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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-25662
ANADIGICS, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2582106
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
141 Mt. Bethel Road
Warren, New Jersey 07059
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(Address of principal executive offices) (Zip Code)
(908) 668-5000
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(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 National Market
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 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. /X/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of June 28, 2003 was approximately $98 million, based upon the
closing sales price of the Registrant's common stock as quoted on the NASDAQ
National Market on such date.
The number of shares outstanding of the Registrant's common stock as of March 8,
2004 was 31,575,258.
Documents incorporated by reference: Definitive proxy statement for the
Registrant's 2004 annual meeting of shareholders (Part III).
TABLE OF CONTENTS
PART I
Item 1: Business 3
Item 2: Properties 18
Item 3: Legal Proceedings 18
Item 4: Submission of Matters to a Vote of Security Holders 18
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 18
Item 6: Selected Financial Data 19
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 25
Item 8: Financial Statements and Supplementary Data 27
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 44
Item 9A: Controls and Procedures 44
PART III
Item 10: Directors and Executive Officers of the Registrant 45
Item 11: Executive Compensation 45
Item 12: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 45
Item 13: Certain Relationships and Related Transactions 45
Item 14: Principal Accountant Fees and Services 45
PART IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 8-K 45
2
PART 1
ITEM 1. BUSINESS.
Background
ANADIGICS, Inc. (the "Company") was 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.
ANADIGICS, Inc. designs and manufactures radio frequency integrated
circuit (RFIC) solutions for the wireless and broadband communications markets.
Our high frequency RFIC products enable manufacturers of communications
equipment to enhance overall system performance and reduce manufacturing cost
and time to market. Our products are primarily included in cellular and PCS
(personal communications service) phones and base stations, wireless local area
networks (WLANs), and cable television infrastructure and set-top boxes. We
offer a broad array of products including amplifiers, switches, tuner integrated
circuits, photodiodes and integrated RF modules. These integrated circuits
perform the transmit and receive functions that are critical to the performance
of wireless and broadband communication systems.
In the wireless market, we focus on RFIC solutions for wireless
communication handset applications operating over various air interface
standards, including CDMA, GSM, WCDMA, GPRS and EDGE (Code Division Multiple
Access, Global System for Mobile communication, Wideband CDMA, General Packet
Radio Service and Enhanced Data rate for GSM Evolution). In the broadband
markets, our focus is on applications for WLAN systems, cable television (CATV)
subscriber products, CATV infrastructure systems, and fiber optic communications
systems. We believe we have a competitive advantage in the markets we serve due
to our design, development and applications expertise, our superior compound
semiconductor technologies, our high-volume, low-cost state-of-the-art
manufacturing processes and expertise, and our strong working relationships with
leading original equipment manufacturers (OEMs), original design manufacturers
(ODMs) and reference design houses (collectively our "market customers").
We design, develop and manufacture 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 quality and reliability of our products results from a
comprehensive design, characterization, qualification, and robust manufacturing
process. In addition to the design team located at our corporate headquarters in
Warren, New Jersey, we operate development centers in Richardson, Texas;
Atlanta, Georgia; San Jose, California; Aalborg, Denmark; Taipei, Taiwan and
Seoul, Korea.
Our design and applications engineering staff is strategically active
and engaged with customers during all phases of design and production. This
strategy helps our customers streamline their design process and time to market,
achieve cost-effective and manufacturable designs, and ensure a smooth
transition into high-volume production.
We have two company-owned fabrication facilities ("fabs"): a
state-of-the-art six-inch diameter analog GaAs fab located at our corporate
headquarters in Warren, New Jersey, and a two-inch diameter indium phosphide
(InP) fab located in Camarillo, California. Our six-inch wafer fab allows us to
produce, at a small incremental cost, more than twice the RF die per wafer
compared with the current industry norm four-inch wafer. We believe our strong
manufacturing fabrication capability, combined with logistics expertise and
innovative product designs, allow us to quickly develop and manufacture products
in line with market and customer requirements.
Developments
In March 2003, we acquired the WLAN power amplifier product line from
RF Solutions, headquartered in Atlanta, Georgia as an entrance into the
high-growth and emerging WLAN market. In October 2003, we acquired the Tavanza
CDMA power amplifier business located in San Jose, California from Celeritek,
increasing our customer expansion and product design efforts within the CDMA
handset market.
Industry Background
Over the last decade, there have been remarkable developments in
electronic communications, as evidenced by the emergence of wireless
communications, Internet services and digital television services. Radio
frequency/microwave and integrated circuit technologies have enabled increases
in communications capacity and significant reductions in systems costs. The
wireless and broadband communications markets are beneficiaries of current
technological trends, including higher frequencies, digital modulation and
higher levels of electronic integration.
3
Wireless communications are growing rapidly and replacing landline
telephone services in mature markets and are being built in lieu of landline
services in other emerging markets. Worldwide unit sales of cellular/PCS
wireless handsets were approximately 500 million in 2003.
