market.
Wireless 4G
As a fourth-generation wireless standard, WiMAX continues to gain momentum worldwide, as commercial mobile broadband wireless services that use this technology continue to be introduced and gain subscribers. Clearwire Corporation is well on its way to providing nationwide service in the United States; UQ Communications Inc. plans to support service over all of Japan within three years; and successful service launches in Korea, Russia, Malaysia and Taiwan all indicate the growth potential of this technology. We currently ship WiMAX PAs to several customers, and believe that our relationships with leading WiMAX equipment and chipset vendors have positioned us to be one of the market-leading providers of WiMAX PAs in the world.
Long Term Evolution (LTE) is the 4G standard developed by the 3GPP consortium and supported by the Global mobile Suppliers Association (GSA), one of the largest wireless industry groups. A survey by the GSA in February 2010 identified 59 LTE network commitments in 28 countries, with 20 networks planning to begin commercial LTE service in 2010. The GSA expects additional operators to announce their LTE plans during 2010. According to the GSA, LTE is needed to accommodate the dramatic traffic growth anticipated for data, and to fully address the mass market. LTE will significantly boost network throughputs, reduce latency, improve spectrum and deliver operational efficiencies and performance; the next step in the user experience. ANADIGICS long-standing business relationships with key players in the LTE ecosystem makes us well-positioned to benefit from the developing demand for LTE-capable power amplifiers as more LTE networks are deployed.
Wireless Fidelity (WiFi)
The market for electronic devices with WiFi, or wireless LAN, networking capabilities continues to grow. ABI Research forecasts that shipments of WiFi-enabled devices will grow from 600 million units in 2009 to over 1.5 billion units in 2013, representing a 26% compounded annual growth rate over that period of time. WiFi functionality in notebook and netbook computers has become standard, and WiFi is now being embedded in other consumer electronic devices such as cameras, printers, audio devices, mobile phones, mobile internet devices and gaming consoles. Our WiFi power amplifier, front end module (FEM) and front end integrated circuit (FEIC) business stands to benefit from the following two market trends, in particular:
(i) With the advent of the 802.11n standard in 2007, WiFi products for mobile computing have expanded into MIMO architectures, which require multiple PAs per product. ABI estimates that in 2009 about 46% of all WiFi integrated circuits shipped conformed to the 802.11n standard, and forecasts that market share to reach 85% by 2013. This trend suggests that the growth rate of PA demand may significantly outpace that of WiFi products in general. We believe that in addition to an increase in demand for PAs, there will also be an increase in demand for FEMs or FEICs that include multiple PAs.
(ii) Annual shipments of WiFi-enabled cellular handsets and mobile internet devices are expected to grow from 142 million units in 2009 to 559 million units in 2013, according to ABI. We believe that a growing share of these devices will require dual-band operation, representing a significant opportunity for our new dual-band FEMs and FEICs. These products offer high levels of functional integration in small form factors which are necessary for handheld applications.
We continue to secure new RF front end sockets in next-generation reference designs from leading WiFi chipset providers for a wide range of applications. Taking into account the multiple-PA MIMO technology supported by the 802.11n standard and the demand for small, integrated products for handheld applications, we believe that our portfolio of differentiated products in these high-growth market areas will allow us to benefit from the prevailing WiFi market trends.
Cable Set-Top Box and Cable Modem Markets
The markets for CATV set-top boxes and cable modems are being shaped by several key trends. Set-top boxes are incorporating advanced functionality, to leverage the convergence of voice, data and video services over the broadband network, such as DVR, HDTV, wireless internet access, interactive services, home networking and gaming. These new features are driving demand for both new and replacement set-top boxes, including high-end multi-function boxes called gateways. As a long-term supplier to Cisco Systems Inc. (Cisco) and Motorola, Inc., we believe that we are well positioned to benefit from these trends and we are offering new products with features tailored for gateway boxes. We also believe that the rollouts of DTV in China and parts of Europe, and Verizon’s FiOS in the U.S., are contributing to sustained demand for digital set-top boxes.
As the cable modem market transitions to the new DOCSIS 3.0 standard, we believe it will provide additional opportunity for our upstream amplifier products. The DOCSIS 3.0 standard uses multiple channels simultaneously to provide wider bandwidth and higher data throughput than previous technologies, and we believe that we are well positioned to support this market opportunity.
CATV Infrastructure and FTTP
We are a leading supplier of 12V and 24V line amplifier radio frequency integrated circuit (RFIC) amplifiers and drop amplifiers to the CATV infrastructure market. This market shows continuing demand for equipment upgrades as a result of increasing CATV infrastructure bandwidth requirements, the need of cable service providers to offer converged voice, data and video services over their broadband networks, and the increased deployment of CATV fiber nodes. We are participating in these upgrades through our collaboration with industry leaders, and as a result of the rollout of digital cable in China and parts of Europe. We are also offering new line amplifier products in industry-standard packages that we believe will expand our addressable market. Historically, we have enjoyed long product life cycles in these markets. Additionally, we are providing optical network RF amplifiers in the FTTP market for use in systems such as Verizon’s FiOS, for which deployments continue throughout the U.S.
Our Strategy
Our objective is creating value through innovative RF and Mixed Signal solutions that enable instantaneous connectivity anytime, anywhere. The key elements of our strategy include:
| · | Focus on the high-growth end markets of broadband wireless and wireline. We target the fastest-growing and most sophisticated segments of the wireless and wireline communications markets. These segments offer the largest growth opportunity and the greatest opportunity for semiconductor manufacturers to extract value. |
| · | Create innovative RF patented technology resulting in industry-leading products. Our longstanding reputation of innovation in process technology and design has resulted in best-in-class RF products. We consistently provide performance advantages that help our customers deliver differentiated products to market. |
| · | Work closely with industry-leading customers and partners. We strive to develop close working relationships with industry leaders in the wireless and broadband markets. These relationships give us insight into the most important specifications for next-generation products. |
| · | Build market share to improve economies of scale. Establishing our business as a leading technology enabler for the long-term involves responsible investment for future technologies supported by appropriate long-term return. Increased volumes are critical to semiconductor companies and consistent with long-term viability for our business. |
| · | Provide additional and flexible capacity through foundries. Leveraging third-party foundry capabilities to supplement our existing wafer fab, and expand our ability to grow scale while limiting costly further capital investment in manufacturing. |
| · | Focus on improving our financial model. We seek to increase our gross margins and profitability by focusing on those products and markets where we can achieve a strong market position by deploying our technological leadership. We intend to focus on supplying products in the following markets for this purpose: (1) 3G standards CDMA/EVDO, W-CDMA/HSPA and UMTS, (2) 4G standards LTE and WiMAX, (3) WiFi standards 802.11 a/b/g and 802.11 n, (4) CATV set-top boxes and cable modems, and (5) CATV and FTTP infrastructure amplifiers. |
Products
We classify our revenues based upon the end application of the product in which our integrated circuits are used. For the years ended December 31, 2007, 2008 and 2009, wireless accounted for approximately 56%, 60% and 68% respectively, of our total net sales, while broadband accounted for approximately 44%, 40% and 32%, respectively, of our total net sales.
Wireless
Our Wireless product line includes power amplifier modules for CDMA/EVDO, GSM/EDGE, WCDMA/HSPA, LTE and other wireless technologies for mobile handsets and data devices. The following table describes our principal products for these applications:
| Product | Application |
| Power Amplifier (PA) | Used in RF transmit chain of wireless handset, modem, datacard or embedded module to amplify uplink signal to base station. |
| HELP™ PA Module (multiple versions) | ANADIGICS proprietary High Efficiency at Low Power PA design reduces average PA power consumption as much as 75% in CDMA/EVDO and W-CDMA/HSPA devices. |
| ZeroIC™ PA Module | Unique InGaP PA design for specific Qualcomm CDMA/EVDO platforms includes switched RF path with zero current consumption to conserve battery life at lower power levels. |
| Multi-band PA Modules | Two or more PA’s in a single package enables device operation in multiple frequency bands at lower cost and with less board area compared to multiple single-band PA designs. |
Broadband
Our Broadband product line encompasses video and data telecommunications systems, primarily consisting of CATV, WiFi and WiMAX applications.
The following table outlines our principal CATV products and their applications:
| Product | Application |
| CATV Set-Top Box and Cable Modem Products | |
Tuner Upconverters and Downconverters | Used to perform signal amplification and frequency conversion in double-conversion video and data tuners. |
| Active Splitters | Used to split an incoming signal to feed multiple tuners. |
| Integrated Tuners | Used to integrate tuner upconverters, downconverters and synthesizers in a single package. |
| Upstream Amplifiers | Used to amplify and control the level of signals in the return path. |
| Product | Application |
| CATV Infrastructure and FTTP Products | |
| Line Amplifiers | Used to distribute RF signals from headends to subscribers. |
| Drop Amplifiers | Used to amplify RF signals at individual subscriber locations. |
| Optical Network RF Amplifiers | Used to amplify RF signals for FTTP and FiOS. |
The following table sets forth information regarding our principal products in the WiFi market:
| Product | Application |
| WiFi Products | |
| 2.4 GHz (802.11 b/g) PAs and Front-End ICs | Used in wireless network interface cards (NIC), embedded notebook computers (mini-PCI) and access point (AP) applications to boost the transmit signal for increased range and data throughput. |
| 5 GHz (802.11 a) PAs and Front-End ICs | Used in wireless rich-media applications, such as streaming audio/video, to boost the transmit signal for increased range and data throughput. |
| Dual Band (802.11 a/b/g) PAs and Front-End ICs | Used in wireless network systems that require seamless transition between frequencies to mitigate interference and congestion. |
| MIMO (802.11n) PAs and Front-End ICs | Used in multimedia applications for higher data throughput and greater WiFi coverage. |
The following table sets forth information regarding our principal products in the WiMAX market:
| Product | Application |
| WiMAX Products | |
| Mobile WiMAX PAs | PA modules used for mobility applications. |
| Fixed Point WiMAX PAs | PA modules used for point-to-point Central Premises Equipment (CPE) applications. |
Marketing, Sales, Distribution and Customer Support
We sell our products primarily to our direct customers worldwide and have developed close working relationships with leading companies in the broadband wireless and wireline communications markets. Additionally, we selectively use independent manufacturers’ representatives and distributors to complement our direct sales and customer support efforts. Our relationships with our distributors enable them to maintain local practices regarding inventories and payment terms while supporting our growth in Asian wireless and global broadband markets. Working with distributors like World Peace Group and Richardson Electronics, who have extensive sales networks, provides us access to tier-one customers in these markets. We believe this is critical to our objective of expanding our customer base, especially as we expand our product portfolio.
We believe that the technical nature of our products and markets demands an unwavering commitment to building and maintaining close relationships with our customers. Our sales and marketing staff, which is assisted by our technical staff and senior management, visit prospective and existing customers worldwide on a regular basis. Our design and applications engineering staff actively communicate with customers during all phases of design and production. We have highly specialized field application engineering teams near our customers in Korea, Taiwan and China, as well as a system application team in Denmark, which is located near key European handset original equipment manufacturers (OEM’s) and chipset providers. We believe that these contacts are vital to the development of close, long-term working relationships with our customers, and in obtaining regular forecasts, market updates and information regarding technical and market trends.
We believe that reference-design manufacturers in the broadband wireless and wireline communications markets will continue to play an important role in the future of these markets. Therefore, we believe it is essential that we maintain strong relationships in partnering with these companies to further penetrate these market opportunities.
Process Technology, Manufacturing, Assembly and Testing
We design, develop and manufacture RFICs primarily using GaAs compound semiconductor substrates with various process technologies, Metal Semiconductor Field Effect Transistors (MESFET), Pseudomorphic High Electron Mobility Transistors (pHEMT), and Heterojunction Bipolar Transistors (HBT). Our patented technology, which utilizes InGaP-plus, combines InGaP HBT and pHEMT processes on a single substrate, enabling us to integrate the PA function and the RF active switch function on the same die.
Manufacturing
We fabricate substantially all of our ICs in our six-inch diameter GaAs wafer fab in Warren, New Jersey. The Warren fab was first certified as ISO 9001 compliant in December 1993. Since that time, we have updated our compliance to the ISO 9001:2000 upgrade of this standard. In 2004, we also received ISO 14001 certification and remain certified.
During 2009, we announced a hybrid manufacturing strategy whereby we entered into a strategic foundry agreement with WIN Semiconductors to supplement our existing wafer fabrication capability and allow for additional and flexible capacity without the requisite capital investment. We have begun developing certain new products that will use this additional production and process capability.
Assembly
Fabricated GaAs wafers are shipped to contractors in Asia for packaging. Certain processes cannot be easily or economically integrated onto a single die, and consequently multi-chip modules that combine multiple die within a single package are now required, enabling the selection of the optimal process technology for each IC within the package. This provides enhanced integration at the sub-system level and these solutions generate significant size reductions in wireless handset component circuitry.
Modules allow our customers to get their product to market more rapidly at a lower overall end product cost due largely to the reduced parts count and reduction in required engineering effort. We believe we are well positioned to address the shift toward more complex multi-chip modules because we possess both extensive process breadth (a key advantage, as modules typically incorporate numerous process technologies) and a large portfolio of RF expertise (e.g., PAs, switches, transceivers, filters, and discretes).
Final Test
After assembly, packaged ICs are tested prior to shipment to our customers. We outsource the majority of our production RF testing operations, which are performed near our module assembly contractors in Asia. This adds considerable efficiencies to the device manufacturing process in reducing product cycle times and manufacturing costs and supports our initiative to reduce manufacturing costs.
Raw Materials
GaAs wafers, HBT/pHEMT epitaxial wafers, passive components, other raw materials, and equipment used in the production of our ICs are available from a limited number of sources. See “Risk Factors—Sources for certain components, materials and equipment are limited, which could result in delays or reductions in product shipments.”
Research and Development
We have made significant investments in our proprietary processes, including product design, packaging and wafer fabrication, which we believe gives us a competitive advantage. Research and development expenses were $46.5 million, $54.5 million and $46.0 million in 2007, 2008 and 2009, respectively. We continue to focus our research and development on advanced PAs and front end modules for 3, 3.5 and 4 G wireless markets, and on active splitters, WiFi PAs and Front-End ICs, WiMAX PAs, CATV infrastructure amplifiers and FTTP amplifiers in the broadband market.
Further, we develop other components, for example silicon CMOS components, to support our PA module and other products. We do not intend to manufacture this technology in-house, as we believe there will be adequate external foundry capacity available. See “Risk Factors—Sources for certain components, materials and equipment are limited, which could result in delays or reductions in product shipments.”
Customers
Sales to LGE and RIM accounted for 15% and 14%, respectively, of total net sales during 2009. No other customer accounted for 10% or more of total net sales during 2009. See “Risk Factors—We depend on a small number of customers; a loss of or a decrease in purchases and/or change in purchasing patterns by one of these customers could materially and adversely affect our revenues and our ability to forecast revenue.”
Employees
As of December 31, 2009, we had 564 employees.
Competition
We compete with U.S. and international semiconductor and integrated circuit manufacturers of all sizes. Our key competitors are Avago Technologies Limited, Microtune, Inc., RF Micro Devices, Inc., SiGe Semiconductor, Inc., Skyworks Solutions, Inc. and TriQuint Semiconductor, Inc.
Many of our competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. Increased competition could adversely affect our revenue and profitability through price reductions or reduced demand for our products. See “Risk Factors—We face intense competition, which could result in a decrease in our products’ prices and sales.”
Patents, Licenses and Proprietary Rights
It is our practice to seek U.S. patent and copyright protection on our products and developments where appropriate and to protect our valuable technology under U.S. laws affording protection for trade secrets and for semiconductor chip designs. We own 70 U.S. patents and have 9 pending U.S. patent applications. The U.S. patents were issued between 1991 and 2009 and will expire between 2010 and 2027.
We rely primarily upon trade secrets, technical know-how and other unpatented proprietary information relating to our product development and manufacturing activities. To protect our trade secrets, technical know-how and other proprietary information, our employees are required to enter into agreements providing for maintenance of confidentiality and the assignment of rights to inventions made by them while in our employ. We have also entered into non-disclosure agreements to protect our confidential information delivered to third parties in conjunction with possible corporate collaborations and for other purposes. See “Risk Factors—We may not be successful in protecting our intellectual property rights or in avoiding claims that we infringe on the intellectual property rights of others.”
Environmental Matters
Our operations are subject to federal, state and local environmental laws, regulations and ordinances that govern activities or operations that may have adverse effects on human health or the environment. These laws, regulations or ordinances may impose liability for the cost of remediating, and for certain damages resulting from, sites of past releases of hazardous materials. We believe that we currently conduct, and have conducted, our activities and operations in substantial compliance with applicable environmental laws and regulations, and that costs arising from existing environmental laws and regulations will not have a material adverse effect on our results of operations. We cannot assure you, however, that such environmental laws and regulations will not become more stringent in the future or that we will not incur significant costs in the future in order to comply with these laws and regulations. See “Risk Factors—We are subject to stringent environmental laws and regulations both domestically and abroad.”
Available Information
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website (www.anadigics.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission. All SEC filings are also available at the SEC’s Web site at www.sec.gov
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CERTAIN STATEMENTS IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS (AS THAT TERM IS DEFINED IN THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED) THAT INVOLVE RISKS AND UNCERTAINTIES. THESE FORWARD-LOOKING STATEMENTS CAN GENERALLY BE IDENTIFIED AS SUCH BECAUSE THE CONTEXT OF THE STATEMENT WILL INCLUDE WORDS SUCH AS WE "BELIEVE", "ANTICIPATE", "EXPECT" OR WORDS OF SIMILAR IMPORT. SIMILARLY, STATEMENTS THAT DESCRIBE OUR FUTURE PLANS, OBJECTIVES, ESTIMATES OR GOALS ARE FORWARD-LOOKING STATEMENTS. THE CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS AND DEVELOPMENTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS PRESENTED HEREIN INCLUDE THE RISK FACTORS DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMPANY AND IN ANALYZING OUR FORWARD-LOOKING STATEMENTS.
Risks Related to ANADIGICS
We have experienced losses in the past, and expect to continue to incur losses.
We have incurred substantial operating and net losses in the past. While we had positive operating results during calendar year 2007, we had a net loss in calendar years 2008 and 2009 as a result of the general economic downturn, market factors beyond our control and a loss in market share, and we expect to continue to incur losses in 2010. Additionally, we compete in an industry with limited visibility into customers’ forecasts beyond just a few quarters. If economic conditions worsen or there is an abrupt change in our customers’ businesses or markets, our business, financial condition and results of operations will likely be materially and adversely affected.
Unfavorable general economic conditions in individual or world markets could negatively impact our financial performance.
Unfavorable general economic conditions, such as a recession or economic slowdown in the United States or in one or more of our other major markets, could negatively affect the demand for some of our products. Our customer base includes OEMs that are reliant on consumer demand. Consumers may seek to reduce discretionary spending, which can soften demand for our customers’ products and can negatively affect our financial performance.
Our results of operations can vary significantly due to the cyclical nature of the semiconductor industry and our end markets.
The semiconductor industry and our end markets have been cyclical, seasonal and subject to significant downturns. In past years, the industry has experienced periods marked by market weaknesses that created lower order demand, production overcapacity, high inventory levels, and accelerated declines in average selling prices for our products. These factors negatively affected our financial condition and results of operations during these periods and may negatively affect our financial condition and results of operations in the future.