Broadband markets are also benefiting from technological changes. Cable
television systems are moving from one-way analog signal distribution systems to
interactive digital systems offering increased and new video content, Internet
connection services and telephony. We estimate that approximately 10 million
digital cable television (CATV) set-top boxes were produced in 2003. The
continued build out of the cable infrastructure network required a production of
approximately 2.5 million line extenders, systems amplifiers and fiber nodes.
Additionally, WLANs continue to be a bright spot in the worldwide chip
marketplace. The demand for increased mobility, seamless communications,
internet browsing, and streaming video/audio is driving the need for increased
throughput and gaining even greater momentum in WLANs in the enterprise and home
markets. New standards, such as 802.11g, 802.11 b/g as well as dual-band combo
products, are accelerating the adoption and expanding the use of WLANs globally.
We estimate that approximately 40 million WLAN chipsets, primarily wireless
notebooks and access points, were shipped in 2003.
Activity in broadband fiber optic networks is being driven by demand
from Internet and corporate users for high-speed data transfer capability and
the resultant demand for Internet, Local Area Networks (LAN), Metropolitan Area
Networks (MAN), and Storage Area Networks (SAN).
Given these developments, our market customers are facing the following
challenges and need the following solutions from their suppliers:
o Shorter cycle times. In both the wireless and broadband
communications markets, manufacturers must bring new
subscriber products to market quickly in order to maintain
their market position. The development of multi-chip modules,
using advanced packaging techniques, and the development of
relationships with providers of RF reference designs is
imperative;
o Need for low-cost products. Wireless handsets and cable
set-top boxes are increasingly becoming consumer-driven,
commodity products. Component suppliers must be cost effective
in order for their market customers to stay competitive; and
o Stronger supplier relationships. The digital, wireless, cable
and fiber optic industries are standards driven. Companies in
the communications industry must work very closely with their
suppliers in order to develop new products. Companies
therefore limit themselves to a small number of suppliers in
order to keep their competitive advantages.
The GaAs Advantage
Through our research and development efforts, we have developed
expertise in producing cost-effective GaAs-based RFICs for high-volume
commercial applications. These circuits offer the performance attributes
required for radio frequency/microwave applications that are not easily
obtainable with silicon-based integrated circuits. GaAs transistors can operate
at frequencies greater than silicon transistors, and therefore can handle the
requirements of radio frequency/microwave applications. GaAs RFICs have a lower
noise figure than silicon-based integrated circuits, providing increased
sensitivity, less distortion and interference and better dynamic range, thereby
enabling systems to handle a wide range of signal strengths. GaAs is a
semi-insulating material that facilitates integration of the passive components
required in radio frequency/microwave applications. Finally, GaAs RFICs used in
transmitter applications are more power-efficient than silicon-based circuits,
allowing for longer battery life or use of smaller batteries.
The InGaP Advantage
In the industry, there are two predominant commercially viable types of
HBT process technologies. Earlier generations use either beryllium or carbon
doping in the base layer and Aluminum Gallium Arsenide (AlGaAs) in the emitter
layer. The state-of-the-art for HBT uses carbon doping in the base layer and
Indium Gallium Phosphide (InGaP) in the emitter layer.
There are several significant advantages to InGaP. One advantage is
stability over a range of temperatures. An InGaP HBT device will experience only
an approximate 10% drop in gain over a range of 0 to 100 degrees Celsius, while
the gain loss in an AlGaAs device approximates 50%. An InGaP device has much
higher reliability than an AlGaAs device, giving the option to run the InGaP
device at higher temperatures. These advantages lead to smaller chip sizes and
thus lower cost. Finally, InGaP allows for more robust manufacturing because the
material has the advantage of a selective etch process not possible with AlGaAs.
The InGaP advantages of performance, reliability and manufacturability
led to our decision to develop the world's first commercially viable 6-inch
InGaP HBT process, which was completed in 2000 and complements our GaAs MESFET
technology.
4
ANADIGICS' Strategy
Our objective is to be a leading supplier of RFICs for the wireless and
broadband communications markets. The cornerstone of our strategy is to
capitalize on opportunities in the wireless and broadband communications markets
by addressing applications that leverage our RFIC design and manufacturing
expertise and longstanding relationships with leading companies in these
markets. The key elements of this strategy include:
Be First-to-Market with Proprietary Value-Added Products
We intend to continue to design timely, cost-effective RFIC solutions
for our target markets. In developing prototypes, the combination of an
experienced engineering staff, a "quick-turn" wafer fabrication facility, the
flexibility of using both in-house and contracted product assembly, and a world
class product testing process generally allow us to develop parts and be ready
for customer evaluation in less than one month. This design efficiency
contributes to customer satisfaction and allows us to improve product designs
rapidly for manufacturing efficiency. We will continue to apply our
"best-of-breed" product differentiation strategy, which focuses on developing
high-performance and integrated products. We believe that this strategy has
expanded the company's potential available market in 2003 from $200 million to
$1.1 billion covering wireless RFICs shipped into the mobile handset market,
wireless LAN (WLAN) market, and the wireless infrastructure market.