Our results of operations also may be subject to significant quarterly and annual fluctuations. These fluctuations are due to a number of factors, many of which are beyond our control, including, among others: (i) changes in end-user demand for the products manufactured and sold by our customers; (ii) the effects of competitive pricing pressures, including decreases in average selling prices of our products; (iii) industry production capacity levels and fluctuations in industry manufacturing yields; (iv) levels of inventory in our end markets; (v) availability and cost of products from our suppliers; (vi) the gain or loss of significant customers; (vii) our ability to develop, introduce and market new products and technologies on a timely basis; (viii) new product and technology introductions by competitors; (ix) changes in the mix of products produced and sold; (x) market acceptance of our products and our customers; and (xi) intellectual property disputes.
As a result, we may experience substantial period-to-period fluctuations in future operating results. Investors should not rely on our results of operations for any previous period as an indicator of what results may be for any future period. Failure of our operating results to meet the expectations of analysts or investors could materially and adversely affect the price of our common stock.
If we fail to sell a high volume of products, our operating results may be harmed.
In calendar years 2007 and 2008 we increased capacity in our manufacturing facility in order to attempt to meet customer demands. At present, we are underutilizing this facility, resulting in excess capacity. This excess capacity means we incur higher fixed costs for our products relative to the revenues we generate. Because large portions of our manufacturing costs are relatively fixed, our manufacturing volumes are critical to our operating results. If we fail to achieve acceptable manufacturing volumes or experience product shipment delays, our results of operations could be harmed. During periods of decreased demand, our high fixed manufacturing costs negatively affect our results of operations. We base our expense levels in part on our expectations of future orders and these expense levels are predominantly fixed. If we receive fewer customer orders than expected or if our customers delay or cancel orders, we may not be able to reduce our manufacturing costs, which would have an adverse effect on our results of operations. If we are unable to improve utilization levels and correctly manage capacity, the increased expense levels relative to revenue will have an adverse effect on our business, financial condition and results of operations.
We depend on a small number of customers; a loss of or a decrease in purchases and/or change in purchasing patterns by one of these customers could materially and adversely affect our revenues and our ability to forecast revenue.
We receive a significant portion of our revenues from a few significant customers and their subcontractors. Sales to LGE and RIM accounted for 15% and 14%, respectively, of total net sales during 2009. Sales to our greater than 10% customers have approximated or exceeded 30% of total net sales in each of the last three fiscal years. Our financial condition and results of operations have been materially and adversely affected in the past by the failure of anticipated orders to be realized and by deferrals or cancellations of orders as a result of changes in customer requirements. If we were to lose any of our major customers, or if sales to these customers were to decrease materially, our financial condition and results of operations could be materially and adversely affected.
We face intense competition, which could result in a decrease in our products’ prices and sales.
The markets for our products are intensely competitive and are characterized by rapid technological change. We compete with U.S. and international semiconductor and integrated circuit (IC) manufacturers of all sizes, some of whom have significantly greater financial, technical, manufacturing and marketing resources than we do. We currently face significant competition in our markets and expect that intense price and product competition will continue. This competition has resulted in, and is expected to continue to result in, declining average selling prices for our products and increased challenges in maintaining or increasing market share. We believe that the principal competitive factors for suppliers in our markets include, among others: (i) time-to-market; (ii) timely new product innovation; (iii) product quality, reliability and performance; (iv) product price; (v) features available in products; (vi) compliance with industry standards; (vii) strategic relationships with leading reference design providers and customers; and (viii) access to and protection of intellectual property.
Certain of our competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products than we can.
Current and potential competitors have established, or may in the future establish, financial or strategic relationships among themselves or with customers, distributors, reference design providers or other third parties with whom we have or may in the future have relationships. If our competitors are able to strengthen existing, or establish new, relationships with these third parties they may rapidly acquire market share at our expense, which occurred to some extent in 2008 when we were unable to fully meet customer demand due to capacity constraints. We cannot assure you that we will be able to compete successfully against current and potential competitors. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our financial condition and results of operations.
We have implemented restructuring programs in the past and may need to in future.
We implemented cost restructuring programs in late 2008 and early 2009, and have implemented other restructuring programs in our history. Such restructuring programs are costly to implement and may inadequately address the operating environment. No assurance can be given that the implementation of cost reduction programs will generate the anticipated cost savings and other benefits or that future or additional measures may be required. We could incorrectly anticipate the extent and term of the market decline and weakness for our products and services and we may be forced to restructure further or may incur future operating charges due to poor business conditions.
We face risks from failures in our manufacturing processes and the processes of our vendors.
The fabrication of integrated circuits, particularly those made of GaAs, is a highly complex and precise process. Our integrated circuits are primarily manufactured on wafers made of GaAs requiring multiple process steps. It requires production in a highly controlled, clean environment. Minor impurities, contamination of the clean room environment, errors in any step of the fabrication process, defects in the masks used to print circuits on a wafer, defects in equipment or materials, downtime on equipment, human error, interruptions in electrical supply or a number of other factors can cause a substantial interruption in our manufacturing processes. Moreover, our manufacturing process is subject to fluctuations in our demand and fab utilization. In an environment of increasing manufacturing output and personnel to satisfy increasing demand, we may incur manufacturing disruptions limiting supply to customers.
Additionally, our operations may be affected by lengthy or recurring disruptions of operations at our production facility or those of our subcontractors. These disruptions may include electrical power outages, fire, earthquakes, flooding, international conflicts, war, acts of terrorism, or other natural or man-made disasters. Disruptions of our manufacturing operations could cause significant delays in our shipments unless and until we are able to shift the manufacturing of such products from an affected facility to another facility or the disruption is remedied. Furthermore, many of our customers require that they qualify a new manufacturing source before they will accept products from such source. This qualification process may be expensive and time consuming. In the event of such delays, we cannot assure you that the required alternative capacity, particularly wafer production capacity, would be available on a timely basis or at all. Even if alternative manufacturing capacity or assembly and test capacity is available, we may not be able to obtain it on favorable terms, which could result in higher costs and/or a loss of customers. We may be unable to obtain sufficient manufacturing capacity to meet demand, either at our own facilities or through external manufacturing.
Due to the highly specialized nature of the gallium arsenide integrated circuit manufacturing process, in the event of a disruption at the Warren, New Jersey semiconductor wafer fab, alternative gallium arsenide production capacity would not be readily available from third-party sources. Any disruptions could have a material adverse effect on our business, financial condition and results of operations.
We also depend on certain vendors for components, equipment and services. We maintain stringent policies regarding qualification of these vendors. However, if these vendors’ processes vary in reliability or quality, they could negatively affect our products, and thereby, our results of operations.
Our dependence on foreign semiconductor component suppliers, assembly and test operations contractors could lead to delays in or reductions of product shipments.
We do not assemble or test all of our integrated circuits or multi-chip modules. Instead, we provide the integrated circuit die and, in some cases, packaging and other components to assembly and test vendors located primarily in Asia. Our products contain numerous component parts, substrates and silicon-based products, obtained from external suppliers. The use of external suppliers involves a number of risks, including the possibility of material disruptions in the supply of key components and the lack of control over delivery schedules, capacity constraints, manufacturing yields, quality, fabrication costs, warranty issues and protection of intellectual property. Further, we are dependent upon a few foreign semiconductor assembly and test subcontractors. If these vendors’ processes vary in reliability or quality, they could negatively affect our products and, therefore, our results of operations. If we are unable to obtain sufficient high quality and timely component parts, assembly or test service, if we experience delays in transferring or requalifying our production between suppliers, assembly or test locations or if means of transportation to or from these locations are interrupted, we would experience increased costs, delays or reductions in product shipment, and/or reduced product yields, which could materially and adversely affect our financial condition and results of operations.
Sources for certain components, materials and equipment are limited, which could result in delays or reductions in product shipments.
We do not manufacture any of the starting wafers, packaging or passive components used in the production of our gallium arsenide integrated circuits. While we do not typically rely on a single source of supply for our raw materials, we are currently dependent on a sole-source supplier for certain epitaxial wafers used in the gallium arsenide semiconductor manufacturing processes at our manufacturing facility. If we were to lose this sole source of supply, for any reason, a material adverse effect on our business could result until an alternate source is obtained. Packaging and passive components are available from a limited number of sources. To the extent that we are unable to obtain these packaging or passive components in the required quantities, as has occurred from time to time in the past, we could experience delays or reductions in product shipments, which could materially and adversely affect our financial condition and results of operations.
We depend on a limited number of vendors to supply the equipment used in our manufacturing processes. When demand for semiconductor manufacturing equipment is high, lead times for delivery of such equipment can be substantial. We cannot assure you that we would not lose potential sales if required manufacturing equipment is unavailable and, as a result, we are unable to maintain or increase our production levels. A delay for any reason in increasing capacity would limit our ability to increase sales volumes, which could harm our relationships with customers.
The variability of our manufacturing yields may affect our gross margins.
Our manufacturing yields vary significantly among products, depending on the complexity of a particular integrated circuit’s design and our experience in manufacturing that type of integrated circuit. We have experienced difficulties in achieving planned yields in the past, particularly in pre-production and upon initial commencement of full production volumes, which have adversely affected our gross margins.
Regardless of the process technology used, the fabrication of integrated circuits is a highly complex and precise process. Problems in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous integrated circuits on each wafer to be nonfunctional, thereby reducing yields. These difficulties can include: (i) defects in masks, which are used to transfer circuit patterns onto our wafers; (ii) impurities in the materials used; (iii) operator errors; (iv) contamination of the manufacturing environment; (v) equipment failure; and (vi) interruptions in electrical supply.
Many of our manufacturing costs are fixed and average selling prices for our products tend to decline over time. Therefore, it is critical for us to increase the number of shippable integrated circuits per wafer and increase the production volume of wafers in order to maintain or improve our results of operations. Yield decreases can result in substantially higher unit costs, which could materially and adversely affect our financial condition and results of operations and have done so in the past. We cannot assure you that we will not suffer periodic yield problems, particularly during the early production of new products or introduction of new process technologies. If any new yield problems were to arise or any existing yield problems were to continue, our financial condition and results of operations could be materially and adversely affected.
Our products may experience significant declines in unit prices.
In each of the markets where we compete, prices of established products tend to decline significantly over time and in some cases rapidly. Accordingly, in order to remain competitive, we believe that we must continue to develop product enhancements and new technologies that will either slow the price declines of our products or reduce the cost of producing and delivering our products. If we fail to do so, our financial condition and results of operations could be materially and adversely affected.
The short life cycles of some of our products may leave us with obsolete or excess inventories.
The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are designed. For example, we estimate that current life cycles for wireless handsets, and in turn our wireless products, are approximately 9 to 12 months. Products with short life cycles require us to manage production and inventory levels closely. We cannot assure you that obsolete or excess inventories, which may result from unanticipated changes in the estimated total demand for our products and/or the estimated life cycles of the end products into which our products are designed, will not result in significant charges that will negatively affect our operating profit and net income.
We will need to keep pace with rapid product and process development and technological changes as well as product cost reductions to be competitive.
The markets for our products are characterized by rapid changes in both product and process technologies based on the continuous demand for product enhancements, higher levels of integration, decreased size and reduced power consumption. Because the continuous evolution of these technologies and frequent introduction of new products and enhancements have generally resulted in short product life cycles for our products, we believe that our future success will depend, in part, upon our ability to continue to improve the efficiency of our products and process technologies and rapidly develop new products and process technologies. The successful development of our products is highly complex and depends on numerous factors, including our ability to anticipate customer and market requirements and changes in technology and industry standards, our ability to differentiate our products from offerings of our competitors, and our ability to protect, develop or otherwise obtain adequate intellectual property for our new products. If a competing technology emerges that is, or is perceived to be, superior to our existing technology and we are unable to develop and/or implement the new technology successfully or to develop and implement a competitive and economically acceptable alternative technology, our financial condition and results of operations could be materially and adversely affected. This implementation may require us to modify the manufacturing process for our products, design new products to more stringent standards, and redesign some existing products, which may prove difficult for us and result in sub-optimal manufacturing yields, delays in product deliveries and increased expenses. We will need to make substantial investments to develop these enhancements and technologies, and we cannot assure investors that we will have funds available for these investments or that these enhancements and technologies will be successful.
If our products fail to perform or meet customer requirements, we could incur significant additional costs.
The fabrication of integrated circuits from substrate materials and the modules containing these components is a highly complex and precise process. Our customers specify quality, performance and reliability standards that we must meet. If our products do not meet these standards, we may be required to rework or replace the products. Our products may contain undetected defects or failures that only become evident after we commence volume shipments, which we may experience from time to time. Other defects or failures may also occur in the future. If such failures or defects occur, we could: (i) lose revenues; (ii) incur increased costs such as warranty expense and costs associated with customer support; (iii) experience delays, cancellations or rescheduling of orders for our products; or (iv) experience increased product returns or discounts.
Our gallium arsenide semiconductors may cease to be competitive with silicon alternatives.
Among our product portfolio, we manufacture and sell gallium arsenide semiconductor devices and components, principally PAs and switches, which tend to be more expensive than their silicon counterparts. The cost differential is due to higher costs of raw materials for gallium arsenide and higher unit costs associated with smaller sized wafers and lower production volumes. We expect the cost of producing gallium arsenide devices will continue for the foreseeable future to exceed the costs of producing their silicon counterparts. In addition, silicon semiconductor technologies are widely-used process technologies for certain integrated circuits and these technologies continue to improve in performance. Therefore, to remain competitive, we must offer gallium arsenide products that provide superior performance over their silicon-based counterparts. If we do not continue to offer products that provide sufficiently superior performance to justify their higher cost, our financial condition and results of operations could be materially and adversely affected. We cannot assure you that there will continue to be products and markets that require the performance attributes of gallium arsenide solutions.
We face a risk that capital needed for our business will not be available when we need it.
In the future, we may need to access sources of financing to fund our growth. Taking into consideration our cash balance as of December 31, 2009, including marketable securities, of $92.5 million, we believe that our existing sources of liquidity will be sufficient to fund our research and development, capital expenditures, working capital requirements, interest and other financing requirements for at least the next twelve months.
However, there is no assurance that the capital required to fund these expenditures will be available in the future. Conditions existing in the U.S. capital markets, as well as the then current condition of our company, will affect our ability to raise capital, as well as the terms of any financing. We may not be able to raise enough capital to meet our capital needs on a timely basis or at all. Failure to obtain capital when required could have a material adverse affect on us.
In addition, any strategic investments and acquisitions that we may make to help us grow our business may require additional capital. We cannot assure you that the capital required to fund these investments and acquisitions will be available in the future.
Our marketable securities’ liquidity and valuation could be affected by disruption in financial markets.
We maintain investments in financial instruments including corporate debt obligations, auction rate securities, certificates of deposit and government-related obligations, which included $6.6 million carrying value of auction rate securities at December 31, 2009. These investments must be supported by actively trading financial markets in order to be liquid investments. Financial markets can temporarily or permanently have an imbalance of buyers and sellers that can impact valuations and liquidity. Auction rate markets have experienced imbalances since late 2007 and may continue to be imbalanced. Such imbalances could negatively impact the fair value of our investments, requiring a charge against income as occurred in 2007, 2008 and 2009, our access to cash and the liquidity of our marketable securities. We can not assure you that our marketable securities could be sold for their carrying value or in our required time frame to support our intermediate term cashflow and liquidity needs.
Our success depends on our ability to attract and retain qualified personnel.
A small number of key executive officers manage our business. Their departure could have a material adverse effect on our operations. We believe that our future success will also depend in large part on our continued ability to attract and retain highly qualified manufacturing personnel, technical sales and marketing personnel, design and application engineers, as well as senior management. We believe that there is, and will continue to be, intense competition for qualified personnel in the semiconductor industry as the emerging broadband wireless and wireline communications markets develop, and we cannot assure you that we will be successful in retaining our key personnel or in attracting and retaining highly qualified manufacturing personnel, technical sales and marketing personnel, design and application engineers, as well as senior management. The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could have a material effect on our ability to operate our business. We do not presently maintain key-man life insurance for any of our key executive officers.
We are subject to risks due to our international customer base and our subcontracting operations.
Sales to customers located outside the United States (based on shipping addresses and not on the locations of ultimate end users) accounted for 95%, 94% and 93% of our net sales for the years ended December 31, 2007, 2008 and 2009, respectively. We expect that international sales will continue to represent a significant portion of our net sales. In addition, independent third parties located in Asia supply a substantial portion of the starting wafers and packaging components that we use in the production of gallium arsenide integrated circuits, and assemble and test nearly all of our products.
Due to our reliance on international sales and on foreign suppliers, assemblers and test houses, we are subject to risks of conducting business outside of the United States, including primarily those arising from local economic and political conditions, fluctuations in exchange rates, international health epidemics, natural disasters, restrictive governmental actions (e.g., exchange controls, duties, etc.), limitation of protecting intellectual property rights in foreign jurisdictions and potential acts of terrorism.
We are subject to stringent environmental laws and regulations both domestically and abroad.
We are subject to a variety of federal, state, local and foreign laws and regulations governing the protection of the environment. These environmental laws and regulations include those related to the use, storage, handling, discharge and disposal of toxic or otherwise hazardous materials used in or resulting from our manufacturing processes. Failure to comply with environmental laws and regulations could subject us to substantial liability or force us to significantly change our manufacturing operations. In addition, under some of these laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated, even if we did not cause the contamination. Although we are aware of contamination resulting from historical third-party operations at one of our facilities, a prior owner of such facility has been performing, and paying for the costs associated with, remediation of this property pursuant to an agreement with the state environmental regulatory authority. However, we cannot assure you that such prior owner will continue to do so or that we will not incur any material costs or liabilities associated with compliance with environmental laws in the future.
We may not be successful in protecting our intellectual property rights or in avoiding claims that we infringe on the intellectual property rights of others.
Our success depends in part on our ability to obtain patents and copyrights. Despite our efforts to protect our intellectual property, unauthorized third parties may violate our patents or copyrights. In addition to intellectual property that we have patented and copyrighted, we also rely on trade secrets, technical know-how and other non-patented proprietary information relating to our product development and manufacturing activities, which we seek to protect, in part, by entering into confidentiality agreements with our collaborators and employees. We cannot assure you that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others.
We seek to operate without infringing on the intellectual property rights of third parties. As is typical in the semiconductor industry, we have been notified, and may be notified in the future, that we may be infringing on certain patents and/or other intellectual property rights of other parties. We cannot assure you that we will not be subject to litigation to defend our products or processes against claims of patent infringement or other intellectual property claims. Any such litigation could result in substantial costs and diversion of our resources. If we infringe on the intellectual property rights of others, we cannot assure investors that we would be able to obtain any required licenses on commercially reasonable terms and we may be required to pay substantial damages, including treble damages, and cease production of our work product or use of one or more manufacturing processes. Even if we are ultimately successful, patent litigation can be time consuming, disruptive to management and expensive. If any of the foregoing were to occur, our financial condition and results of operations could be materially adversely affected.
We may pursue selective acquisitions and alliances and the management and integration of additional operations could be expensive and could divert management time and acquisitions may dilute the ownership of our stockholders.
Our ability to complete acquisitions or alliances is dependent upon, and may be limited to, the availability of suitable candidates and capital. In addition, acquisitions and alliances involve risks that could materially adversely affect our financial condition and results of operations, including the management time that may be diverted from operations in order to pursue and complete such transactions and difficulties in integrating and managing the additional operations and personnel of acquired companies. We cannot assure you that we will be able to obtain the capital necessary to consummate acquisitions or alliances on satisfactory terms, if at all. Further, any businesses that we acquire will likely have their own capital needs, which may be significant, which we could be called upon to satisfy independent of the acquisition price. Future acquisitions or alliances could result in additional debt, costs and contingent liabilities, all of which could materially adversely affect our financial condition and results of operations. Any additional debt could subject us to substantial and burdensome covenants. The growth that may result from future acquisitions or alliances may place significant strains on our resources, systems and management. If we are unable to effectively manage such growth by implementing systems, expanding our infrastructure and hiring, training and managing employees, our financial condition and results of operations could be materially adversely affected. In addition, if we issue additional shares of our common stock in order to acquire another business, our stockholders’ interest in us, or the combined company, could be materially diluted.
We have had significant volatility in our stock price and it may fluctuate in the future. Therefore, you may be unable to sell shares of our common stock at or above the price you paid for such shares.
The trading price of our common stock has and may continue to fluctuate significantly. Such fluctuations may be influenced by many factors, including: (i) our operating results and prospects; (ii) the operating results and prospects of our major customers; (iii) announcements by our competitors; (iv) the depth and liquidity of the market for our common stock; (v) investor perception of us and the industry in which we operate; (vi) changes in our earnings estimates or buy/sell recommendations by analysts covering our stock; (vii) general financial and other market conditions; and (viii) domestic and international economic conditions.
Public stock markets have experienced extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility significantly affected and may in the future affect the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may materially and adversely affect the market price of our common stock.
In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis.
Certain provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and our stockholders’ rights agreement and of Delaware law could deter, delay or prevent a third party from acquiring us and that could deprive you of an opportunity to obtain a takeover premium for our common stock.
Our amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law contain provisions that could have the effect of making it more difficult for a third party to acquire us, or of discouraging a third party from attempting to acquire control of us. In addition, we have a stockholders’ rights agreement that under certain circumstances would significantly impair the ability of third parties to acquire control of us without prior approval of our board of directors.
Together, our amended and restated certificate of incorporation, our amended and restated by-laws, certain provisions of Delaware law and our stockholders’ rights agreement may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices for our common stock and could also limit the price that investors may be willing to pay in the future for our common stock.
We and certain of our officers and directors are defendants in litigation and the outcome of these lawsuits may, to the extent not covered by insurance, negatively affect our financial condition, results of operations and cash flows.
Since late 2008, the Company and certain of its former and current officers and/or directors have been parties to a now consolidated putative securities class action lawsuit pending in the United States District Court for the District of New Jersey. This lawsuit alleges federal securities fraud claims and seeks unspecified damages arising out of the alleged non-disclosure of information concerning, among other things, manufacturing inefficiencies and customer demand. The alleged class period runs from July 24, 2007 through August 7, 2008. In early 2009, two shareholders’ derivative lawsuits were filed in New Jersey Superior Court against the Company, as a nominal defendant, and certain of its current and former directors, alleging state law claims and seeking unspecified damages arising out of the same events at issue in the putative class action lawsuits. Neither the putative class action lawsuits nor the shareholders’ derivative lawsuits have yet advanced beyond the preliminary procedural stages. (See “Item 3. Legal Proceedings” for additional details on these cases and related matters.)
At this time, we cannot predict the probable outcome of these lawsuits. The pendency of these lawsuits, and any others that might subsequently be filed against us, could divert the attention of management from our business, harm our reputation and otherwise have a negative effect on our financial condition, results of operations and cash flows. Any adverse outcome in any one of these lawsuits may, to the extent not reimbursed by insurance, have a negative effect on our financial condition, results of operations and cash flows.
Not applicable.
Our executive offices and primary fabrication facility are located at 141 Mt. Bethel Road, Warren, New Jersey 07059. We currently lease space in several buildings in Warren, New Jersey, located within the industrial complex. Approximately 150,000 square feet of manufacturing and office space is occupied in a building located at 141 Mt. Bethel Road in Warren, New Jersey under a twenty-year lease expiring on December 31, 2016. We occupy another 25,000 square feet of office space in a nearby building under a three-year lease expiring on October 31, 2010.
We also lease approximately 40,800 square feet in aggregate of office space in the following locations: Atlanta, Georgia; Tyngsboro, Massachusetts; Richardson, Texas; Taipei, Taiwan; Aalborg, Denmark; China; South Korea; and Japan under lease agreements with remaining terms ranging from four to thirty six months that can be extended, at our option.
On or about November 11, 2008, plaintiff Charlie Attias filed a putative securities class action lawsuit in the United States District Court for the District of New Jersey, captioned Charlie Attias v. Anadigics, Inc., et al., No. 3:08-cv-05572, and, on or about November 21, 2008, plaintiff Paul Kuznetz filed a related class action lawsuit in the same court, captioned Paul J. Kuznetz v. Anadigics, Inc., et al., No. 3:08-cv-05750 (jointly, the "Class Actions"). The Complaints in the Class Actions, which were consolidated under the caption In re Anadigics, Inc. Securities Litigation, No. 3:08-cv-05572, by an Order of the District Court dated November 24, 2008, seek unspecified damages for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder, in connection with alleged misrepresentations and omissions in connection with, among other things, Anadigics's manufacturing capabilities and the demand for its products. On October 23, 2009, plaintiffs filed a Consolidated Amended Class Action Complaint, which names the Company, a current officer and a former officer-director, and alleges a proposed class period that runs from July 24, 2007 through August 7, 2008. On December 23, 2009, defendants filed a motion to dismiss the Amended Complaint. The motion is scheduled to be fully briefed by the parties on or before March 30, 2010.
On or about January 14, 2009, a shareholder's derivative lawsuit, captioned Sicari v. Anadigics, Inc., et al., No. SOM-L-88-09, was filed in the Superior Court of New Jersey, and, on or about February 2, 2009, a related shareholder's derivative lawsuit, captioned Moradzadeh v. Anadigics, Inc., et al., No. SOM-L-198-09, was filed in the same court (jointly, the "Derivative Lawsuits"). The Derivative Lawsuits seek unspecified damages for alleged state law claims against certain of the Company's current and former directors arising out of the matters at issue in the Class Actions. By Order dated March 6, 2009, the New Jersey Superior Court consolidated the Derivative Lawsuits under the caption In re Anadigics, Inc. Derivative Litigation, No. SOM-L-88-09. By Order dated March 27, 2009, the court stayed the Derivative Lawsuits pending disposition of the defendants' motion to dismiss the Amended Complaint in the Class Actions.
Because the Class Actions and the Derivative Lawsuits, which are in a preliminary stage, do not specify alleged monetary damages, we are unable to reasonably estimate a possible range of loss, if any, to the Company in connection therewith.
We are also a party to ordinary course litigation arising out of the operation of our business. We believe that the ultimate resolution of such ordinary course litigation should not have a material adverse effect on our consolidated financial condition or results of operations.
No matters were submitted to a vote of the Company’s security holders during the fourth quarter of 2009.
PART II
Our $0.01 par value Common Stock, (“Common Stock”) has been quoted on the NASDAQ Global Market under the symbol "ANAD" since the commencement of trading on April 21, 1995 following our initial public offering of our Common Stock. The following table sets forth for the periods indicated the high and low sale prices for our Common Stock.
| High | Low | |||||||
| Calendar 2009 | ||||||||
| Fourth Quarter | $ | 4.93 | $ | 2.86 | ||||
| Third Quarter | 5.21 | 3.38 | ||||||
| Second Quarter | 4.59 | 1.98 | ||||||
| First Quarter | 2.51 | 1.43 | ||||||
| Calendar 2008 | ||||||||
| Fourth Quarter | $ | 2.96 | $ | 1.13 | ||||
| Third Quarter | 10.53 | 2.88 | ||||||
| Second Quarter | 13.95 | 6.52 | ||||||
| First Quarter | 11.59 | 5.85 | ||||||
As of December 31, 2009, there were 64,398,029 shares of Common Stock outstanding (excluding shares held in Treasury) and 685 holders of record of the Common Stock.
We have never paid cash dividends on our capital stock. We currently anticipate that we will retain available funds for use in the operation and expansion of our business, and do not anticipate paying any cash dividends in the foreseeable future.
See also “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” under Part III, Item 12 of this report.
The selected financial data set forth below should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and our financial statements, related notes and other financial information included herein. The selected consolidated financial data set forth below as of December 31, 2008 and 2009 and for the years ended December 31, 2007, 2008 and 2009 have been derived from our audited financial statements included herein. The selected consolidated financial data set forth below as of December 31, 2005, 2006 and 2007 and for the years ended December 31, 2005 and 2006 have been derived from our audited financial statements, as adjusted for discontinued operations, that are not included herein or incorporated by reference herein. Our historical results are not necessarily indicative of the results that may be expected for any future period.
| (amounts in thousands, except for per share amounts) | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||
| RESULTS OF OPERATIONS | ||||||||||||||||||||
| Net sales | $ | 103,871 | $ | 166,442 | $ | 230,556 | $ | 258,170 | $ | 140,484 | ||||||||||
| Gross profit | 21,736 | 50,231 | 78,788 | 78,587 | 20,158 | |||||||||||||||
| Operating (loss) income from continuing operations | (27,950 | ) | (8,483 | ) | 2,078 | (38,267 | ) | (55,323 | ) | |||||||||||
| (Loss) income before income taxes | (30,466 | ) | (7,870 | ) | 6,916 | (41,872 | ) | (57,404 | ) | |||||||||||
| Benefit from income taxes | - | - | - | - | (321 | ) | ||||||||||||||
| Net (loss) income from continuing operations | (30,466 | ) | (7,870 | ) | 6,916 | (41,872 | ) | (57,083 | ) | |||||||||||
| (Loss) earnings per share from continuing operations: | ||||||||||||||||||||
| Basic | $ | (0.90 | ) | $ | (0.18 | ) | $ | 0.13 | $ | (0.70 | ) | $ | (0.92 | ) | ||||||
| Diluted | $ | (0.90 | ) | $ | (0.18 | ) | $ | 0.12 | $ | (0.70 | ) | $ | (0.92 | ) | ||||||
| BALANCE SHEET DATA: | ||||||||||||||||||||
| Total cash and marketable securities | $ | 86,357 | $ | 83,482 | $ | 176,812 | $ | 145,724 | $ | 92,526 | ||||||||||
| Total assets | 168,273 | 182,602 | 333,461 | 303,777 | 214,452 | |||||||||||||||
| Total capital lease obligations | 2,032 | 1,775 | - | - | - | |||||||||||||||
| Current portion of long-term debt | 46,700 | - | - | 38,000 | - | |||||||||||||||
| Long-term debt | 38,000 | 38,000 | 38,000 | - | - | |||||||||||||||
| Total stockholders’ equity | 58,135 | 115,760 | 250,106 | 230,008 | 189,058 | |||||||||||||||
OVERVIEW
We are a leading provider of semiconductor solutions in the growing broadband wireless and wireline communications markets. Our products include power amplifiers, tuner integrated circuits, active splitters, line amplifiers and other components, which can be sold individually or packaged as integrated radio frequency and front end modules. We believe that we are well-positioned to capitalize on the high growth voice, data and video segments of the broadband wireless and wireline communications markets. We offer 3G products that use the W-CDMA, EDGE and WEDGE standards, 3.5G products that use HSPA and EVDO standards, 4G products for WIMAX and LTE, WiFi products that use the 802.11 a/b/g and 802.11 n MIMO standards, CATV cable modem and set-top box products, CATV infrastructure products and FTTP products.
Our business strategy focuses on developing RF front end solutions for our customers and partnering with industry-leading wireless and wireline 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 continue to focus on leveraging our technological advantages to remain a leading supplier of innovative 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 (pHEMT) on the same die, provides us with a competitive advantage in the marketplace. Additionally, we believe technologies such as HELP provide our customers a competitive advantage by enabling their 3G, 3.5G and 4G devices to consume less battery power and deliver longer talk time than comparable products in their markets.
Our six-inch diameter GaAs fab located at our corporate headquarters in Warren, New Jersey, has been operational since 1999. During 2009, we announced a hybrid manufacturing strategy whereby we entered into a strategic foundry agreement with WIN Semiconductors to supplement our existing wafer fabrication capability and allow for additional and flexible capacity without the requisite capital investment.
Our annual revenues declined from 2008, as a result of a combination of a reduction in market share with certain customers and an industry slowdown due to the current macroeconomic environment. Although our annual revenue declined in 2009, we experienced sequential growth in quarterly revenue commencing with the second quarter of 2009.
We believe our markets are, and will continue to remain, competitive which could result in continued quarterly volatility in our net sales. This competition has resulted in, and is expected over the long-term to continue to result in competitive or declining average selling prices for our products and increased challenges in maintaining or increasing market share.
We have only one reportable segment. For financial information related to such segment and certain geographic areas, see Note 4 to the accompanying consolidated financial statements.
CRITICAL ACCOUNTING POLICIES & SIGNIFICANT ESTIMATES
GENERAL
We believe the following accounting policies are critical to our business operations and the understanding of our results of operations. Such accounting policies may require management to exercise a higher degree of judgment and make estimates used in the preparation of our consolidated financial statements.
REVENUE RECOGNITION
Revenue from product sales is recognized when title to the products is transferred to the customer, which occurs upon shipment or delivery, depending upon the terms of the sales order. We sell to certain distributors who are granted limited contractual rights of return and exchange and certain pre-negotiated individual product-customer price protection. Revenue from sales of our products to distributors is recognized, net of allowances, upon shipment of the products to the distributors. At the time of shipment, title transfers to the distributors and payment from the distributors is due on our standard commercial terms; payment terms are not contingent upon resale of the products. Revenue is appropriately reduced for the portion of shipments subject to return, exchange or price protection. Allowances for the distributors are recorded upon shipment and calculated based on the distributors’ indicated intent, historical data, current economic conditions and contractual terms. We believe we can reasonably and reliably estimate allowances for credits to distributors in a timely manner. We charge customers for the costs of certain contractually-committed inventories that remain at the end of a product's life. Such amounts are recognized as cancellation revenue when cash is received. The value of the inventory related to cancellation revenue may, in some instances, have been reserved during prior periods in accordance with our inventory obsolescence policy.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses resulting from our customers' failure to make payments. If the financial condition of our customers were to erode, making them unable to make payments, additional allowances may be required.
WARRANTY COSTS
We provide for potential warranty claims by recording a current charge to income. We estimate potential claims by examining historical returns and other information deemed critical and provide for an amount which we believe will cover future warranty obligations for products sold. The liability for warranty costs is included in accrued liabilities in the consolidated balance sheets.
STOCK-BASED COMPENSATION
We account for stock-based compensation costs in accordance with Accounting Standards Codification (ASC) 718 “Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to our employees and directors. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period which in most cases is the vesting period. Determining the fair value of certain awards at the grant date requires considerable judgment, including estimating expected volatility, expected term and risk-free interest rate. Our expected volatility is based on historical and implied volatility. The expected term of the stock options is based on several factors including historical observations of employee exercise patterns and expectations of employee exercise behavior in the future giving consideration to the contractual terms of the stock-based awards. The risk free interest rate assumption is based on the yield at the time of grant of a U.S. Treasury security with an equivalent remaining term. If factors change and we employ different assumptions, stock-based compensation expense may differ significantly from what we have recorded in the past.
MARKETABLE SECURITIES
Available-for-sale securities are stated at fair value, as determined by quoted market prices or, as needed, independent valuation models, with unrealized gains and losses reported in other accumulated comprehensive income or loss. Independent valuations developed to estimate the fair value of illiquid auction rate securities (ARS) were determined using a combination of two calculations: (1) a discounted cash flow model, where the expected cash flows of the ARS are discounted to the present value using a yield that incorporates compensation for illiquidity, and (2) a market comparables method, where the ARS are valued based on indications, from the secondary market, of what discounts buyers demand when purchasing similar ARS. The valuations include numerous assumptions such as assessments of the underlying structure of each security, expected cash flows, discount rates, credit ratings, workout periods and overall capital market liquidity. We review our investments on an ongoing basis for indications of possible impairment, and if an impairment is identified, we determine whether the impairment is temporary or other-than-temporary, in which case it is recorded as a charge to income. Determination of whether the impairment is temporary or other-than-temporary requires significant judgment. Unrealized losses are recognized in our consolidated statement of operations when a decline in fair value is determined to be other than temporary. The primary factors we consider in classifying the impairment are the extent to which and period of time that the fair value of each investment has declined below its cost basis.
INVENTORY
Inventories are valued at the lower of cost or market ("LCM"), using the first-in, first-out method. We capitalize production overhead costs to inventory on the basis of normal capacity of the production facility and in periods of abnormally low utilization we charge the related expenses as a period cost in the statement of operations. In addition to LCM limitations, we reserve against inventory items for estimated obsolescence or unmarketable inventory. The reserve for excess and obsolete inventory is primarily based upon forecasted short-term demand for the product. Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In the event we sell inventory that had been covered by a specific inventory reserve, the sale is recorded at the actual selling price and the related cost of goods sold at the full inventory cost, net of the reserve.
LONG-LIVED ASSETS
Long-lived assets is primarily comprised of fixed assets. We regularly review these assets for indicators of impairment and assess the carrying value of the assets against market values. When an impairment exists, we record an expense to the extent that the carrying value exceeds fair market value.
We assess the impairment of long-lived assets, including intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors which could trigger an impairment review include the following: significant changes in the manner of use of the assets; significant underperformance relative to historical or projected future operating results; or significant negative industry or economic trends. An impairment occurs when the future undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of such assets. Cash flow estimates are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions. The net carrying values of assets not recoverable through future cash flows are reduced to fair value. Estimates of fair value represent management’s best estimates based on industry trends, and market rates and transactions. In connection with completing step two of our goodwill impairment analysis during the fourth quarter of 2008, we assessed the fair values of our related intangible assets, consisting principally of assembled workforce related to the WiFi reporting unit and expensed such value as an impairment charge in the statement of operations.
During the fourth quarter of 2008, we evaluated our future options with regard to our investment in constructing a wafer fabrication facility in Kunshan China and subsequently estimated and evaluated future cashflows associated with this investment. Such estimates included significant assumptions on possible recoveries through a sale of the facility, further investment, and a return in demand for production capacity and discount rate. After evaluating the discounted cash flows, we fully impaired the investment and charged such amounts within restructuring and impairment charges in our statement of operations.
Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell. Management considers sensitivities to capacity, utilization and technological developments in making its assumptions of fair value.
DEFERRED TAXES
We record a valuation allowance to reduce deferred tax assets when it is more likely than not that some portion of the amount may not be realized. During 2001, we determined that it was no longer more likely than not that we would be able to realize all or part of our net deferred tax asset in the future, and an adjustment to provide a valuation allowance against the deferred tax asset was charged to income. We continue to maintain a full valuation allowance on our deferred tax assets.