Capitalize on World Class Manufacturing Capabilities, while Reducing
Costs
We will continue to focus on improving manufacturing performance and
customer service, while reducing costs. We believe we can effectively control
the critical phases of the production process in order to realize high
manufacturing yields, product quality and customer satisfaction. Our six-inch
wafer fab provides increased manufacturing capacities and shorter cycle times at
a lower incremental cost than four-inch wafer fabs. We believe our strong
working relationship with overseas manufacturing subcontractors will allow us to
continue to deliver low-cost products to our customers.
Forge Strong Customer Relationships
We have developed strong working relationships with our customers, many
of whom are leading manufacturers in their markets. Because our target markets
are standards-driven, customer relationships are important. These relationships
provide us with product development opportunities and the ability to anticipate
future market needs. The rapid feedback received from our customers during the
product design phase increases the likelihood that our designs will meet our
customers' cost and performance requirements. We believe furthering our
relationships with reference design companies will continue to contribute market
share gains within each of the wireless and broadband communications markets.
Pursue Strategic Alliances and Investments
We will continue to pursue strategic alliances and investments to
expand and improve upon our technologies, industry expertise, products and
market share. We expect that these alliances and investments will be
complementary to current activities and will enhance our ability to work with
leading companies to develop next generation solutions. We believe the
acquisitions completed during 2003 related to the purchase of the WLAN Power
Amplifier product line from RF Solutions and the TAVANZA CDMA Power Amplifier
business from Celeritek have strategically positioned us to capitalize on the
large and growing markets in wireless and WLAN. As new strategic opportunities
to increase shareholder value arise, we will continue to monitor and selectively
pursue them.
Target Markets and Products
The Company classifies its revenues based upon the end application of
the product in which its integrated circuits are used. For the years ended
December 31, 2001, 2002 and 2003, wireless applications accounted for
approximately 38%, 54% and 55% of total net sales, while broadband applications
accounted for approximately 62%, 46% and 45% of total net sales.
Wireless Communications
The wireless communications market is a growing, dynamic market as a
result of increasing demand for:
o Portable voice and data communications;
o Smaller, lighter handsets offering increased functionality;
o Reliable access and voice quality comparable to land lines;
o Longer talk-time and standby time; and
o Wireless access to the Internet.
5
Our RFIC products are used in handsets where small size, multi-band
operation and low power consumption are key features. Currently in the United
States, the primary digital air interface communications standard is Code
Division Multiple Access (CDMA). Another standard, Global System for Mobile
communication (GSM), is the most widely deployed digital standard on a worldwide
basis, with total subscribers expected to exceed one billion in 2004. We
currently offer and continue to bring to market an array of products for both
the handset and infrastructure markets for these major air interface standards.
We have developed multiband/multimode InGaP HBT power amplifier (PA)
modules for the CDMA and GSM standards. InGaP HBT module technology offers high
efficiency, low power consumption and stability over a range of temperatures, as
well as a lower total solution cost. This combination allows our customers to
build the transmitter section of the wireless handset more efficiently by
reducing design complexity and component counts.
Our principal customers in the wireless market include Kyocera and LG
Electronics. Of our total net sales in the year ended December 31, 2003, Kyocera
accounted for 28% and LG Electronics accounted for 14%, while no other customer
in this market accounted for more than 10% of total net sales during 2003.
The following table sets forth information regarding our principal
products in the wireless communications market:
Product Application
Handset Products
o Power Amplifier (PA) Used in RF transmit chain of wireless handset to
amplify signal to base station.
o Single-band PA module Encapsulates InGaP HBT PA die and certain passive
components in multi-layer laminate module. Used primarily
in CDMA handsets
o Quad-band PA module Encapsulates InGaP HBT PA die, CMOS bias control chip,
and certain passive components in multi-layer laminate
module. Used primarily in GSM handsets
o PowerPlexer (TM) Encapsulates two InGaP HBT PA die, CMOS, bias and power
control chip, antenna switch, coupler, harmonic filter
and passives in multi-layer laminate module. Used in GSM
handsets
o RF Switches Used in wireless handsets and other wireless
applications to switch between receive and transmit
modes and multiple frequency bands
Infrastructure Products
o Driver Amplifiers Used in cellular base stations in the transmit chain
o Gain Blocks Used in cellular base stations in the transmit chain
Broadband
Broadband encompasses our key markets in support of data and
telecommunications support systems and primarily covers cable television, WLAN
and fiber applications.
The trends that currently drive product development in the cable
television markets are:
o Shift to digital cable television with interactive services;
o Demand for high speed Internet access; and
o Emergence of cable telephony.
The convergence of these trends, enabled by digital transmission,
creates the need for innovative RFICs for cable television applications.
6
Cable television systems, which traditionally delivered one-way analog
television programming, limited to a few entertainment channels, are
increasingly used to deliver a wide array of interactive video and other
services, such as high speed Internet access and telephony. In order to support
these new applications, cable system operators must upgrade both the bandwidth
(i.e., capacity) and quality of the infrastructure and terminal equipment. The
new equipment must also be able to handle digital as well as analog modulated
signals.
Our cable products are used in CATV set-top boxes and infrastructure
applications. We produce tuner and reverse amplifier RFICs, as well as line
amplifiers and systems amplifiers for infrastructure applications. The tuner
RFICs are used in double conversion tuners to receive analog and digital signals
in the 50-860 megahertz frequency band. Reverse amplifier RFICs are used in
certain cable set-top boxes that require a reverse path for interactivity. These
tuner and reverse amplifier RFICs enable customers to accelerate and simplify
their designs, and reduce manufacturing complexity and costs.
We have also developed GaAs RFIC line amplifiers to be used in 50-860
megahertz cable television infrastructure equipment, such as line extenders,
distribution amplifiers and system amplifiers. Our product offerings in this
area include amplifier RFICs that operate at 24 volts.
Our principal customer in the cable and broadcast markets is Motorola,
Inc., which represented 14% of total net sales in 2003. No other customer in
this market accounted for more than 10% of our total net sales in 2003.
The following table sets forth information regarding our principal
products in the cable television market:
Product Application
Subscriber Products:
o Upconverters and downconverters Used in set-top box double conversion video and
data tuners
o Reverse amplifiers Used in set-top boxes and cable telephony to transmit signals from a
set-top box upstream to a cable company headend for interactive
applications
Infrastructure Products:
o Line amplifiers Used in cable television systems to distribute signals from cable
headends to subscribers
o Drop amplifiers Used in cable television systems to amplify signals at individual
subscriber homes
In March 2003, we acquired the WLAN power amplifier product line from
RF Solutions, headquartered in Atlanta, Georgia as an entrance into the growing
WLAN market. The WLAN market is being driven by:
o Demand for wireless data access and portability of wireless
access devices;
o Emergence of several wireless data networking mediums,
primarily via personal computers; and
o new market applications such as consumer electronics and
wireless voice over Internet protocol (VoIP).
Adoption of wireless data networking has been enabled by the
introduction of a family of industry standards for WLAN technology that have
substantially increased capacity and data rates. The introduction of the 802.11g
standard allows the existing 2.4 GHz spectrum to be operated more efficiently
with a substantial increase in data rates from the previous one or two megabits
per second (Mbps) now up to 54 Mbps. The introduction of the 802.11a standard
has enabled the use of the 5 GHz spectrum and substantially increased the
available channel capacity. The wireless networking market is further
transitioning from products that operate using a single standard to products
that support all of the standards using the 2.4 GHz and 5 GHz bands in a variety
of combinations. These 802.11a/g dual band products will support the continued
growth of the market while substantially diminishing or avoiding frequency
interference and network congestion.
The wireless capabilities of WLAN networking products are provided
primarily by a semiconductor chipset. A wireless chipset typically contains a
radio transceiver, a digital media access controller (MAC), baseband processor
and power amplifier to boost the transmit signal; improving range and data
throughput. Traditionally, a single power amplifier supported a chipset.
However, the market has begun seeking both dual band power amplifiers and power
amplifiers with higher levels of integration. This increased integration will
provide for smaller size, higher reliability and faster time to market for WLAN
systems.
7
No single customer in the WLAN market was responsible for more than 10%
of total net sales in 2003. The following table sets forth information regarding
our principal products in the WLAN market:
Product Application
Single band Products:
o 2.4 GHz power amplifiers Used in wireless network interface cards (NIC),
embedded PC notebook (mini-PCI) and access point
(AP) applications to boost the transmit signal for
increased range and data throughput.
o 5 GHz power amplifiers Used in wireless rich-media applications, such as
streaming audio/video, to boost the transmit
signal for increased range and data throughput.
o Dual band power amplifiers Used in wireless network systems that require
seamless transition between frequencies to mitigate
interference and congestion.
The fiber optic market is being driven by:
o Internet data traffic use;
o Implementation of corporate local area networks (LAN) and
storage area networks (SAN), which require high speed data
transfer capability;
o Upgrades of existing telecommunication and data communication
systems with fiber optic systems; and
o Expected build outs to Metropolitan Area Networks (MAN)
Fiber optic communication systems use low-loss fiber optic cable to
link central office switches with one another and to connect the central office
to the serving area. Most telecommunication networks today are based on
Synchronous Optical Network (SONET) (United States and Japan) or SDH (Europe)
standards, which require high sensitivity, high bandwidth, and wide dynamic
range receivers. Fiber optic data communications systems use either Gigabit
Ethernet or Fibre Channel standards to achieve high-speed data transfer. The
Gigabit Ethernet standard has emerged as the most widely used in LAN
environments, as it addresses the need for short distance, high speed transfers
of large volumes of information. The Fibre Channel and emerging 4x Fibre Channel
standards have become the most widely used in SAN environments.