While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period such determination was made.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data as a percentage of net sales for the periods indicated:
| 2007 | 2008 | 2009 | ||||||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of sales | 65.8 | 69.6 | 85.7 | |||||||||
| Gross profit | 34.2 | 30.4 | 14.3 | |||||||||
| Research and development expense | 20.2 | 21.1 | 32.7 | |||||||||
| Selling and administrative expenses | 13.1 | 15.9 | 19.2 | |||||||||
| Restructuring and impairment charges | - | 8.2 | 1.8 | |||||||||
| Operating (loss) income | 0.9 | % | (14.8 | %) | (39.4 | %) | ||||||
| Interest income | 3.5 | 2.0 | 0.8 | |||||||||
| Interest expense | (1.1 | ) | (0.9 | ) | (1.3 | ) | ||||||
| Other expense | (0.3 | ) | (2.5 | ) | (0.9 | ) | ||||||
| Income (loss) from continuing operations before income taxes | 3.0 | % | (16.2 | %) | (40.8 | %) | ||||||
| Benefit from income taxes | - | - | (0.2 | ) | ||||||||
| Income (loss) from continuing operations | 3.0 | % | (16.2 | %) | (40.6 | %) | ||||||
| Loss from discontinued operations | (0.4 | %) | - | - | ||||||||
| Net income (loss) | 2.6 | % | (16.2 | %) | (40.6 | %) | ||||||
2009 COMPARED TO 2008
NET SALES. Net sales for the year ended December 31, 2009 decreased 45.6% to $140.5 million, compared to net sales for the year ended December 31, 2008 of $258.2 million. The net sales decline resulted from a combination of a reduction in market share with certain customers and an industry slowdown due to the unfavorable macroeconomic environment.
Net sales for the year ended December 31, 2009 of the Company’s wireless products decreased 38.0% to $96.0 million compared to net sales for the year ended December 31, 2008 of $154.7 million. The decrease in sales was primarily due to decreased demand in both the CDMA and EDGE/WEDGE cellular device markets resulting from a reduction in market share with certain customers and an industry slowdown due to the unfavorable macroeconomic environment.
Net sales for the year ended December 31, 2009 of the Company’s broadband products decreased 57.0% to $44.5 million compared to net sales for the year ended December 31, 2008 of $103.5 million. The decrease in sales was primarily due to decreased demand for WLAN PAs shipped into the PC Notebook market resulting from the combination of a reduction in market share with one of our key customers and general softness in demand for WLAN PAs that has occurred due to the unfavorable macroeconomic environment. To a lesser degree, decreased demand in the set top box and cable infrastructure markets contributed to the lower sales for the year ended December 31, 2009.
GROSS MARGIN. Gross margin for 2009 declined to 14.3% of net sales, compared with 30.4% of net sales in the prior year. Gross margin for 2009 included charges of $5.3 million, representing 3.8% of revenue, arising from a settlement of a commercial dispute with a customer and certain inventory reserve charges. Gross margin for 2008 included charges of $7.1 million, representing 2.7% of revenue, associated with production equipment purchase cancelation charges, equipment impairment charges and inventory reserve charges, which the Company considered an anomaly of the period. After considering the charges outlined above, the decrease in gross margin were primarily due to lower product shipments and wafer production, and fixed production costs increasing as a percent of lower revenues. Fixed production costs include, but are not limited to depreciation, maintenance and operations’ support functions.
RESEARCH & DEVELOPMENT. Company-sponsored research and development (R&D) expenses decreased 15.6% during 2009 to $46.0 million from $54.5 million during 2008. The decrease was primarily due to decreased headcount and related materials used in our R&D product and process development following workforce reductions in late 2008 and early 2009.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses decreased 34.5% during 2009 to $26.9 million from $41.1 million in 2008. In 2008, selling and administrative expenses included $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 decrease in 2009 was primarily driven by lower headcount and operating expenses following workforce reductions in late 2008 and early 2009.
RESTRUCTURING AND IMPAIRMENT CHARGES. During the first quarter of 2009 we implemented workforce reductions, which eliminated approximately 110 positions, resulting in a restructuring charge of $2.6 million principally for severance and related benefits. During the fourth quarter of 2008, we implemented workforce reductions which eliminated approximately 100 positions resulting in a restructuring charge of $2.1 million, principally for severance and related benefits.
During the fourth quarter of 2008, we evaluated alternatives with regard to our investment in the construction of a wafer fabrication facility in Kunshan China in light of surplus industry production capacity, reduced demand experienced by the Company, as well as the broader macroeconomic environment. We determined that the carrying amount of the China fabrication building was not recoverable as the carrying amount was greater than the sum of the undiscounted cash flows expected from the use and disposition of these assets. As a result of this impairment analysis, we recorded a full $13.0 million impairment charge in the fourth quarter of 2008.
In 2008, our annual goodwill impairment test determined that the fair value of the WiFi reporting unit was less than the carrying value of the net assets of the reporting unit, and thus we performed step two of the impairment test. Our step two analysis resulted in no implied fair value of goodwill and therefore, we recognized an impairment charge of $5.9 million in the fourth quarter of 2008, representing a write off of the entire amount of our previously recorded goodwill. In connection with our goodwill impairment analysis, we also assessed the fair values of our related intangible assets, which carried an unamortized value of $0.3 million consisting principally of assembled workforce related to the WiFi reporting unit noting it was similarly impaired and charged the remaining unamortized carrying value to restructuring and impairment charges.
INTEREST INCOME. Interest income decreased 78.4% to $1.1 million during 2009 from $5.3 million in 2008. The decrease was primarily due to lower interest rates, as we maintained liquidity in Government-backed investments, and were compounded by lower average funds invested.
INTEREST EXPENSE. Interest expense decreased 19.8% to $1.9 million in 2009 compared to $2.4 million in 2008. The interest expense principally arose from obligations under our 5% Convertible Senior Notes due in October 2009 (“2009 Notes”) which matured on October 15, 2009.
OTHER INCOME (EXPENSE). Other income (expense) primarily results from valuation activity in marketable securities we hold. Other expense is primarily comprised of other-than-temporary declines in value on certain auction rate securities and a corporate debt security held by the Company of $1.5 million and $6.8 million in 2009 and 2008, respectively. The aforementioned other-than-temporary declines were net of $0.2 million and $0.4 million of income recorded on par value redemption recoveries in 2009 and 2008, respectively.
BENEFIT FROM INCOME TAXES. The Housing and Economic Recovery Act of 2008 included the partial refund of certain carried-forward Research and Experimental (R&E) tax credits. During the third quarter of 2009, the Company finalized and filed the R&E claim as part of its 2008 Federal tax return and subsequently received cash of $0.3 million for the R&E credits. Such refund was recorded as a benefit from income taxes.
2008 COMPARED TO 2007
NET SALES. Net sales for the year ended December 31, 2008 increased 12.0% to $258.2 million, compared to net sales for the year ended December 31, 2007 of $230.6 million. The net sales improvement was primarily due to increased demand for wireless third generation technologies (or 3G), most significantly WCDMA.
Net sales for the year ended December 31, 2008 for the Company’s wireless products increased 19.9% to $154.7 million compared to net sales for the year ended December 31, 2007 of $129.0 million. The net sales improvement was primarily due to increased demand for power amplifiers for 3G applications of $34.7 million or 29.1%, most significantly in WCDMA applications. The growth in 3G was partially offset by lower net sales in power amplifiers for GSM of $9.1 million or 91.5%, which resulted from the Company’s shift in market focus to 3G technologies.
Net sales for the year ended December 31, 2008 for the Company’s broadband products increased to $103.5 million or 2.0% compared to net sales for the year ended December 31, 2007 of $101.5 million. The net sales improvement was due to increased demand for integrated circuits used in cable set-top boxes of $10.2 million or 55.4% partly offset by a decline in cable infrastructure and WiFi applications of $8.2 million or 9.9%.
GROSS MARGIN. Gross margin for 2008 declined to 30.4% of net sales, compared with 34.2% of net sales in the prior year. The decline in gross margin was impacted by $7.1 million in charges principally comprised of production equipment purchase cancelation charges of $1.9 million, impairment charges on equipment held for sale of $1.5 million and $3.5 million of inventory reserve charges on dedicated inventory which was surplus to reduced customer demand. In addition, depreciation expense increased by $5.4 million, which was partially offset by improvements in product mix.
RESEARCH & DEVELOPMENT. Company sponsored research and development expenses increased 17.0% during 2008 to $54.5 million from $46.5 million during 2007. The increase was primarily due to an expansion and focus in research and development efforts on new product development, requiring increased staffing and support costs, including automated design tools. In addition, our purchase of the RF group from Fairchild Semiconductor on September 5, 2007 which further added to our new product development capability, impacted the year on year comparison in the amount of $2.9 million, such amount was primarily comprised of staffing-related costs.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses increased 36.2% during 2008 to $41.1 million from $30.2 million in 2007. The increase included $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 was primarily driven by increased staff and outside advisors costs.
RESTRUCTURING AND IMPAIRMENT CHARGES. During the fourth quarter of 2008, we implemented a workforce reduction which eliminated approximately 100 positions resulting in a restructuring charge of $2.1 million, principally for severance and related benefits.
During the fourth quarter of 2008, we evaluated alternatives with regard to our investment in the construction of a wafer fabrication facility in Kunshan China in light of surplus industry production capacity, reduced demand experienced by the Company, as well as the broader macroeconomic environment. We determined that the carrying amount of the China fabrication building was not recoverable as the carrying amount was greater than the sum of the undiscounted cash flows expected from the use and disposition of these assets. As a result of this impairment analysis, we recorded a full $13.0 million impairment charge in the fourth quarter of 2008.
Our annual goodwill impairment test determined that the fair value of the WiFi reporting unit was less than the carrying value of the net assets of the reporting unit, and thus we performed step two of the impairment test. Our step two analysis resulted in no implied fair value of goodwill and therefore, we recognized an impairment charge of $5.9 million in the fourth quarter of 2008, representing a write off of the entire amount of our previously recorded goodwill. In connection with our goodwill impairment analysis, we also assessed the fair values of our related intangible assets, which carried an unamortized value of $0.3 million consisting principally of assembled workforce related to the WiFi reporting unit noting it was similarly impaired and charged the remaining unamortized carrying value to restructuring and impairment charges.
INTEREST INCOME. Interest income decreased 34.6% to $5.3 million during 2008 from $8.0 million in 2007. The decrease was primarily due to lower interest rates globally as we reinvested funds and concentrated our investments in shorter-term vehicles which carried federal deposit insurance.
INTEREST EXPENSE. Interest expense was essentially flat at $2.4 million in 2008 compared to $2.5 million in 2007. The interest expense arises from obligations under our 5% Convertible Senior Notes due in October 2009 (“2009 Notes”).
OTHER EXPENSE. Other expense was $6.5 million in 2008 compared to $0.7 million in 2007 and included charges for other than temporary declines in value on certain auction rate securities (ARS) held by the Company of $6.8 million and $1.0 million respectively. While interest continues to be paid currently by all the issuers of these ARS, due to the severity of the decline in fair value and the duration of time for which these ARS have been in a loss position, the Company concluded that ARS held at December 31, 2008 experienced an other-than-temporary decline in fair value and recorded impairment charges of $4.7 million for the year ended December 31, 2008. The aforementioned other-than-temporary impairment charge was net of $0.4 million of income recorded on par value redemption recoveries. Additionally during 2008, a corporate debt ARS position was exchanged for the underlying 30 year notes. This debt trades in the market with a value of $1.9 million against its face value of $4.0 million. Due to the severity and duration of the decline, the Company has recorded an impairment of $2.1 million related to this security.
LOSS FROM DISCONTINUED OPERATIONS. Loss from discontinued operations was $1.0 million in 2007 and included $0.5 million loss on the sale of the majority of the operating assets of Telcom Devices Inc. upon its sale at the close of the first quarter of 2007.
LIQUIDITY AND SOURCES OF CAPITAL
At December 31, 2009 we had $83.2 million of cash and cash equivalents and $9.3 million in marketable securities. In October 2009, we repaid $38.0 million aggregate principal amount of our 2009 Notes upon maturity.
Operations used $8.5 million in cash during 2009, primarily as a result of our operating results adjusted for non-cash expenses which was partly offset by $16.0 million generated by reducing working capital. Investing activities provided $5.0 million of cash during 2009, consisting of net sales of marketable securities of $14.0 million and $1.3 million of proceeds on sales of fixed assets, which were partly offset by purchases of equipment of $10.3 million. Financing activities required $36.9 million of cash during 2009, which principally consisted of repayment of our $38.0 million 5% Convertible notes, partly offset by proceeds received from the employee stock purchase plan and stock option exercises.
At December 31, 2009, the Company had unconditional purchase obligations of approximately $0.9 million.
We believe that our existing sources of capital, including our existing cash and marketable securities, will be adequate to satisfy operational needs and anticipated capital needs for at least the next twelve months. Our anticipated capital needs may include acquisitions of complimentary businesses or technologies, investments in other companies or repurchases of our equity. Subject to liquidity considerations of our auction rate securities as discussed more fully in Item 7A, we may elect to finance all or part of our future capital requirements through additional equity or debt financing. There can be no assurance that such additional financing would be available on satisfactory terms.
The table below summarizes required cash payments as of December 31, 2009:
| CONTRACTUAL OBLIGATIONS | PAYMENTS DUE BY PERIOD (in thousands) | |||||||||||||||||||
| Total | Less than 1 year | 1 – 3 years | 4 - 5 years | After 5 years | ||||||||||||||||
| Operating leases | 15,493 | 2,750 | 4,348 | 4,084 | 4,311 | |||||||||||||||
| Unconditional purchase obligations | 913 | 913 | - | - | - | |||||||||||||||
| Total contractual cash obligations | $ | 16,406 | $ | 3,663 | $ | 4,348 | $ | 4,084 | $ | 4,311 | ||||||||||
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board (FASB) issued FAS 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles", which was primarily codified into Accounting Standards Codification (ASC) 105 "Generally Accepted Accounting Standards". This standard will become the single source of authoritative nongovernmental U.S. generally accepted accounting principles. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. This guidance is effective for interim and annual periods ending after September 15, 2009. For clarity, we have chosen to include the available Codification references in this annual report in addition to pre-Codification accounting standard references. As the Codification is not intended to change the existing accounting guidance, its adoption did not have an impact on our consolidated financial statements.
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (ASC 820) which defined fair value, established a framework for measuring fair value in generally accepted accounting principles and expanded disclosures about fair value measurements. ASC 820 was effective 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” (ASC 820-10-65-2), which delayed the effective date 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 ASC 820-10-65-2 as of January 1, 2009 did not have a material effect on our consolidated financial statements for non-financial assets and liabilities and any other assets and liabilities carried at fair value.
In April 2009, the FASB issued FSP 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” (ASC 820-10-65-4), which provides additional guidance on factors to consider in estimating fair value when there has been a significant decrease in market activity for a financial asset. ASC 820-10-65-4 was effective for interim and annual periods ending after June 15, 2009. This standard was effective beginning with our second quarter of 2009 financial reporting and did not have a material impact on our consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring Liabilities at Fair Value.” This ASU clarifies the application of certain valuation techniques in circumstances in which a quoted price in an active market for the identical liability is not available and clarifies that when estimating the fair value of a liability, the fair value is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. This standard was effective beginning with our third quarter of 2009 financial reporting and did not have a material impact on our consolidated financial statements.
In December 2007, the FASB issued FASB Statement No. 141R, “Business Combinations” (ASC 805), which changes how business acquisitions are accounted. ASC 805 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. ASC 805 was effective for financial statements issued for fiscal years beginning after December 15, 2008 and upon adoption did not have a material impact on our consolidated financial statements. However it is expected to change our accounting prospectively for future business combinations consummated subsequently.
In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (ASC 810), which changes the accounting for and reporting of noncontrolling interests (formerly known as minority interests) in consolidated financial statements. It was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, with early adoption prohibited. Upon implementation, prior periods will be recast for the changes required by ASC 810. The adoption of this standard effective January 1, 2009 did not have a material impact on our consolidated financial statements.
In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (ASC 815), which applies to all derivative instruments and related hedged items accounted for under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". ASC 815 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. ASC 815 was effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of this standard effective January 1, 2009 did not have a material impact on our consolidated financial statements.
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)" (ASC 470-20), which 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. ASC 470-20 was effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The adoption of this standard effective January 1, 2009 did not have a material impact on our consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (primarily covered within ASC 260-10), which clarifies 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. ASC 260-10 was effective for fiscal years beginning after December 15, 2008. The adoption of this standard effective January 1, 2009 did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FSP 115-2 and FSP 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (ASC 320-10-65-1), which changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of the impairment to be recorded in earnings. ASC 320-10-65-1 was effective for interim and annual periods ending after June 15, 2009 and apply based upon the Company’s ability and intent to hold the security to maturity or a recovery in valuation. The adoption of this standard did not have an impact on our consolidated financial statements, as it is more likely than not that we will sell the impaired debt securities prior to a recovery in valuation.
In April 2009, the FASB issued FSP 107-1, APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (ASC 825-10-65-1), which requires fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. ASC 825-10-65-1 was effective for interim and annual periods ending after June 15, 2009. This standard was effective beginning with our second quarter of 2009 financial reporting and the additional financial reporting disclosures are included herein.
In May 2009, the FASB issued FASB Statement No. 165, “Subsequent Events” (ASC 855-10), which establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before the financial statements are issued. ASC 855-10 was effective for interim and annual periods ending after June 15, 2009. This standard was effective beginning with our second quarter of 2009 financial reporting and did not have an impact on our consolidated financial statements.
Our cash and available-for-sale securities are exposed to changes in short-term interest rates. Our available-for-sale securities consist of a corporate bond security and certain auction rate securities discussed more specifically below. We continually monitor our exposure to changes in interest rates and the credit ratings of issuers with respect to our available-for-sale securities. Accordingly, we believe that the effects of changes in interest rates and the credit ratings of these issuers are limited and would not have a material impact on our financial condition or results of operations. However, it is possible that we would be at risk if interest rates or the credit ratings of these issuers were to change in an unfavorable direction. The magnitude of any gain or loss would be a function of the difference between the fixed rate of the financial instrument and the market rate and our financial condition and results of operations could be materially affected.
At December 31, 2009, we held marketable securities with an estimated fair value of $9.3 million. Our primary interest rate exposure results from changes in short-term interest rates. We do not purchase financial instruments for trading or speculative purposes. All of our marketable securities are classified as available-for-sale securities. The following table provides information about our marketable securities at December 31, 2009:
| Estimated Principal Amount and Weighted Average Stated Interest Rate by Expected Maturity Value | Fair Value | |||||||||||||||
| ($’s 000) | 2010 | > 10 years | Total | ($’s 000) | ||||||||||||
| Principal | $ | 0 | $ | 15,900 | $ | 15,900 | $ | 9,354 | ||||||||
| Weighted Average Stated Interest Rates | 0 | % | 1.47 | % | 1.47 | % | - | |||||||||
The stated rates of interest expressed in the above table may not approximate the actual yield of the securities which we currently hold since we have valued some of our marketable securities at other than face value. Additionally, some of the securities represented in the above table may be called or redeemed, at the option of the issuer, prior to their expected due dates. If such early redemptions occur, we may reinvest the proceeds realized on such calls or redemptions in marketable securities with stated rates of interest or yields that are lower than those of our current holdings, which would affect both future cash interest streams and future earnings. We invest our cash in money market funds in order to maintain liquidity and as well as fund operations and hold cash pending investments in marketable securities. Fluctuations in short term interest rates will affect the yield on monies invested in such money market funds. Such fluctuations can have an impact on our future cash interest streams and future earnings, but the impact of such fluctuations are not expected to be material.
All of our investment securities are classified as available-for-sale and therefore reported on our balance sheet at market value. Within our $9.3 million in marketable securities at December 31, 2009, we held a total of $6.6 million of auction rate securities (ARS) and $2.7 million as a corporate debt security, which was originally purchased as an ARS prior to its exchange for the underlying 30 year notes due 2037. ARS are generally financial instruments of long-term duration with interest rates that are reset in short intervals through auctions. 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. When there is insufficient demand for the securities at the time of an auction and the auction is not completed, the interest rates reset to predetermined higher rates (default rates). While certain issuers redeemed certain of their ARS during 2008, the market remained constrained by illiquidity and the lack of free trading. 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. If the credit ratings of the security issuers deteriorate and any decline in market value is determined to be other-than-temporary, we would be required to adjust the carrying value of the investment through an additional impairment charge. To date, we have not realized any losses on ARS held by the Company or the notes received in exchange for an ARS, but have recognized other-than-temporary impairments of $9.3 million. During 2009, fair market values of certain of our ARS, when combined with the fair market values of our corporate debt security, increased by $2.7 million, which was recorded to other comprehensive income.
We anticipate selling these impaired debt securities prior to a recovery in valuation. We will continue to monitor and evaluate these investments for impairment and for short term classification purposes. We may not be able to access cash by selling the aforementioned debt or preferred securities without the loss of principal until a buyer is located, a future auction for these investments is successful, they are redeemed by their issuers or they mature. If we are unable to sell these securities in the market or they are not redeemed, then we may be required to hold them to maturity or in perpetuity for the preferred ARS. Based on our ability to access our cash, our expected operating cash flows, and our other sources of cash, we do not anticipate that the potential illiquidity of these investments will affect our ability to execute our current business plan.
Our 2009 Notes were convertible with a fixed rate of interest of 5% and were repaid on the October 15, 2009 maturity date.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
ANADIGICS, Inc.
We have audited the accompanying consolidated balance sheets of ANADIGICS, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ANADIGICS, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ANADIGICS, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
MetroPark, New Jersey
March 12, 2010
ANADIGICS, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 123,552 | $ | 83,172 | ||||
| Marketable securities | 13,340 | - | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $739 at December 31, 2008 and 2009 | 25,384 | 20,013 | ||||||
| Inventories | 33,578 | 18,250 | ||||||
| Prepaid expenses and other current assets | 3,121 | 2,503 | ||||||
| Total current assets | 198,975 | 123,938 | ||||||
| Marketable securities | 8,832 | 9,354 | ||||||
| Plant and equipment | ||||||||
| Equipment and furniture | 201,217 | 208,735 | ||||||
| Leasehold improvements | 40,589 | 44,705 | ||||||
| Projects in process | 18,940 | 5,978 | ||||||
| 260,746 | 259,418 | |||||||
| Less accumulated depreciation and amortization | 165,075 | 178,534 | ||||||
| 95,671 | 80,884 | |||||||
| Other assets | 299 | 276 | ||||||
| $ | 303,777 | $ | 214,452 | |||||
| LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 18,267 | $ | 11,287 | ||||
| Accrued liabilities | 13,203 | 10,208 | ||||||
| Accrued restructuring costs | 1,165 | 55 | ||||||
| Convertible notes | 38,000 | - | ||||||
| Total current liabilities | 70,635 | 21,550 | ||||||
| Other long-term liabilities | 3,134 | 3,844 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred stock, $0.01 par value, 5,000 shares authorized, none issued or outstanding | ||||||||
| Common stock, convertible, non-voting, $0.01 par value, 1,000 shares authorized, none issued or outstanding | ||||||||
| Common stock, $0.01 par value, 144,000 shares authorized at December 31, 2008 and 2009, and 63,424 and 64,517 issued at December 31, 2008 and 2009, respectively | 634 | 645 | ||||||
| Additional paid-in capital | 563,468 | 576,975 | ||||||
| Accumulated deficit | (333,967 | ) | (391,050 | ) | ||||
| Accumulated other comprehensive income | 131 | 2,747 | ||||||
Treasury stock at cost: 114 and 115 shares at December 31, 2008 and 2009, respectively | (258 | ) | (259 | ) | ||||
| Total stockholders’ equity | 230,008 | �� | 189,058 | |||||
| $ | 303,777 | $ | 214,452 | |||||
See accompanying notes.
ANADIGICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| YEAR ENDED DECEMBER 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| Net sales | $ | 230,556 | $ | 258,170 | $ | 140,484 | ||||||
| Cost of sales | 151,768 | 179,583 | 120,326 | |||||||||
| Gross profit | 78,788 | 78,587 | 20,158 | |||||||||
| Research and development expenses | 46,539 | 54,452 | 45,969 | |||||||||
| Selling and administrative expenses | 30,171 | 41,098 | 26,914 | |||||||||
| Restructuring and impairment charges | - | 21,304 | 2,598 | |||||||||
| 76,710 | 116,854 | 75,481 | ||||||||||
| Operating income (loss) | 2,078 | (38,267 | ) | (55,323 | ) | |||||||
| Interest income | 8,035 | 5,254 | 1,134 | |||||||||
| Interest expense | (2,463 | ) | (2,365 | ) | (1,897 | ) | ||||||
| Other expense | (734 | ) | (6,494 | ) | (1,318 | ) | ||||||
| Income (loss) from continuing operations before income taxes | $ | 6,916 | $ | (41,872 | ) | $ | (57,404 | ) | ||||
| Benefit from income taxes | - | - | (321 | ) | ||||||||
| Income (loss) from continuing operations | $ | 6,916 | $ | (41,872 | ) | $ | (57,083 | ) | ||||
| Loss from discontinued operations | (965 | ) | - | - | ||||||||
| Net income (loss) | $ | 5,951 | $ | (41,872 | ) | $ | (57,083 | ) | ||||
| Basic earnings (loss) per share: | ||||||||||||
| Income (loss) from continuing operations | $ | 0.13 | $ | (0.70 | ) | $ | (0.92 | ) | ||||
| Loss from discontinued operations | (0.02 | ) | - | - | ||||||||
| Net income (loss) | $ | 0.11 | $ | (0.70 | ) | $ | (0.92 | ) | ||||
| Diluted earnings (loss) per share: | ||||||||||||
| Income (loss) from continuing operations | $ | 0.12 | $ | (0.70 | ) | $ | (0.92 | ) | ||||
| Loss from discontinued operations | (0.02 | ) | - | - | ||||||||
| Net income (loss) | $ | 0.10 | $ | (0.70 | ) | $ | (0.92 | ) | ||||
| Weighted average common shares outstanding used in computing earnings (loss) per share: | ||||||||||||
| Basic | 55,189 | 60,183 | 62,372 | |||||||||
| Diluted | 58,621 | 60,183 | 62,372 | |||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS)
| Year Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| Net income (loss) | $ | 5,951 | $ | (41,872 | ) | $ | (57,083 | ) | ||||
| Other comprehensive income (loss): | ||||||||||||
| Unrealized (loss) gain on marketable securities | (948 | ) | (1,373 | ) | 2,701 | |||||||
| Foreign currency translation adjustment | (8 | ) | 164 | (85 | ) | |||||||
| Reclassification adjustment: | ||||||||||||
| Net recognized loss on marketable securities previously included in other comprehensive income (loss) | 962 | 1,434 | - | |||||||||
| Comprehensive income (loss) | $ | 5,957 | $ | (41,647 | ) | $ | (54,467 | ) | ||||
See accompanying notes.
ANADIGICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
| Common Stock Shares | Common Stock Amount | Treasury Stock Shares | Treasury Stock Amount | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (loss ) | Total Stockholders’ Equity | |||||||||||||||||||||||||
| Balance, December 31, 2006 | 49,200 | $ | 492 | (114 | ) | $ | (258 | ) | $ | 413,672 | $ | (298,046 | ) | $ | (100 | ) | $ | 115,760 | ||||||||||||||
| Stock options exercised | 2,135 | 22 | 12,217 | 12,239 | ||||||||||||||||||||||||||||
| Shares issued under employee stock purchase plan | 236 | 2 | 1,872 | 1,874 | ||||||||||||||||||||||||||||
| Issuance of common stock in public offering, net of costs | 8,625 | 86 | 98,869 | 98,955 | ||||||||||||||||||||||||||||
| Restricted stock grant, net of forfeitures | 1,096 | 11 | (11 | ) | - | |||||||||||||||||||||||||||
| Amortization of stock-based compensation | 15,321 | 15,321 | ||||||||||||||||||||||||||||||
| Other comprehensive income | 6 | 6 | ||||||||||||||||||||||||||||||
| Net income | 5,951 | 5,951 | ||||||||||||||||||||||||||||||
| Balance, December 31, 2007 | 61,292 | $ | 613 | (114 | ) | $ | (258 | ) | $ | 541,940 | $ | (292,095 | ) | $ | (94 | ) | $ | 250,106 | ||||||||||||||
| Stock options exercised | 384 | 4 | 2,596 | 2,600 | ||||||||||||||||||||||||||||
| Shares issued under employee stock purchase plan | 183 | 2 | 234 | 236 | ||||||||||||||||||||||||||||
| Restricted stock grant, net of forfeitures | 1,565 | 15 | (15 | ) | - | |||||||||||||||||||||||||||
| Amortization of stock-based compensation | 18,713 | 18,713 | ||||||||||||||||||||||||||||||
| Other comprehensive income | 225 | 225 | ||||||||||||||||||||||||||||||
| Net loss | (41,872 | ) | (41,872 | ) | ||||||||||||||||||||||||||||
| �� | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2008 | 63,424 | $ | 634 | (114 | ) | $ | (258 | ) | $ | 563,468 | $ | (333,967 | ) | $ | 131 | $ | 230,008 | |||||||||||||||
| Stock options exercised | 49 | 1 | 101 | 102 | ||||||||||||||||||||||||||||
| Shares issued under employee stock purchase plan | 729 | 7 | 1,006 | 1,013 | ||||||||||||||||||||||||||||
| Treasury share purchase | (1 | ) | (1 | ) | (1 | ) | ||||||||||||||||||||||||||
| Restricted stock activity, net of forfeitures | 315 | 3 | (3 | ) | - | |||||||||||||||||||||||||||
| Amortization of stock-based compensation | 12,403 | 12,403 | ||||||||||||||||||||||||||||||
| Other comprehensive income | 2,616 | 2,616 | ||||||||||||||||||||||||||||||
| Net loss | (57,083 | ) | (57,083 | ) | ||||||||||||||||||||||||||||
| Balance, December 31, 2009 | 64,517 | $ | 645 | (115 | ) | $ | (259 | ) | $ | 576,975 | $ | (391,050 | ) | $ | 2,747 | $ | 189,058 | |||||||||||||||
See accompanying notes.
ANADIGICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
| YEAR ENDED DECEMBER 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||
| Net income (loss) | $ | 5,951 | $ | (41,872 | ) | $ | (57,083 | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
| Loss from discontinued operations | 965 | - | - | |||||||||
| Depreciation | 9,547 | 15,984 | 18,463 | |||||||||
| Amortization | 738 | 718 | 341 | |||||||||
| Stock based compensation | 15,276 | 18,713 | 12,403 | |||||||||
| Amortization of (discount) premium on marketable securities | (550 | ) | (90 | ) | 12 | |||||||
| Recognized marketable securities impairment and other | 962 | 6,807 | 1,492 | |||||||||
| Gain on disposal of equipment | (9 | ) | (295 | ) | (167 | ) | ||||||
| Asset impairment charges | - | 20,634 | - | |||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable | (18,957 | ) | 20,280 | 5,371 | ||||||||
| Inventory | (3,770 | ) | (9,589 | ) | 15,328 | |||||||
| Prepaid expenses and other assets | (1,233 | ) | 523 | 300 | ||||||||
| Accounts payable | 5,922 | (11,187 | ) | (1,489 | ) | |||||||
| Accrued and other liabilities | 1,984 | 6,438 | (3,480 | ) | ||||||||
| Net cash provided by (used in) operating activities | 16,826 | 27,064 | (8,509 | ) | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||
| Purchases of plant and equipment | (32,506 | ) | (54,541 | ) | (10,346 | ) | ||||||
| Purchases of marketable securities | (267,357 | ) | (20,410 | ) | (15,201 | ) | ||||||
| Proceeds from sales and redemptions of marketable securities | 217,709 | 110,608 | 29,216 | |||||||||
| Purchase of RF group assets | (2,415 | ) | - | - | ||||||||
| Proceeds from sale of equipment | 30 | 209 | 1,346 | |||||||||
| Proceeds from sale of discontinued operations | 500 | - | - | |||||||||
| Net cash (used in) provided by investing activities | (84,039 | ) | 35,866 | 5,015 | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||
| Payment of obligations under capital leases | (1,775 | ) | - | - | ||||||||
| Repayment of Convertible notes | - | - | (38,000 | ) | ||||||||
| Issuances of common stock, net of related costs | 113,068 | 2,836 | 1,115 | |||||||||
| Repurchase of common stock into treasury | - | - | (1 | ) | ||||||||
| Net cash provided by (used in) financing activities | 111,293 | 2,836 | (36,886 | ) | ||||||||
| Net increase (decrease) in cash and cash equivalents | 44,080 | 65,766 | (40,380 | ) | ||||||||
| Cash and cash equivalents at beginning of period | 13,706 | 57,786 | 123,552 | |||||||||
| Cash and cash equivalents at end of period | $ | 57,786 | $ | 123,552 | $ | 83,172 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Interest paid | $ | 1,997 | $ | 1,900 | $ | 1,900 | ||||||
| Net taxes paid (refunded) | 28 | 52 | (311 | ) | ||||||||
See accompanying notes.
ANADIGICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
ANADIGICS, Inc (the Company) is a leading provider of semiconductor solutions in the growing broadband wireless and wireline communications markets. The Company’s 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. The Company offers third generation (3G) products that use the Wideband Code-Division Multiple Access (W-CDMA) and Enhanced Data Rates for Global System for Mobile Communication 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 (HSPA, inclusive of downlink and uplink) and Evolution Data Optimized (EVDO) standards, fourth generation (4G) products for Worldwide Interoperability for Microwave Access (WiMAX) and Long Term Evolution (LTE), Wireless Fidelity (WiFi) products that use the 802.11 a/b/g and 802.11 n (Multiple Input Multiple Output (MIMO)) standards, cable television (CATV) cable modem and set-top box products, CATV infrastructure products and Fiber-To-The-Premises (FTTP) products. The Company’s integrated solutions enable its 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.
The Company designs, develops and manufactures RF integrated circuits (RFICs) primarily using Gallium Arsenide (GaAs) compound semiconductor substrates with various process technologies, Metal Semiconductor Field Effect Transistors (MESFET), Pseudomorphic High Electron Mobility Transistors (pHEMT), and Heterojunction Bipolar Transistors (HBT). The Company’s proprietary technology, which utilizes InGaP-plusTM, combines InGaP HBT and pHEMT processes on a single substrate, enabling it to integrate the PA function and the RF active switch function on the same die. The Company fabricates substantially all of its ICs in its six-inch diameter GaAs wafer fabrication facility.
The consolidated financial statements include the accounts of ANADIGICS, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
As more fully discussed in Note 15, the Company sold the majority of the operating assets of Telcom Devices Inc, (Telcom, a wholly-owned subsidiary of the Company) on April 2, 2007 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 periods.
The Company has evaluated subsequent events and determined that there were no subsequent events to recognize or disclose in these consolidated financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with US generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. Significant estimates that affect the financial statements include, but are not limited to: allowance for doubtful accounts, recoverability and valuation of inventories, warranty reserve, valuation of stock-based compensation, reserves for distributor arrangements and returns, valuation of certain marketable securities, useful lives and amortization periods and recoverability of long-lived assets.
CONCENTRATION OF CREDIT RISK
The Company grants trade credit to its customers, who are primarily foreign manufacturers of wireless communication devices, cable and broadcast television receivers and fiber optic communication devices. The Company performs periodic credit evaluations of its customers and generally does not require collateral. Sales and accounts receivable from customers are denominated in U.S. dollars. The Company has not experienced significant losses related to receivables from these individual customers.
Net sales to individual customers and their affiliates who accounted for 10% or more of the Company’s total net sales and corresponding end application information are as follows:
| YEAR ENDED DECEMBER 31 | ||||||||||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||||||||||
| Customer (application) | $ | % | $ | % | $ | % | ||||||||||||||||||
| LG Electronics, Inc. (Wireless) | 22,188 | 10 | % | <10 % | <10 % | 20,359 | 15 | % | ||||||||||||||||
| Research In Motion Limited (Wireless) | <10 % | <10 % | <10 % | <10 % | 19,824 | 14 | % | |||||||||||||||||
| Intel (Broadband) | 49,862 | 22 | % | 45,273 | 18 | % | <10 % | <10 % | ||||||||||||||||
| Samsung Electronics (Wireless) | 30,471 | 13 | % | 41,486 | 16 | % | <10 % | <10 % | ||||||||||||||||
| Shenzhen Huawei Mobile Comm. Tech. (Wireless) | 23,953 | 10 | % | <10 % | <10 % | <10 % | <10 % | |||||||||||||||||
| Cisco (Broadband) | 23,378 | 10 | % | <10 % | <10 % | <10 % | <10 % | |||||||||||||||||
| World Peace Group (Wireless & Broadband) | 22,855 | 10 | % | <10 % | <10 % | <10 % | <10 % | |||||||||||||||||
Accounts receivable at December 31, 2008 and 2009 from the greater than 10% customers accounted for 17% and 34% of total accounts receivable, respectively.
REVENUE RECOGNITION
Revenue from product sales is recognized when title to the products is transferred to the customer, which occurs upon shipment or delivery, depending upon the terms of the sales order. The Company sells to certain distributors who are granted limited contractual rights of return and exchange and certain pre-negotiated individual product-customer price protection. Revenue from sales of products to distributors is recognized, net of allowances, upon shipment of the products to the distributors. At the time of shipment, title transfers to the distributors and payment from the distributors is due on our standard commercial terms; payment terms are not contingent upon resale of the products. Revenue is appropriately reduced for the portion of shipments subject to return, exchange or price protection. Allowances for the distributors are recorded upon shipment and calculated based on the distributors’ indicated intent, historical data, current economic conditions and contractual terms. The Company believes it can reasonably and reliably estimate allowances for credits to distributors in a timely manner. The Company charges customers for the costs of certain contractually-committed inventories that remain at the end of a product's life. Such amounts are recognized as cancellation revenue when cash is received. The value of the inventory related to cancellation revenue may, in some instances, have been reserved during prior periods in accordance with the Company’s inventory obsolescence policy. The Company maintains an allowance for doubtful accounts for estimated losses resulting from customers' failure to make payments.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company establishes an allowance for doubtful accounts for estimated losses resulting from customers' failure to make payments, based upon historical experience.