The front end of most fiber optic receivers contains a photodetector
and a transimpedance amplifier (TIA), which are used in both fiber optic
telecommunications and data communications networks. Our GaAs TIAs for the
telecommunications networks are designed to meet the requirements of SONET/SDH
systems covering data speeds of OC-3 through OC-192, certain of which are for
use in Dense Wavelength Division Multiplexing (DWDM) systems. With respect to
telecommunications receivers and transceivers, we offer long wavelength (1300
nanometer) positive-intrinsic-negative photodiodes and transimpedance amplifiers
(PIN TIAs) for SONET and SDH applications.
For data communications receivers and transceivers, we sell short
wavelength (850 nanometer) monolithically-integrated metal-semiconductor-metal
photodiodes and transimpedance amplifiers (MSM-TIAs) and short wavelength PIN
TIAs for the Gigabit Ethernet and Fibre Channel standards.
The continued LAN/SAN growth is placing new demands on MANs to provide
expanded cost-effective capacity at 2.5 and 10 gigabits per second (Gb/s) to
meet the needs of dedicated high-speed Internet users and the requirements for
high-speed communication between private LANs and remote storage. We are
expanding our product portfolio to offer low power consumption 3.3 volt TIAs
addressing data rates from OC3 to OC48, 1, 2 and 4X Fibre Channel and Gigabit
Ethernet applications.
In April 2001, we acquired Telcom Devices Corp. ("Telcom"), an
optoelectronic semiconductor manufacturer of indium phosphide (InP) based "long
wavelength" (1310 and 1550 nanometers) emitter (light-emitting diode, or LED)
and detector (photodiode) products for the telecommunications and data
communications markets. Telcom division produces active components used
primarily for fiber optic applications in telecommunications systems, data
communications networks, CATV broadcast and reception, fiber optic test and
measurement equipment, and scientific, custom, and military markets.
8
No single customer in the fiber optics market was responsible for more
than 10% of total net sales in 2003. The following table sets forth information
regarding our principal products in the fiber optic market:
Product Application
Fiber Optic Products:
o Transimpedance amplifiers Used in the receivers or transceivers of a telecom
fiber optic link to amplify the signal received
o Limiting amplifiers Used in the receivers or transceivers of a telecom
fiber optic link to provide a voltage limited output
o Metal semiconductor metal Used in the transceiver of a datacom fiber optic
transimpedance amplifiers link to detect and amplify short wavelength optical
(MSM-TIA) signals
o PIN-TIA Used in the transceiver of a datacom fiber optic link
to detect and amplify long wavelength optical signals
o Photodiodes Long wavelength detectors for SONET/SDH transmitters
and receivers, CATV receivers and instrumentation
o Light-Emitting Diodes (LEDs) Long wavelength emitters
Marketing, Sales, Distribution and Customer Support
We primarily sell our products to our direct customers worldwide. We
have developed close working relationships with leading companies in the
broadband and wireless communications markets. Additionally, we selectively use
independent manufacturers' representatives and distributors to complement our
direct sales and customer support efforts. In 2003 we continued to evaluate,
upgrade and expand our sales representative organization. We believe this is
critical to our objective of expanding our customer base, especially as we
expand our product portfolio. In particular, we established a strategic presence
in both Taipei, Taiwan and Seoul, South Korea by opening field sales
applications support centers. These support centers position our resources in
close proximity to our existing and potential customers in these regions
allowing us to provide real-time service.
We believe that the technical nature of our products and markets
demands an extraordinary commitment to building and maintaining close
relationships with our customers. The sales and marketing staff, assisted by the
technical staff and senior management, visit prospective and existing customers
worldwide on a regular basis. Additionally, both field and factory sales
personnel communicate regularly with our customers. 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.
Our design and applications engineering staff actively communicate with
customers during all phases of design and production. We provide our customers
with engineering data and up-to-date product application notes, and communicate
with our customers' engineers on a regular basis to assist in resolving
technical problems on and off site. In most cases the design and applications
engineers obtain prototypes from our customers in order to troubleshoot and
identify potential improvements to the design in parallel with our customers'
efforts. This strategy helps our customers speed up their design process,
achieve cost-effective and manufacturable designs, and ensure a smooth
transition into high-volume production.
We believe that reference-design manufacturers in the wireless and
broadband market will continue to play an ever-increasing role in the future of
these markets. Therefore, we believe it is essential that we maintain strong
relationships in partnering with these companies to penetrate market
opportunities in the U.S. market and abroad.