WARRANTY COSTS
The Company provides, by a current charge to income, an amount it estimates, by examining historical returns and other information it deems critical, will be needed to cover future warranty obligations for products sold during the year. The liability for warranty costs is included in accrued liabilities in the consolidated balance sheets.
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation of plant, furniture and equipment has been provided on the straight-line method over 3-7 years. Leasehold improvements are amortized and included in depreciation over the useful life of the leasehold or the life of the lease, whichever is shorter.
GOODWILL AND OTHER INTANGIBLES
Goodwill, intellectual property, customer list, covenant-not-to-compete and assembled workforce were recorded as part of the Company's acquisitions and asset purchases. Goodwill is not subject to amortization but is reviewed for potential impairment annually or upon the occurrence of an impairment indicator using a two-step process. The first step of the two-step impairment test compares the carrying value of the reporting unit to its fair value calculated using the income approach based on the present value of estimated future cash flows. If the fair value of the unit is less than the carrying value of its net assets, the Company performs step two of the impairment test. In step two, the Company allocates the fair value of the reporting unit to its underlying assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the unit was the price paid to acquire the reporting unit. Any excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. Intellectual property, customer list, covenant and the assembled workforce have been amortized using the straight-line method over two to four year lives. The carrying amount of the Company’s intangibles are reviewed on a regular basis for indicators of an impairment. The Company determines if the carrying amount is impaired based on anticipated cash flows. In the event of impairment, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the asset. For each of the reporting units, fair value is determined primarily using the anticipated cash flows, discounted at a rate commensurate with the associated risk. The Company’s goodwill and other intangibles were fully impaired during the year ended December 31, 2008. See Note 2 for further discussion.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets used in operations are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell. See Note 2 for further discussion.
INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the income tax basis of such assets and liabilities. 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 other than for the refund of certain research and experimental tax credits during 2009. The Company recognizes interest and penalties related to the underpayment of income taxes in income tax expense. Upon adoption of ASC 740-10, the Company had no unrecognized tax benefits. No unrecognized tax benefits, interest or penalties were accrued at December 31, 2008 and 2009. 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.
RESEARCH AND DEVELOPMENT COSTS
The Company charges all research and development costs associated with the development of new products to expense when incurred.
CASH EQUIVALENTS
The Company considers all highly liquid marketable securities with a maturity of three months or less when purchased as cash equivalents.
MARKETABLE SECURITIES
Available for sale securities are stated at fair value, as determined by quoted market prices or as needed, independent valuation models, with unrealized gains and losses reported in other accumulated comprehensive income or loss. Unrealized losses are reviewed by management and those considered other than temporary are recorded as a charge to income. The cost of securities sold is based upon the specific identification method. The amortized cost of debt securities is adjusted for amortization of premium and accretion of discounts to maturity. Such amortization, realized gains and losses, interest and dividends are included in interest income. See Note 5 for a summary of marketable securities.
INVENTORY
Inventories are valued at the lower of cost or market ("LCM"), using the first-in, first-out method. The Company capitalizes production overhead costs to inventory on the basis of normal capacity of its production facility and in periods of abnormally low utilization charges the related expenses as a period cost in the statement of operations. In addition to LCM limitations, the Company reserves against inventory items for estimated obsolescence or unmarketable inventory. The reserve for excess and obsolete inventory is primarily based upon forecasted short-term demand for the product. Once established, these write-downs are considered permanent adjustments to the cost basis of the excess inventory. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required. In the event the Company sells inventory that had been covered by a specific inventory reserve, the sale is recorded at the actual selling price and the related cost of goods sold at the full inventory cost, net of the reserve.
DEFERRED RENT
Aggregate rental expense is recognized on a straight-line basis over the lease terms of operating leases that contain predetermined increases in rentals payable during the lease term.
FOREIGN CURRENCY TRANSLATION
The financial statements of subsidiaries outside of the United States are measured using the local currency as the functional currency. Assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet dates. The resultant translation adjustments are included in other accumulated comprehensive income or loss. Income and expense items are translated at the average monthly rates of exchange. Gains and losses from foreign currency transactions of these subsidiaries are included in the determination of net income or loss.
EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with ASC 260, “Earnings Per Share”. Basic earnings per share is computed by dividing income (loss) from continuing operations and net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised resulting in the issuance of common stock of the Company. Any dilution arising from the Company's outstanding stock awards or shares potentially issuable upon conversion of the convertible notes will not be included where their effect is anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of each of the following instruments approximates their carrying value because of the short maturity of these instruments: cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. See Note 5 for additional fair value disclosures.
STOCK-BASED COMPENSATION
The Company has various stock-based compensation plans for employees and directors, which are described more fully in Note 12. The Company accounts for these plans under ASC 718 Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to its employees and directors. Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period which in most cases is the vesting period.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2009, the Financial Accounting Standards Board (FASB) issued FAS 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles", which was primarily codified into Accounting Standards Codification (ASC) 105 "Generally Accepted Accounting Standards". This standard will become the single source of authoritative nongovernmental U.S. generally accepted accounting principles. All existing accounting standard documents will be superseded and all other accounting literature not included in the FASB Codification will be considered non-authoritative. This guidance is effective for interim and annual periods ending after September 15, 2009. For clarity, we have chosen to include the available Codification references in this annual report in addition to pre-Codification accounting standard references. As the Codification is not intended to change the existing accounting guidance, its adoption did not have an impact on the Company’s consolidated financial statements.
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements and Disclosures” (ASC 820), which defined fair value, established a framework for measuring fair value in generally accepted accounting principles and expanded disclosures about fair value measurements. ASC 820 was effective 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” (ASC 820-10-65-2), which delayed the effective date 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 ASC 820-10-65-2 as of January 1, 2009 did not have a material effect on the Company’s consolidated financial statements for non-financial assets and liabilities and any other assets and liabilities carried at fair value.
In April 2009, the FASB issued FSP 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” (ASC 820-10-65-4), which provides additional guidance on factors to consider in estimating fair value when there has been a significant decrease in market activity for a financial asset. ASC 820-10-65-4 was effective for interim and annual periods ending after June 15, 2009. This standard was effective beginning with the Company’s second quarter of 2009 financial reporting and did not have a material impact on its consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Measuring Liabilities at Fair Value.” This ASU clarifies the application of certain valuation techniques in circumstances in which a quoted price in an active market for the identical liability is not available and clarifies that when estimating the fair value of a liability, the fair value is not adjusted to reflect the impact of contractual restrictions that prevent its transfer. This standard was effective beginning with the Company’s third quarter of 2009 financial reporting and did not have a material impact on the its consolidated financial statements.
In December 2007, the FASB issued FASB Statement No. 141R, “Business Combinations” (ASC 805), which changes how business acquisitions are accounted. ASC 805 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. ASC 805 was effective for financial statements issued for fiscal years beginning after December 15, 2008 and upon adoption did not have a material impact on the Company’s consolidated financial statements. However it is expected to change the Company’s accounting prospectively for future business combinations consummated subsequently.
In December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (ASC 810), which changes the accounting for and reporting of noncontrolling interests (formerly known as minority interests) in consolidated financial statements. It was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, with early adoption prohibited. Upon implementation, prior periods will be recast for the changes required by ASC 810. The adoption of this standard effective January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (ASC 815), which applies to all derivative instruments and related hedged items accounted for under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". ASC 815 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. ASC 815 was effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of this standard effective January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
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)" (ASC 470-20), which 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. ASC 470-20 was effective for fiscal years beginning after December 15, 2008 on a retroactive basis. The adoption of this standard effective January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (primarily covered within ASC 260-10), which clarifies 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. ASC 260-10 was effective for fiscal years beginning after December 15, 2008. The adoption of this standard effective January 1, 2009 did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued FSP 115-2 and FSP 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (ASC 320-10-65-1), which changes the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of the impairment to be recorded in earnings. ASC 320-10-65-1 was effective for interim and annual periods ending after June 15, 2009 and apply based upon the Company’s ability and intent to hold the security to maturity or a recovery in valuation. The adoption of this standard did not have an impact on the Company’s consolidated financial statements, as it is more likely than not that the Company will sell the impaired debt securities prior to a recovery in valuation.
In April 2009, the FASB issued FSP 107-1, APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (ASC 825-10-65-1), which requires fair value disclosures in both interim as well as annual financial statements in order to provide more timely information about the effects of current market conditions on financial instruments. ASC 825-10-65-1 was effective for interim and annual periods ending after June 15, 2009. This standard was effective beginning with the Company’s second quarter of 2009 financial reporting and the additional financial reporting disclosures are included herein.
In May 2009, the FASB issued FASB Statement No. 165, “Subsequent Events” (ASC 855-10), which establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before the financial statements are issued. ASC 855-10 was effective for interim and annual periods ending after June 15, 2009. This standard was effective beginning with the Company’s second quarter of 2009 financial reporting and did not have an impact on its consolidated financial statements.
2. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
RESTRUCTURING
During the fourth quarter of 2008, the Company recorded restructuring charges of $2,140 pertaining to severance and related benefits of workforce reductions undertaken in that quarter. The workforce reductions eliminated approximately 100 positions throughout the Company.
In the first quarter of 2009, the Company implemented further workforce reductions, which eliminated approximately 110 positions throughout the Company, resulting in a charge of $2,598 for severance and related benefits.
Activity and liability balances related to the restructuring were as follows:
| Workforce-related | Other | Total | ||||||||||
Year ended December 31, 2008 Restructuring expense | $ | 2,040 | $ | 100 | $ | 2,140 | ||||||
| Deductions | (975 | ) | - | (975 | ) | |||||||
| December 31, 2008 balance | $ | 1,065 | $ | 100 | $ | 1,165 | ||||||
| Restructuring expense | 2,598 | - | 2,598 | |||||||||
| Deductions | (3,608 | ) | (100 | ) | (3,708 | ) | ||||||
| December 31, 2009 balance | $ | 55 | $ | - | $ | 55 | ||||||
IMPAIRMENT
China wafer fabrication facility
During the fourth quarter of 2008, the Company evaluated alternatives with regard to its investment in the construction of a wafer fabrication facility in Kunshan China in light of surplus industry production capacity, reduced demand experienced by the Company as well as the broader macroeconomic environment. The Company subsequently estimated and evaluated future cashflows associated with this investment which included significant assumptions on possible recoveries through a sale of the facility, further investment and a return in demand for production capacity and in the event of an impairment, a reasonable discount rate. The Company determined that the carrying amount of the China fabrication building was not recoverable as the carrying amount was greater than the sum of the undiscounted cash flows expected from the use and disposition of these assets. As a result of this impairment analysis, we recorded a full $12,957 impairment charge in the fourth quarter of 2008 related to the China fabrication facility.
Goodwill and other intangibles
In 2008, the Company performed an evaluation and estimation of future cash flows associated with our goodwill and intangible assets of its WiFi reporting unit. The impairment test assessed the fair value of the WiFi reporting unit using the income approach based on the present value of estimated future cash flows. The Company determined that the fair value of the WiFi reporting unit was less than the carrying value of the net assets of the reporting unit due to a loss in market share with a certain customer and the significant deterioration in the macroeconomic environment and thus performed step two of the impairment test. The Company allocated the fair value of the reporting unit to its underlying assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the WiFi reporting unit was the price paid to acquire the reporting unit. This step two analysis resulted in no implied fair value of goodwill and therefore, the Company recognized an impairment charge of $5,918 in the fourth quarter of 2008, representing a write off of the entire amount of its previously recorded goodwill. In connection with completing step two of its goodwill impairment analysis, the Company also assessed the fair values of the related intangible assets, which carried an unamortized carrying value of $289 consisting principally of assembled workforce related to the WiFi reporting unit noting that it was similarly impaired. These impairment charges were included in restructuring and impairment charges in the statement of operations.
OTHER CHARGES
In the third quarter of 2009, the Company recorded a charge within Cost of goods sold in the amount of $3,879 in settlement of a commercial dispute with a customer. The settlement required an initial payment of $1,110 which was paid in the fourth quarter of 2009, and six quarterly payments of $500 commencing March 2010.
In the fourth quarter of 2009, the Company recorded a management separation charge of $2,125. Of this amount, $1,755 was included in Research and development and $370 was included in Selling and administrative expenses.
In the second half of 2008, the Company recorded charges to cost of sales for equipment purchase cancellations, equipment impairment charges and inventory reserve charges on dedicated inventory which was determined to be surplus due to reduced customer demand in the amounts of $1,860, $1,470 and $3,508, respectively. In addition, the Company recorded charges for certain management separations in the amount of $6,026. Of the total $12,864 aforementioned charges, $7,135 was included in cost of sales and $5,729 was included in Selling and administrative expenses. The management separation charge primarily arose from the resignation of our former Chief Executive Officer in the third quarter of 2008 and included separation pay, accelerated vesting of equity awards and certain other costs. The equipment cancellation charges were incurred in the third quarter of 2008, when the Company cancelled certain manufacturing equipment purchase obligations.
3. INTANGIBLES AND GOODWILL
During the fourth quarter of 2008, the Company recorded an impairment charge associated with its goodwill and other intangibles. See Note 2 for further discussion.
Annual amortization expense related to intangible assets was calculated over their estimated useful lives of two to four years and was $97 and $253 in the years ended December 31, 2007 and 2008, respectively.
4. SEGMENTS
The Company operates in one segment. Its integrated circuits are primarily manufactured using common manufacturing facilities located in the same domestic geographic area. All operating expenses and assets of the Company are combined and reviewed by the chief operating decision maker on an enterprise-wide basis, resulting in no additional discrete financial information or reportable segment information.
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:
| Year Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| Wireless | $ | 129,044 | $ | 154,678 | $ | 95,951 | ||||||
| Broadband | 101,512 | 103,492 | 44,533 | |||||||||
| Total | $ | 230,556 | $ | 258,170 | $ | 140,484 | ||||||
The Company primarily sells to four geographic regions: Asia, Latin America, USA and Other. The geographic region is determined by the destination of the shipped product. During 2009, the Company identified certain prior period sales that were classified by invoicing location rather than the destination of the shipped product. Certain prior period information presented below has been recast to properly classify these sales based on their shipped product destination.
| Year Ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| Asia | $ | 187,900 | $ | 213,128 | $ | 101,064 | ||||||
| Latin America | 23,478 | 19,143 | 20,647 | |||||||||
| USA | 11,112 | 11,297 | 7,498 | |||||||||
| Other | 8,066 | 14,602 | 11,275 | |||||||||
| Total | $ | 230,556 | $ | 258,170 | $ | 140,484 | ||||||
5. FAIR VALUE AND MARKETABLE SECURITIES
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is defined 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). Inputs used to measure fair value are classified in 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. The following table presents a summary of fair value information for available-for-sale securities in accordance with ASC 820:
| Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
| Security Type | Amortized Cost Basis (1) | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||
| Government-Sponsored Enterprises Debt Security | $ | 3,000 | $ | 3,006 | $ | 3,006 | $ | - | $ | - | ||||||||||
| Certificates of Deposit | 5,000 | 5,000 | 5,000 | - | - | |||||||||||||||
| Non-auction Corporate Debt securities | 7,210 | 7,217 | 7,210 | - | - | |||||||||||||||
| Auction Rate Securities | ||||||||||||||||||||
| Corporate Debt | 662 | 662 | - | - | 662 | |||||||||||||||
| Preferred Equity | 4,340 | 4,340 | - | - | 4,340 | |||||||||||||||
| State and Municipal Debt | 1,947 | 1,947 | - | - | 1,947 | |||||||||||||||
| Total at December 31, 2008 | $ | 22,159 | $ | 22,172 | $ | 15,216 | $ | - | $ | 6,949 | ||||||||||
| Non-auction Corporate Debt security (2) | $ | 1,530 | $ | 2,740 | $ | 2,740 | $ | - | $ | - | ||||||||||
| Auction Rate Securities | ||||||||||||||||||||
| Corporate Debt (2) | 600 | 1,106 | - | - | 1,106 | |||||||||||||||
| Preferred Equity | 3,013 | 3,703 | - | - | 3,703 | |||||||||||||||
| State and Municipal Debt(2) | 1,497 | 1,805 | - | - | 1,805 | |||||||||||||||
| Total at December 31, 2009 | $ | 6,640 | $ | 9,354 | $ | 2,740 | $ | - | $ | 6,614 | ||||||||||
(1) Difference between amortized cost basis and fair value represents gross unrealized gains.
(2) These available for sale debt securities have contractual maturities in excess of 10 years.
AUCTION RATE SECURITIES
Auction rate securities (ARS) are generally long-term financial 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. The funds associated with the 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.
During the years ended December 31, 2007, 2008 and 2009, there was insufficient observable ARS market information available to determine the fair value of the Company’s investments in ARS. Given the complexity of ARS investments, the Company obtained the assistance of an independent valuation firm to assist management in assessing the Level 3 fair value of its ARS portfolio. The third party valuations developed to estimate the ARS fair value were determined using a combination of two calculations (1) a discounted cash flow model, where the expected cash flows of the ARS are discounted to the present using a yield that incorporates compensation for illiquidity, and (2) a market comparables method, where the ARS are valued based on indications, from the secondary market, of what discounts buyers demand when purchasing similar ARS. The valuations include numerous assumptions such as assessments of the underlying structure of each security, expected cash flows, discount rates, credit ratings, workout periods, and overall capital market liquidity. While interest at default rates continues to be paid currently by the issuers of these ARS, due to the severity of the decline in fair value and the duration of time for which these ARS have been in a loss position, the Company concluded that its ARS experienced an other-than-temporary decline in fair value and in total recorded gross impairment charges of $957, $5,119 and $1,377 for the years ended December 31, 2007, 2008 and 2009, respectively and was reported in Other income (expense) and partly offset by recoveries upon par value redemptions.
During 2008, a corporate debt ARS position with a face value of $4,000 was exchanged for the underlying 30 year notes due 2037. Due to the severity and duration of the decline, the Company recorded an impairment of $2,117 and $354 related to this security during the years ended December 31, 2008 and 2009, respectively, which in combination with the ARS impairment discussed above, was reported in Other income (expense).