Our policy is to provide our customers with applications engineering
support at our customers' design locations and factories throughout the world,
generally within 48 hours of a customer request. Our sales are made pursuant to
customer purchase orders.
Manufacturing, Assembly and Testing
Manufacturing
We fabricate substantially all of our integrated circuits in our
six-inch diameter GaAs wafer fab in Warren, New Jersey and in our two-inch
diameter InP fab in Camarillo, California.
9
Our Warren facility has a 19,000 square foot fab, including 10,000
square feet of Class 100 "clean room" space. Based on physical floor space,
weekly production capacity at the Warren facility is approximately 1,600
equivalent six-inch MESFET wafers (adjusting for the additional mask layers, or
processing steps, inherent in HBT production). Based on equipment currently
installed, present weekly capacity is 800 equivalent six-inch MESFET wafers,
although this space can be equipped to expand capacity as market conditions
require. On the basis of equivalent four-inch MESFET wafers, which is the
industry norm, present weekly capacity is 1,800 wafers per week. See "Risk
Factors - We may face constraints on our manufacturing capacity which would
limit our ability to increase sales volumes."
Our InP fab in Camarillo is a 22,000 square foot facility with 2,000
and 6,000 square feet of fab and assembly clean room, respectively. Production
capacity is currently 50 InP wafers per week per shift.
Our six-inch diameter InGaP HBT process, including a backside VIA hole
process, was among the first in the industry and is the technology platform for
our newer-generation PA module wireless applications. The advantages of better
performance over a range of temperatures and higher reliability lead to smaller
chip sizes and thus lower cost. InGaP also allows for more robust manufacturing
because the material has the advantage of a selective etch process not possible
with AlGaAs.
Our wafer processing technologies have been developed for low cost,
high yield, rapid throughput and short cycle-time manufacturing. Our GaAs MESFET
process uses ion implant variations to optimize performance and yield, allowing
us to produce high-linearity, low-noise, receiver integrated circuits or
transmitter integrated circuits with high power and efficiency. MESFET is the
technology platform underlying the majority of our broadband products.
Our GaAs pHEMT manufacturing process achieves extremely high electron
mobility. Devices manufactured using this process have better sensitivity and
bandwidth than conventional MESFET devices, and offer better stability at higher
frequencies. The pHEMT process is an enabling technology for our wireless switch
products.
Our Warren manufacturing processes were 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.
Our manufacturing process technology includes our two-inch InP process
in Camarillo. InP applications for discrete active devices are widespread in
communications networking, making it the natural starting place for wholesale
integration of passive devices for a complete system on a chip. As a
semiconductor material, InP can provide all-in-one integrated functionality that
includes light generation, detection, amplification, high-speed modulation and
switching, as well as passive splitting, combining and routing. The same
material can be used to make high-speed modulators, switches, amplifiers and
detectors, or just passive waveguides for interconnecting these diverse devices.
Assembly
Fabricated GaAs wafers are shipped to contractors in Asia for packaging
into monolithic microwave integrated circuits (MMICs) or for assembly into
standard plastic lead frame-based packaging or modules.
The components within mobile phones have become increasingly
integrated, enabling the development of ever smaller, lighter, and more
efficient phones. However, integration in the RF subsystem at the IC level is
considerably more challenging, given that various components require different
manufacturing processes for optimal performance. Typical RF processes include
pHEMT, MESFET, HBT, and RF CMOS. The choice of process for various RFICs is
typically based on a trade-off between performance (often measured by efficiency
and linearity) and cost. In general, the process selection will depend on the
relative weight given to performance versus cost. In low-end phones, cost will
dominate, and less-efficient, less-costly components will be used. On the other
hand, in high-end phones, the emphasis will shift to better performance.
Since the processes cannot be easily or economically integrated onto a
single die, multi-chip modules that combine multiple die within a single package
have taken hold, enabling the selection of the optimal process technology for
each IC within the package, while providing enhanced integration at the system
level. These solutions generate significant size and weight reductions in
handset component circuitry, while simultaneously increasing the reliability of
the components.
A number of challenges, outlined below, are being overcome as we become
a fully integrated module manufacturer:
Design complexity: Within a cellphone, the RF section arguably
represents the greatest design challenge for engineers. Modules place
the burden of designing and optimizing RF front-end subsystems on RFIC
manufacturers. The suppliers must focus on providing the optimal IC
process (e.g., InGaP HBT for PAs) and then integrate the technology
into a well-designed module that also incorporates additional passive
and control circuitry. The quality of the RF module design ultimately
drives the device's performance and manufacturability.
10
Increased cost: Modules can be substantially more expensive to produce
than individual IC components. Modules often require extensive design
and engineering expertise, new production processes, and additional
assembly costs. In many cases, the necessary components (e.g.,
discretes and passives) must be purchased from outside vendors.
Consequently, the gross margin is generally lower for modules than for
discrete RF MMICs.