The table below provides a summary of securities valued using Level 3 including a reconciliation of the beginning and ending balances by security type.
| ($ in 000’s) | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Years ended December 31, 2008 and 2009 | |||||||||||||||||||
| State & Municipal Security (a) | Corporate Debt Security (b) | Preferred Equity Securities | Total | |||||||||||||||||
| Closed-end Funds (c ) | Monoline insurers (d) | |||||||||||||||||||
| Beginning balance December 31, 2007 | $ | - | $ | 2,324 | $ | - | $ | 2,344 | $ | 4,668 | ||||||||||
Transfers into Level 3 | 2,600 | - | 9,475 | - | 12,075 | |||||||||||||||
Total gains or losses realized/unrealized | ||||||||||||||||||||
Included in net loss | (653 | ) | (1,662 | ) | (644 | ) | (1,735 | ) | (4,694 | ) | ||||||||||
Included in other comprehensive loss | - | - | - | - | - | |||||||||||||||
Redemptions | - | - | (5,100 | ) | - | (5,100 | ) | |||||||||||||
| Balance at December 31, 2008 | $ | 1,947 | $ | 662 | $ | 3,731 | $ | 609 | $ | 6,949 | ||||||||||
Transfers into Level 3 | - | - | - | - | - | |||||||||||||||
Total gains or losses realized/unrealized | ||||||||||||||||||||
Included in net loss | (250 | ) | (62 | ) | (596 | ) | (231 | ) | (1,139 | ) | ||||||||||
Included in other comprehensive income | 308 | 506 | 546 | 144 | 1,504 | |||||||||||||||
Redemptions | (200 | ) | - | (500 | ) | - | (700 | ) | ||||||||||||
| Ending Balance December 31, 2009 | $ | 1,805 | $ | 1,106 | $ | 3,181 | $ | 522 | $ | 6,614 | ||||||||||
| 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 | $ | (300 | ) | $ | (62 | ) | $ | (662 | ) | $ | (231 | ) | $ | (1,255 | ) | |||||
| Securities held at December 31,2009 | ||||||||||||||||||||
| Face value | $ | 2,400 | $ | 2,500 | $ | 3,875 | $ | 3,125 | $ | 11,900 | ||||||||||
| Financial rating of the issues | A3 | A | AAA | NR / C | ||||||||||||||||
| Weighted average interest rates * | 0.64 | % | 2.09 | % | 1.35 | % | 2.07 | % | 1.55 | % | ||||||||||
| Maturity date | 2045 | 2036 | N/A | N/A | ||||||||||||||||
* Interest rates are reset every one to three months based on a premium to AA Commercial Paper, LIBOR or Treasury Bill rates.
(a) Security represents an interest in pooled student loans that are guaranteed by the Federal Family Education Loan Program.
(b) Security issued by a publicly-held insurance company trust, which holds investments in U.S. Government obligations, highly rated commercial paper and money market funds and other investments approved by two credit rating agencies. The trust is funded by life insurance residuals. If the residuals are insufficient, the security becomes an obligation of the publicly-held insurance company.
(c) Preferred securities issued by three diversified closed-end management investment companies which are governed by the Investment Company Act of 1940 with regard to operating standards, antifraud rules, diversification requirements and an asset coverage requirement for asset backing of 200% of the par value of the preferred stock issued.
(d) Preferred securities issued by subsidiaries of two publicly-held debt default insurers.
CLASSIFICATION
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. The Company considers it more likely than not that it will sell their marketable debt securities prior to a recovery in valuation. 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. Expected maturities could differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
6. INVENTORIES
Inventories consist of the following:
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| Raw materials | $ | 9,537 | $ | 6,582 | ||||
| Work in progress | 18,062 | 9,845 | ||||||
| Finished goods | 15,007 | 11,702 | ||||||
| 42,606 | 28,129 | |||||||
| Reserves | (9,028 | ) | (9,879 | ) | ||||
| Total | $ | 33,578 | $ | 18,250 | ||||
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| Accrued compensation | $ | 3,670 | $ | 2,066 | ||||
| Warranty reserve | 645 | 994 | ||||||
| Unpaid management separation charges | 3,222 | 1,720 | ||||||
| Unpaid equipment cancellation charges | 1,200 | - | ||||||
| Liability for customer dispute (short-term portion) | - | 1,929 | ||||||
| Other | 4,466 | 3,499 | ||||||
| $ | 13,203 | $ | 10,208 | |||||
Warranty reserve movements in the years ended December 31, 2007, 2008 and 2009 for returns were $541, $831 and $1,728, respectively. The periodic charges for estimated warranty costs were $521, $1,149 and $2,077 in the years ended December 31, 2007, 2008 and 2009, respectively.
8. CONVERTIBLE NOTES
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 were 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 was equivalent to a conversion price of $5.00 per share (7,600 shares contingently issuable). Interest on the 2009 Notes was payable semi-annually in arrears on April 15 and October 15 of each year. The 2009 Notes were repaid on the October 15, 2009 maturity date.
Unamortized debt issuance costs of $341 at December 31, 2008 consisting principally of underwriters' fees were included in other assets and other current assets and amortized over the life of the notes. The debt issuance costs were fully amortized by the October 15, 2009 maturity date.
9. COMMITMENTS AND CONTINGENCIES
The Company leases manufacturing, warehousing and office space and manufacturing equipment under noncancelable operating leases that expire through 2016. Rent expense was $2,411, $2,717 and $2,742 in 2007, 2008 and 2009, respectively. At December 31, 2008 and 2009, there were no capital lease obligations outstanding. The future minimum lease payments under the noncancelable operating leases are as follows:
| YEAR | Operating Leases | |||
| 2010 | $ | 2,750 | ||
| 2011 | 2,159 | |||
| 2012 | 2,189 | |||
| 2013 | 2,007 | |||
| 2014 | 2,077 | |||
| Thereafter | 4,311 | |||
| Total minimum lease payments | $ | 15,493 | ||
In addition to the above, at December 31, 2009, the Company had unconditional purchase obligations of approximately $913.
10. INCOME TAXES
For the year ended December 31, 2009, the current Federal component of income taxes was a $321 benefit resulting from a refund of research and experimental credits received under the Housing and Economic Recovery Act of 2008. The current and deferred components of income taxes for the year ended December 31, 2008 were zero. For the year ended December 31, 2007, the current Federal and state component of income taxes were $2,083 and $190, respectively which were fully offset by deferred tax movements including the valuation allowance.
Deferred tax assets require a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets may not be realized. Whereas realization of the deferred tax assets is dependent upon the timing and magnitude of future taxable income prior to the expiration of the deferred tax attributes, management began recording a full valuation allowance in 2001. The amount of the deferred tax assets considered realizable, however, could change if estimates of future taxable income during the carry-forward period are changed.
Significant components of the Company’s net deferred taxes as of December 31, 2008 and 2009 are as follows:
| December 31, | ||||||||
| 2008 | 2009 | |||||||
| Deferred tax balances | ||||||||
| Accruals/reserves | $ | 14,688 | $ | 16,149 | ||||
| Net operating loss carryforwards | 113,393 | 134,930 | ||||||
| Research and experimentation credits | 14,242 | 14,129 | ||||||
| Deferred rent expense | 1,199 | 1,130 | ||||||
| Difference in basis of plant and equipment | 7,020 | 7,778 | ||||||
| Valuation allowance | (150,542 | ) | (174,115 | ) | ||||
| Net deferred tax assets | - | - | ||||||
As of December 31, 2009, the Company had net operating loss carryforwards of approximately $392,645 for both federal and state tax reporting purposes. The federal carryforward will begin to expire in 2019, and the state carryforwards have begun to expire. A portion of net operating loss carryforwards and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods due to the “change of ownership” provisions of the Internal Revenue Code and similar state provisions. A portion of these carryforwards may expire before becoming available to reduce future income tax liabilities.
At December 31, 2009, $25,149 of the deferred tax asset related to net operating loss carryforwards and an equivalent amount of deferred tax asset valuation allowance represented tax benefits associated with the exercise of non-qualified stock options and restricted stock deduction over book. Such benefit, when realized, will be credited to additional paid-in capital. Included within the Company’s net operating loss tax carryforwards at December 31, 2009, the Company has excess tax benefits, related to stock-based compensation that arose subsequent to the adoption of FAS 123R of $25,732 which are not recorded as a deferred tax asset as the amounts would not have resulted in a reduction in current taxes payable until all other tax attributes currently available to the Company were utilized. The benefit of these deductions will be recorded to additional paid-in capital at the time the tax deduction results in a reduction of current taxes payable.
The earnings associated with the Company’s investment in its foreign subsidiaries is considered to be permanently invested and no provision for U.S. federal and state income taxes on those earnings or translation adjustments have been provided.
The reconciliation of income tax expense computed at the U.S. federal statutory rate to the benefit from income taxes is as follows:
| Year Ended December 31, | ||||||||||||||||
| 2007 | 2008 | 2009 | ||||||||||||||
| Tax at US statutory rate | $ | 2,083 | 35.0 | % | $ | (14,655 | ) | (35.0 | )% | $ | (20,091 | ) | (35.0 | )% | ||
| Effect of permanent items | (28 | ) | (0.5 | ) | (4,141 | ) | (9.9 | ) | (1,636 | ) | (2.8 | ) | ||||
| State and foreign tax (benefit), net of federal tax effect | 190 | 3.2 | (1,745 | ) | (4.2 | ) | (2,018 | ) | (3.5 | ) | ||||||
| Research and experimentation tax credits, net | (2,513 | ) | (42.2 | ) | (1,043 | ) | (2.5 | ) | 113 | 0.2 | ||||||
| Valuation allowance | (198 | ) | (3.3 | ) | 22,235 | 53.1 | 23,573 | 41.1 | ||||||||
| Other | 466 | 7.8 | (651 | ) | (1.5 | ) | (262 | ) | (0.5 | ) | ||||||
| (Benefit from) provision for income taxes | $ | - | 0.0 | % | $ | - | 0.0 | % | $ | (321 | ) | (0.5 | )% | |||
11. STOCKHOLDERS' EQUITY
In March 2007, the Company completed an underwritten public offering of 8,625 shares of common stock at a price of $12.25 which generated net proceeds to the Company of $98,955.
On December 17, 1998, the Company adopted a Shareholders’ Rights Agreement (the Agreement). Pursuant to the Agreement, as amended on November 30, 2000, and October 2, 2008, rights were distributed as a dividend at the rate of one right for each share of ANADIGICS, Inc. common stock, par value $0.01 per share, held by stockholders of record as of the close of business on December 31, 1998. The rights will expire on December 17, 2018, unless earlier redeemed or exchanged. Under the Agreement, each right will entitle the registered holder to buy one one-thousandth of a share of Series A Junior Participating Preferred Stock at a price of $75.00 per one one-thousandth of a share, subject to adjustment in accordance with the Agreement. The rights will become exercisable only if a person or group of affiliated or associated persons acquires, or obtains the right to acquire, beneficial ownership of ANADIGICS, Inc. common stock or other voting securities that have 18% or more of the voting power of the outstanding shares of voting stock, or upon the commencement or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in such person or group acquiring, or obtaining the right to acquire, beneficial ownership of 18% or more of the voting power of ANADIGICS, Inc. common stock or other voting securities.
12. EMPLOYEE BENEFIT PLANS
The Company accounts for stock-based compensation costs in accordance with ASC 718, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to our employees and directors. Under the fair value recognition provisions of ASC 718-10, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period which in most cases is the vesting period. The Company adopted ASC 718 using the modified-prospective transition method, which requires the recognition of compensation expense over the remaining award vest periods. The Company adopted the alternative transition method for calculating the tax effects of stock-based compensation. The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in-capital pool (APIC pool) related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of ASC 718.
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 shares or units (collectively, 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 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 connection with the hiring of the Company’s new President and Chief Executive Officer on February 1, 2009, an inducement award of 700 stock options was granted to him outside of 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 ($7.95), 183 ($1.28) and 729 ($1.39) respectively for the years ended December 31, 2007, 2008 and 2009, respectively.
Stock-based compensation expense arises from the amortization of restricted stock grants, unamortized stock option grants and from the ESP Plan. The Company uses the straight-line basis in calculating stock-based compensation expense.
The table below summarizes stock-based compensation by source and by financial statement line item:
| For years ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| Amortization of restricted stock awards | $ | 12,319 | $ | 16,613 | $ | 8,242 | ||||||
| Amortization of ESP Plan | 705 | 136 | 461 | |||||||||
| Amortization of stock option awards | 2,297 | 1,964 | 3,700 | |||||||||
| Total stock-based compensation | $ | 15,321 | $ | 18,713 | $ | 12,403 | ||||||
| By Financial Statement line item | ||||||||||||
| Cost of sales | $ | 3,409 | $ | 3,074 | $ | 2,441 | ||||||
| Research and development expenses | 5,855 | 6,665 | 5,088 | |||||||||
| Selling and administrative expenses | 6,012 | 9,005 | 5,065 | |||||||||
| Loss from discontinued operations | 45 | - | - | |||||||||
| Restructuring and impairment charges | - | (31 | ) | (191 | ) | |||||||
No tax benefits have been recorded due to the Company’s full valuation allowance position.
Restricted Stock Awards
Commencing in August 2004, the Company began granting restricted stock shares under the Plans and in July 2008 began granting restricted stock units (collectively restricted stock). The value of the 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 certain forfeitable 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 (WA) price per share for restricted stock and for stock options during the period from January 1, 2007 to December 31, 2009 is presented in tabular form below:
| Restricted Stock Shares | Restricted Stock Units | Stock Options | ||||||||||||||||||||||
| Shares | WA price per share | Units | WA price per unit | Issuable upon exercise | WA exercise price | |||||||||||||||||||
| Shares outstanding at December 31, 2006 | 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 | 1,802 | 9.26 | 678 | $ | 5.04 | - | - | |||||||||||||||||
| Shares vested/options exercised | (1,722 | ) | 9.16 | (31 | ) | 5.88 | (384 | ) | 6.78 | |||||||||||||||
| Forfeited/expired | (318 | ) | 12.17 | (36 | ) | 5.89 | (288 | ) | 10.36 | |||||||||||||||
| Balance at December 31, 2008 | 1,974 | $ | 9.27 | 611 | $ | 4.94 | 2,819 | $ | 10.00 | |||||||||||||||
| Granted | - | - | 873 | 3.22 | 3,245 | 2.04 | ||||||||||||||||||
| Shares vested/options exercised | (1,195 | ) | 8.66 | (587 | ) | 4.71 | (49 | ) | 2.06 | |||||||||||||||
| Forfeited/expired | (141 | ) | 11.52 | (69 | ) | 4.01 | (708 | ) | 9.18 | |||||||||||||||
| Balance at December 31, 2009 | 638 | $ | 9.90 | 828 | $ | 3.36 | 5,307 | $ | 5.32 | |||||||||||||||
Exercisable options and their related average exercise prices were 2,701 ($9.77), 2,514 ($10.05) and 2,389 ($9.21) as of December 31, 2007, 2008 and 2009, respectively.
Included within the restricted stock shares granted during year ended December 31, 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. In August 2008, 27 shares of the 357 LTI shares were released upon the separation of our former chief executive officer. As of December 31, 2009, a total of 174 LTI shares have forfeited since their initial grant date. Based upon the performance of the Company through December 31, 2009, no further stock-based compensation for LTI has been expensed.
The total fair value of restricted stock vested during the years ended December 31, 2007, 2008 and 2009 were $25,023, $11,457 and $4,964, respectively. The intrinsic value of exercised options during the years ended December 31, 2007, 2008 and 2009 were $18,120, $1,775 and $130 respectively.
| Weighted average information as of December 31, 2009 | ||||
| Options currently exercisable | ||||
Shares issuable upon exercise | 2,389 | |||
Weighted average exercise price | $ | 9.21 | ||
Weighted average remaining contractual term | 3.8 years | |||
| Weighted average remaining contractual term for outstanding options | 6.7 years | |||
| Intrinsic value of exercisable options | $ | 833 | ||
| Intrinsic value of outstanding options | $ | 7,101 | ||
| Unrecognized stock-based compensation cost | ||||
Option plans | $ | 2,390 | ||
Restricted stock | $ | 4,923 | ||
| Weighted average remaining vest period for option plans | 1.5 years | |||
| Weighted average remaining vest period for restricted stock | 0.6 years | |||
Stock options outstanding at December 31, 2009 are summarized as follows:
| Range of exercise prices | Outstanding Options at December 31, 2009 | Weighted average remaining contractual life | Weighted average exercise price | Exercisable at December 31, 2009 | Weighted average exercise price | |||||||||||||||||
| $ | 1.39 - $2.03 | 2,921 | 8.6 | $ | 1.97 | 154 | $ | 1.93 | ||||||||||||||
| $ | 2.08 - $8.79 | 1,010 | 4.5 | $ | 5.28 | 877 | $ | 5.50 | ||||||||||||||
| $ | 8.84 - $15.56 | 1,227 | 4.4 | $ | 11.24 | 1,213 | $ | 11.23 | ||||||||||||||
| $ | 15.94 - $31.75 | 149 | 1.1 | $ | 22.39 | 145 | $ | 22.49 | ||||||||||||||
Valuation 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 and fair values for stock-based compensation grants used for the years ended December 31, 2007, 2008 and 2009 are summarized below:
| Year ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| Stock option awards: | ||||||||||||
| Risk-free interest rate | 4.8 | % | N/A | 1.6 | % | |||||||
| Expected volatility | 71 | % | N/A | 99 | % | |||||||
| Average expected term (in years) | 4.75 | N/A | 5.00 | |||||||||
| Expected dividend yield | 0.0 | % | N/A | 0.0 | % | |||||||
| Weighted average fair value of options granted | $ | 6.91 | N/A | $ | 1.52 | |||||||
| ESP Plan: | ||||||||||||
| Risk-free interest rate | 3.3 | % | 0.4 | % | 0.5 | % | ||||||
| Expected volatility | 58 | % | 112 | % | 80 | % | ||||||
| Average expected term | 1 | 1 | 1 | |||||||||
| Expected dividend yield | 0 | % | 0 | % | 0 | % | ||||||
| Weighted average fair value of purchase option | $ | 2.99 | $ | 0.75 | $ | 0.63 | ||||||
The Company regularly assesses the assumptions used in its option valuation. For equity awards with expected terms of less than one year, the assumption for expected volatility is based on the Company’s historical volatility. For equity awards with expected terms of greater than one year, the Company used a combination of historical and implied volatility for options granted in the year ended December 31, 2009 whereas for options granted in the year ended December 31, 2007, it used a combination of both Company and peer company historical volatility which at the time of grant was deemed reflective of our development as a larger capitalization company. The expected term of the stock options is based on historical observations of employee exercise patterns combined with expectations of employee exercise behavior in the future giving consideration to the contractual terms of the stock-based awards. The risk free interest rate assumption has consistently been based on the yield at the time of grant of a U.S. Treasury security with an equivalent remaining term. The Company has never paid cash dividends and does not currently intend to pay cash dividends and has consistently assumed a 0% dividend yield.
The Company also sponsors an Employee Savings and Protection Plan under Section 401(k) of the Internal Revenue Code which is available to all full-time employees. Employees can make voluntary contributions up to limitations prescribed by the Internal Revenue Code. The Company matches 50% of employee contributions up to 6% of their gross pay. During the first quarter of 2009, the Company discontinued matching 401(k) contributions, as part of an overall cost reduction plan. The Company recorded expense of $885, $1,163 and $254 for the years ended December 31, 2007, 2008 and 2009, respectively, relating to plan contributions.
13. EARNINGS PER SHARE
The reconciliation of shares used to calculate basic and diluted earnings (loss) per share consists of the following:
| Year ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| Weighted average common shares for basic earnings (loss) per share | 55,189 | 60,183 | 62,372 | |||||||||
| Effect of dilutive securities: | ||||||||||||
Stock options (*) | 1,630 | - | - | |||||||||
Unvested restricted stock (*) | 1,802 | - | - | |||||||||
| Adjusted weighted average shares for diluted earnings (loss) per share | 58,621 | 60,183 | 62,372 | |||||||||
* | Incremental shares from restricted stock and stock options are computed using the treasury stock method. |
Dilution arising from the Company's unvested restricted stock, outstanding stock options or shares potentially issuable upon conversion of the convertible notes was not included in the years ended December 31, 2008 and 2009 as their effect was anti-dilutive. Potential dilution arising from any of the remainder 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.
| Year ended December 31, | ||||||||||||
| 2007 | 2008 | 2009 | ||||||||||
| Convertible notes | 7,600 | 7,600 | - | |||||||||
| Stock options | 1,703 | 2,819 | 5,307 | |||||||||
| Unvested restricted stock | 204 | 2,585 | 1,466 | |||||||||
14. PURCHASE OF ASSETS OF RF GROUP
On September 5, 2007, the Company purchased certain assets and assumed certain related obligations of the radio frequency group of Fairchild Semiconductor (RF group) in exchange for cash of $2,415, inclusive of transaction costs of $115. The assets acquired were principally equipment used in researching and developing RFICs for the broadband wireless communications markets. No products or manufacturing processes were included as part of the purchase. The RF group staff of 23 accepted employment with the Company.
Included in the purchase were fixed assets with an estimated fair market value of $1,723, non-exclusive rights to certain intellectual property and assembled workforce valued at approximately $168 and $524, respectively. The fixed assets, intellectual property and assembled workforce costs were amortized over their estimated useful lives of 3, 2 and 3 years, respectively. During the fourth quarter of 2008, the Company recorded an impairment charge equal to the remaining unamortized value of the intellectual property and assembled workforce intangibles. See Note 2 for further discussion.
15. DISCONTINUED OPERATIONS
On April 2, 2007, the Company sold the majority of Telcom’s operating assets to GTRAN Camarillo, Inc. in exchange for $500 and effectively ceased Telcom’s operations. As a consequence of the sale, the financial results, position and cashflow of Telcom have been classified as discontinued operations in the accompanying financial statements for all periods presented.
Summarized operating results and loss on sale of discontinued operations in the year ended December 31, 2007 was as follows:
| Year ended December 31, 2007 | ||||
| Revenue | $ | 559 | ||
| Operating loss | (479 | ) | ||
| Interest income | 4 | |||
| Loss on sale of discontinued operations | (490 | ) | ||
| Loss from discontinued operations | $ | (965 | ) | |
The assets and liabilities of Telcom as of December 31, 2007 were zero.
16. OTHER ACCUMULATED COMPREHENSIVE INCOME
The components of other accumulated comprehensive income are as follows:
| As of December 31, | ||||||||
| 2008 | 2009 | |||||||
| Unrealized income on marketable securities | $ | 13 | $ | 2,714 | ||||
| Foreign currency translation adjustment | 118 | 33 | ||||||
| Total | $ | 131 | $ | 2,747 | ||||
17. LEGAL PROCEEDINGS
On or about November 11, 2008, plaintiff Charlie Attias filed a putative securities class action lawsuit in the United States District Court for the District of New Jersey, captioned Charlie Attias v. Anadigics, Inc., et al., No. 3:08-cv-05572, and, on or about November 21, 2008, plaintiff Paul Kuznetz filed a related class action lawsuit in the same court, captioned Paul J. Kuznetz v. Anadigics, Inc., et al., No. 3:08-cv-05750 (jointly, the "Class Actions"). The Complaints in the Class Actions, which were consolidated under the caption In re Anadigics, Inc. Securities Litigation, No. 3:08-cv-05572, by an Order of the District Court dated November 24, 2008, seek unspecified damages for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder, in connection with alleged misrepresentations and omissions in connection with, among other things, Anadigics's manufacturing capabilities and the demand for its products. On October 23, 2009, plaintiffs filed a Consolidated Amended Class Action Complaint, which names the Company, a current officer and a former officer-director, and alleges a proposed class period that runs from July 24, 2007 through August 7, 2008. On December 23, 2009, defendants filed a motion to dismiss the Amended Complaint. The motion is scheduled to be fully briefed by the parties on or before March 30, 2010.
On or about January 14, 2009, a shareholder's derivative lawsuit, captioned Sicari v. Anadigics, Inc., et al., No. SOM-L-88-09, was filed in the Superior Court of New Jersey, and, on or about February 2, 2009, a related shareholder's derivative lawsuit, captioned Moradzadeh v. Anadigics, Inc., et al., No. SOM-L-198-09, was filed in the same court (jointly, the "Derivative Lawsuits"). The Derivative Lawsuits seek unspecified damages for alleged state law claims against certain of the Company's current and former directors arising out of the matters at issue in the Class Actions. By Order dated March 6, 2009, the New Jersey Superior Court consolidated the Derivative Lawsuits under the caption In re Anadigics, Inc. Derivative Litigation, No. SOM-L-88-09. By Order dated March 27, 2009, the court stayed the Derivative Lawsuits pending disposition of the defendants' motion to dismiss the Amended Complaint in the Class Actions.
Because the Class Actions and the Derivative Lawsuits, which are in a preliminary stage, do not specify alleged monetary damages, the Company is unable to reasonably estimate a possible range of loss, if any, to the Company in connection therewith.
The Company is also a party to ordinary course litigation arising out of the operation of our business. The Company believes that the ultimate resolution of such ordinary course litigation should not have a material adverse effect on its consolidated financial condition or results of operations.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
2008 and 2009 Quarterly Financial Data
The following table sets forth certain unaudited results of operations for each quarter during 2008 and 2009. The unaudited information has been prepared on the same basis as the audited consolidated financial statements and includes all adjustments which management considers necessary for a fair presentation of the financial data shown. The operating results for any quarter are not necessarily indicative of the results to be attained for any future period. Basic and diluted (loss) income per share are computed independently for each of the periods presented. Accordingly, the sum of the quarterly (loss) income per share may not agree to the total for the year (in thousands, except for per share data).
| Quarter Ended | ||||||||||||||||||||||||||||||||
| 2008 | 2009 | |||||||||||||||||||||||||||||||
| March 29 | June 28 | Sept. 27 | Dec. 31 | April 4 | July 4 | Oct. 3 | Dec. 31 | |||||||||||||||||||||||||
| ( | *) | ( | *) | ( | *) | ( | *) | |||||||||||||||||||||||||
| Net sales | $ | 74,369 | $ | 80,493 | $ | 58,065 | $ | 45,243 | $ | 30,495 | $ | 31,463 | $ | 36,716 | $ | 41,810 | ||||||||||||||||
| Cost of sales | 47,764 | 50,573 | 44,790 | 36,456 | 29,245 | 28,703 | 32,246 | 30,132 | ||||||||||||||||||||||||
| Gross profit | 26,605 | 29,920 | 13,275 | 8,787 | 1,250 | 2,760 | 4,470 | 11,678 | ||||||||||||||||||||||||
| Research and development expenses | 14,331 | 14,797 | 12,931 | 12,393 | 11,625 | 10,376 | 11,025 | 12,943 | ||||||||||||||||||||||||
| Selling and administrative expense | 8,880 | 9,441 | 14,576 | 8,201 | 7,432 | 6,338 | 6,315 | 6,829 | ||||||||||||||||||||||||
| Restructuring and impairment charges | - | - | - | 21,304 | 2,598 | - | - | - | ||||||||||||||||||||||||
| Operating income (loss) | 3,394 | 5,682 | (14,232 | ) | (33,111 | ) | (20,405 | ) | (13,954 | ) | (12,870 | ) | (8,094 | ) | ||||||||||||||||||
| Interest income | 1,938 | 1,281 | 978 | 1,057 | 559 | 287 | 184 | 104 | ||||||||||||||||||||||||
| Interest expense | (591 | ) | (591 | ) | (592 | ) | (591 | ) | (591 | ) | (591 | ) | (584 | ) | (131 | ) | ||||||||||||||||
| Other (expense) income | (812 | ) | (324 | ) | (1,622 | ) | (3,736 | ) | (1,545 | ) | - | 89 | 138 | |||||||||||||||||||
| Benefit from income taxes | - | - | - | - | - | - | (321 | ) | - | |||||||||||||||||||||||
| Net (loss) income | $ | 3,929 | $ | 6,048 | $ | (15,468 | ) | $ | (36,381 | ) | $ | (21,982 | ) | $ | (14,258 | ) | $ | (12,860 | ) | $ | (7,983 | ) | ||||||||||
| Basic (loss) income per share: | ||||||||||||||||||||||||||||||||
| Net (loss) income | $ | 0.07 | $ | 0.10 | $ | (0.26 | ) | $ | (0.60 | ) | $ | (0.36 | ) | $ | (0.23 | ) | $ | (0.21 | ) | $ | (0.13 | ) | ||||||||||
| Diluted (loss) income per share: | ||||||||||||||||||||||||||||||||
| Net (loss) income | $ | 0.07 | $ | 0.10 | $ | (0.26 | ) | $ | (0.60 | ) | $ | (0.36 | ) | $ | (0.23 | ) | $ | (0.21 | ) | $ | (0.13 | ) | ||||||||||
(*) See Note 2 for further discussion.
None.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the Securities and Exchange Commission, or SEC, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding required disclosure. As of December 31, 2009, an evaluation was performed under the supervision and with the participation of our Management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the U.S. Securities Exchange Act of 1934). Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of December 31, 2009.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework of Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.
The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included below.
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.
Inherent Limitations of Controls
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.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
ANADIGICS, Inc.
We have audited ANADIGICS, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ANADIGICS, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, 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.
In our opinion, ANADIGICS, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ANADIGICS, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009 of ANADIGICS Inc. and our report dated March 12, 2010 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
MetroPark, New Jersey
March 12, 2010
None.
PART III
The Company has adopted a Code of Conduct and Business Ethics that applies to directors, officers and employees, including the President and Chief Executive Officer, and Chief Financial Officer and has posted such code on its website at (www.anadigics.com). Changes to and waivers granted with respect to the Company’s Code of Conduct and Business Ethics for officers and directors that are required to be disclosed pursuant to the applicable rules and regulations will be filed on a current report on Form 8-K and posted on the Company website.
The registrant incorporates by reference herein information to be set forth in its definitive proxy statement for its 2010 annual meeting of shareholders that is responsive to the information required with respect to this Item.
The registrant incorporates by reference herein information to be set forth in its definitive proxy statement for its 2010 annual meeting of shareholders that is responsive to the information required with respect to this Item.
The registrant incorporates by reference herein information to be set forth in its definitive proxy statement for its 2010 annual meeting of shareholders that is responsive to the information required with respect to this Item.
The registrant incorporates by reference herein information to be set forth in its definitive proxy statement for its 2010 annual meeting of shareholders that is responsive to the information required with respect to this Item.
The registrant incorporates by reference herein information to be set forth in its definitive proxy statement for its 2010 annual meeting of shareholders that is responsive to the information required with respect to this Item.
PART IV
(a) 1. Financial Statements
Financial Statements are included in Item 8, "Financial Statements and Supplementary Data" as follows:
| - | Report of Independent Registered Public Accounting Firm |
| - | Consolidated Balance Sheets - December 31, 2008 and 2009 |
| - | Consolidated Statements of Operations - Year ended December 31, 2007, 2008 and 2009 |
| - | Consolidated Statements of Comprehensive Income (Loss) - Year ended December 31, 2007, 2008 and 2009 |
| - | Consolidated Statements of Stockholders’ Equity - Year ended December 31, 2007, 2008 and 2009 |
| - | Consolidated Statements of Cash Flows - Year ended December 31, 2007, 2008 and 2009 |
| - | Notes to Consolidated Financial Statements |
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(b) Exhibit List
| 2.1 | Stock Purchase Agreement dated April 2, 2001, among the Company, Telcom Devices Corp. and the sellers named therein. Filed as an exhibit to the Company’s Current Report on Form 8-K dated April 6, 2001, and incorporated herein by reference. |
| 3.1 | Amended and Restated Certificate of Incorporation of the Company, together with all amendments thereto. Filed as an exhibit to the Company's Registration Statement on Form S-3 (Registration No. 333-75040), and incorporated herein by reference. |
| 3.2 | Amended and Restated By-laws of the Company. Filed as an exhibit to the Company's current report on Form 8-K dated January 22, 2008, and incorporated herein by reference. |
| 4.1 | Form of Common Stock Certificate. Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-89928), and incorporated herein by reference. |
| 4.2 | Form of Registration Rights Agreement. Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-89928), and incorporated herein by reference. |
| 4.3 | Schedule to Form of Registration Rights Agreement. Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 333-20783), and incorporated herein by reference. |
| 4.4 | Rights Agreement dated as of December 17, 1998 between the Company and Chase Mellon Shareholder Services L.L.C., as Rights Agent. Filed as an exhibit to the Company’s Current Report on Form 8-K dated December 17, 1998, and incorporated herein by reference. |
| 4.5 | Amendment No. 1 dated as of November 30, 2000 to the Rights Agreement dated as of December 17, 1998 between the Company and Chase Mellon Shareholder Services L.L.C., as Rights Agent. Filed as an exhibit to the Company’s Current Report on Form 8-K dated December 4, 2000, and incorporated herein by reference. |
| 4.6 | Amendment No. 2 dated as of October 2, 2008, to the Rights Agreement, dated as of December 17, 1998, as amended as of November 30, 2000, between the Company and Mellon Investor Services LLC (f/k/a ChaseMellon Shareholder Services, L.L.C.). Filed as an exhibit to the Company’s Form 8-A filed on October 2, 2008 and incorporated herein by reference. |
| 10.1 | 1994 Long-Term Incentive and Share Award Plan. Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-89928), and incorporated herein by reference. |
| 10.2 | 1995 Long-Term Incentive and Share Award Plan, as amended May 29, 1997 and May 24, 2000. Filed as an exhibit to the Company’s Current Report on Form S-8 (Registration No. 333-49632), and incorporated herein by reference. |
| 10.3 | Employee Savings and Protection Plan. Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 33-89928), and as incorporated herein by reference. |
| 10.4 | First Amendment to Employee Savings and Protection Plan, effective as of May 1, 2005 |
| 10.5 | Amended and Restated Employee Stock Purchase Plan. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q filed on May 16, 2008, and incorporated herein by reference. |
| 10.6 | Lease Agreement between United States Land Resources, L.P. (and its successor in interest, Warren Hi-Tech Center, L.P.), and the Company dated as of April 26, 1996. Filed as an exhibit to the Company's Registration Statement on Form S-1 (Registration No. 333-20783); as amended in the Company’s Annual Report filed on Form 10-K405 dated March 29, 2002; each as incorporated herein by reference. |
| 10.7 | Employment Agreement between the Company and Mario A. Rivas, dated January 15, 2009. Filed as an exhibit to the Company’s current report on Form 8-K dated January 15, 2009; as amended and filed as an exhibit to the Company’s Current Report on Form 8-K dated January 4, 2010; each as incorporated herein by reference. |
| 10.8 | Employment Agreement between the Company and Thomas C. Shields, dated July 25, 2000. Filed as an exhibit to the Company’s Annual Report on Form 10-K405 dated March 29, 2002; as amended and filed as an exhibit to the Company’s Current Report on Form 8-K dated May 10, 2005; as amended and filed as an exhibit to the Company’s Current Report on Form 8-K dated November 7, 2005; each as incorporated herein by reference. |
| *10.9 | Employment Agreement between the Company and Charles Huang, dated July 25, 2000. Filed as an exhibit to the Company’s Annual Report on Form 10-K405 dated March 29, 2002, each as incorporated herein by reference, as amended June 14, 2005, as further amended December 17, 2008, as further amended April 7, 2009 (each such amendment filed herewith.) |
| 10.10 | Form of 1997 Long-Term Incentive and Share Award Plan. Filed as an exhibit to the Company’s Annual Report on Form 10-K405 dated February 18, 1997, and incorporated herein by reference. |
| 10.11 | Amended and Restated 2005 Long Term Incentive and Share Award Plan. Filed as an exhibit to the Company’s current report on Form 8-K filed on May 16, 2008; and incorporated herein by reference. |
| 10.12 | Employment Agreement between the Company and Ron Michels, dated as of January 27, 2009. Filed as an exhibit to the Company’s current report on Form 8-K filed on January 30, 2009. |
| *10.13 | Employment Agreement between the Company and Greg White, dated as of November 13, 2009. |
| *21 | Subsidiary Listing |
| *23.1 | Consent of Ernst & Young LLP. |
| 24.1 | Power of Attorney (included on the signature page of this Annual Report on Form 10-K). |
| *31.1 | Rule 13a-14(a)/15d-14(a) Certification of Mario Rivas, 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 Mario Rivas, 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. |
| * Filed herewith | |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 12th day of March, 2010.
ANADIGICS, INC.
BY: /s/ Mario A. Rivas
-----------------------------------------
Mario A. Rivas
CHIEF EXECUTIVE OFFICER AND PRESIDENT
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Mario A. Rivas and Thomas C. Shields as his attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign and file any and all amendments to this Annual Report on Form 10-K, with all exhibits thereto and hereto, and other documents with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF ANADIGICS, INC. IN THE CAPACITIES AND ON THE DATES INDICATED:
| Name | Title | Date |
| /s/ Mario A. Rivas | President and Chief Executive Officer (Principal Executive Officer) | March 12, 2010 |
| Mario A. Rivas | ||
| /s/ Thomas C. Shields | Executive Vice President and Chief Financial Officer (Principal Financial Accounting Officer) | March 12, 2010 |
| Thomas C. Shields | ||
| /s/ Lewis Solomon | Chairman of the Board of Directors | March 12, 2010 |
| Lewis Solomon | ||
| /s/ Paul S. Bachow | Director | March 12, 2010 |
| Paul S. Bachow | ||
| /s/ David Fellows | Director | March 12, 2010 |
| David Fellows | ||
| /s/ Harry T. Rein | Director | March 12, 2010 |
| Harry T. Rein | ||
| /s/ Ronald Rosenzweig | Director | March 12, 2010 |
| Ronald Rosenzweig | ||
| /s/ Dennis Strigl | Director | March 12, 2010 |
| Dennis Strigl |
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Description (Dollars in Thousands) | Balance at beginning of period | Additions charged to costs and expenses | Deductions | Balance at end of period | ||||||||||||||||
| Year ended December 31, 2009: | ||||||||||||||||||||
| Deducted from asset account: | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 739 | $ | - | - | (1 | ) | $ | 739 | |||||||||||
| Reserve for excess and obsolete inventory | 9,028 | 2,940 | (2,089 | ) | (2 | ) | 9,879 | |||||||||||||
| Reserve for warranty claims | 645 | 2,077 | (1,728 | ) | (3 | ) | 994 | |||||||||||||
| Year ended December 31, 2008: | ||||||||||||||||||||
| Deducted from asset account: | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 924 | $ | 69 | $ | (254 | ) | (1 | ) | $ | 739 | |||||||||
| Reserve for excess and obsolete inventory | 4,237 | 5,383 | (592 | ) | (2 | ) | 9,028 | |||||||||||||
| Reserve for warranty claims | 327 | 1,149 | (831 | ) | (3 | ) | 645 | |||||||||||||
| Year ended December 31, 2007: | ||||||||||||||||||||
| Deducted from asset account: | ||||||||||||||||||||
| Allowance for doubtful accounts | $ | 923 | $ | 1 | $ | - | (1 | ) | $ | 924 | ||||||||||
| Reserve for excess and obsolete inventory | 3,530 | 977 | (270 | ) | (2 | ) | 4,237 | |||||||||||||
| Reserve for warranty claims | 347 | 521 | (541 | ) | (3 | ) | 327 | |||||||||||||
(1) Uncollectible accounts written-off to the allowance account.
(2) Inventory write-offs to the reserve account.
(3) Warranty expenses incurred to the reserve for warranty claims.