Manufacturing challenges: In addition to the increased costs of
designing modules, achieving sufficient yields on new products can be
problematic. Previously, RFIC companies had little or no experience in
manufacturing modules. As a result, our gross margins were under
pressure as we progressed on the learning curve. In order to attain
high "final test" yields, the challenge continues to be to achieve high
yields in the fab, in assembly, and in test.
It is clear that modules result in our customers getting their product
to market more rapidly at a lower overall end-product cost to our customers due
largely to the reduced parts count and reduction in engineering effort by our
customers. We believe we are well positioned to address the shift toward
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 integrated circuits are tested prior to
shipment to our customers. Increasingly, these test activities are being
performed by third party contractors in Asia.
Early in 2002, we announced an agreement with Universal
Communications, Inc. ("UCOMM") for the outsourcing of the majority of our
production RF testing operations. Under the agreement, the production RF testing
operation was transferred closer to our module assembly contractors in Asia,
which added considerable efficiencies to the device manufacturing process and
further reduced product cycle times and manufacturing costs.
In line with our procedure of 100% RF testing of all parts before
shipping, the majority of production testing is now performed by UCOMM. This
agreement supports our initiative to reduce manufacturing costs by lowering test
cost per unit.
See "Risk Factors - We depend on foreign semiconductor assembly
contractors and a loss of an assembly contractor could result in delays or
reductions in product shipment," "The manufacturing of our products could be
delayed as a result of the outsourcing of our test operations" and "We may face
constraints on our manufacturing capacity which would limit our ability to
increase sales volumes."
Raw Materials
GaAs wafers, InP wafers, HBT/pHEMT epitaxial wafers, passive
components, other raw materials, and equipment used in the production of our
integrated circuits 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, wafer fabrication and integrated circuit testing,
which we believe gives us a competitive advantage. Research and development
expenses were $37.8 million, $29.7 million, and $32.1 million in 2001, 2002, and
2003, respectively. Our research and development efforts in 2001 were primarily
focused on developing high yield, low cost, high volume production of InGaP HBT
integrated circuit products for the wireless and broadband communications
markets. In 2002, development activities focused on improving performance
relative to the size of our CDMA products and developing products to compete in
the GSM market. In 2003, our activities included the continued development and
expansion of products offered to the GSM and emerging WLAN markets.
As of December 31, 2003, we had approximately 146 engineers assigned
primarily to research and development.
Our wireless power amplifier capability has expanded from
plastic-packaged GaAs RF integrated circuit products to RF modules incorporating
multiple technologies. This capability is critical to encapsulating RF
intellectual property and know-how into a module that may be used to shrink the
time-to-market for cellular phone manufacturers. Our RF power amplifier modules
use a multi-layer laminate substrate to combine our proprietary InGaP HBT power
amplifier integrated circuits with custom-designed CMOS controllers and passive
components.
11
Module integration capability required extending our design tools in
several dimensions. Electromagnetic simulation of laminate substrates to design
embedded passive components and model parasitic effects were added to our RF
design tool set. In addition, the ability to simulate at the module level was
greatly enhanced through our partnership with a leading manufacturer of
electronic design automation tools.
Additionally, several silicon CMOS components were developed to support
our module efforts. We currently 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
We receive most of our revenues from a few significant customers. 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 would materially and adversely affect our revenues and our ability to
forecast revenue."
Employees
As of December 31, 2003, we had 480 employees, including five employees
in Denmark who were members of the Danish Engineering Union. We believe our
labor relations to be good and we have never experienced a work stoppage. During
the year our workforce increased by 26 employees, consisting primarily of
engineers working in our two acquired businesses.
Competition
Competition in all of the markets for our current products is intense;
competition is on the basis of performance, price and delivery. Our competitors
in the wireless market are suppliers of both discrete devices and integrated
circuits, and include Hitachi, Ltd., RF Micro Devices, Inc., Skyworks Solutions,
Inc. and certain of our customers who design and fabricate their own in-house
solutions.
Within the Broadband markets, which include the cable television, WLAN
and fiber optic markets, our competitors are also primarily manufacturers of
both discrete components and integrated circuits. Our competitors include Analog
Devices, Inc., Applied Micro Circuits Corp., Conexant Systems, Inc., Maxim
Integrated Products, Inc., Microsemi Corp., Microtune, Inc. and Vitesse
Semiconductor Corp., as well as certain of our customers who design and
fabricate their own in-house solutions.
Many of our competitors have significantly greater financial,
technical, manufacturing and marketing resources. 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. and foreign patent and copyright
protection on our products and developments where appropriate and to protect our
valuable technology under U.S. and foreign laws affording protection for trade
secrets and for semiconductor chip designs. We own 33 U.S. patents and have ten
pending U.S. patent applications and one pending foreign patent application
filed under the Patent Cooperation Treaty. The U.S. patents were issued between
1992 and 2003 and will expire between 2009 and 2022.
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
own intellectual property rights or in avoiding claims that we infringed 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
that costs arising from existing environmental laws will not have a material
adverse effect on our results of operations. We cannot assure you, however, that
the environmental laws 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. See "Risk Factors - We are subject to stringent environmental regulation
both domestically and abroad."
12
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.
******************************************************************************
RISK FACTORS
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 ANADIGICS, INC. AND IN ANALYZING OUR FORWARD-LOOKING STATEMENTS.
Risks Related to ANADIGICS
Our results of operations can vary significantly.
The semiconductor industry has been cyclical, seasonal and subject to
significant downturns. Since the beginning of 2001, the industry has experienced
market weaknesses that have created lower order demand, production overcapacity,
high inventory levels, and accelerated declines in average selling prices for
our products, which is expected to continue in the future. These elements have
continued to negatively affect our operating results.
Our results of operations have been subject to significant quarterly
fluctuations. 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.
We cannot accurately predict whether or when demand will strengthen
across our product lines. If we are unable to reverse the recent trend of
revenue declines and net losses, either because the economy does not improve or
because we under-perform, our ability to compete in a very difficult market may
be materially and adversely affected.
Our decline in revenue and underutilized manufacturing capacity have adversely
affected our gross margins and profitability.
Our manufacturing infrastructure and capacity was established to
address significantly higher volume levels and consequently we have
underutilized manufacturing capacity. Many of our expenses, particularly those
relating to capital equipment and manufacturing overhead, are fixed.
Accordingly, our fixed production costs increase as a percent of revenues during
a period of declining revenues, which adversely affects our gross margin and
profitability. In the future, improved utilization of our manufacturing capacity
will primarily depend on continued growth in demand for our wireless products.
Our ability to reduce expenses is further constrained because we must continue
to invest in research and development in order to maintain our competitive
position.
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 would materially
and adversely affect our revenues and our ability to forecast revenue.
We receive most of our revenues from a few significant customers and
their subcontractors. Sales to Kyocera, Motorola and LG Electronics accounted
for 28%, 14% and 14%, respectively, of total net sales during 2003. Sales to our
greater than 10% customers has exceeded 55% of total revenues in each of the
last three years. Our operating results 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 Kyocera, Motorola, LG Electronics or another
major customer, or if sales to these customers were to decrease materially,
results of operations would be materially and adversely affected.
13
Several of our customers have reduced the lead times on orders placed
with us for our products. While this trend has enabled us to reduce our
inventories, it also restricts our ability to forecast future revenues. We
cannot predict whether a change in order demand patterns or lead times from
customers will take place.
We will need to keep pace with rapid product and process development and
technological changes as well as product cost reductions to be competitive.
Rapid changes in both product and process technologies characterize the
markets for our products. Because these technologies are continually evolving,
we believe that our future success will depend, in part, upon our ability to
continue to improve the efficiencies of our product and process technologies and
rapidly develop new products and process technologies. 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 economic alternative technology, our
results of operations would be materially and adversely affected. We will need
to make substantial investments to develop these enhancements and technologies,
and we cannot assure investors that funds for these investments will be
available or that these enhancements and technologies will be successful.
Our products have experienced rapidly declining unit prices.
In each of the markets where we compete, prices of established products
tend to decline significantly over time. 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 results of operations and financial condition would be materially and
adversely affected.
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:
o defects in masks, which are used to transfer circuit patterns
onto our wafers;
o impurities in the materials used;
o contamination of the manufacturing environment; and
o equipment failure.
Many of our manufacturing costs are relatively fixed and average
selling prices for our products tend to decline over time. Therefore, it is
critical for us to improve the number of shippable integrated circuits per wafer
and increase the production volume of wafers in order to maintain and improve
our results of operations. Yield decreases can result in substantially higher
unit costs, which could materially and adversely affect our operating results
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. In either case, our
results of operations and financial condition could be materially and adversely
affected.
We depend on foreign semiconductor assembly contractors and a loss of an
assembly contractor could result in delays or reductions in product shipment.
We do not assemble our integrated circuits or multi-chip modules.
Instead, we provide the integrated circuit die and, in some cases, packaging and
other components to assembly vendors located primarily in Asia. We maintain two
qualified service suppliers for each assembly process. If we are unable to
obtain sufficient high quality and timely assembly service, or if we lose one of
our current assembly vendors, or if we experience delays in transferring our
production between assembly vendors, or if means of transportation to our
vendors are interrupted, we would experience delays or reductions in product
shipment, and/or reduced product yields, that could materially and adversely
affect our results of operations and financial condition.
14
The manufacturing of our products could be delayed as a result of the
outsourcing of our test operations.
We outsource most of the testing of certain of our products to test
houses or vendors overseas, primarily in Asia. The failure of these test houses
or other third parties to maintain our standards of testing or complete the
testing process of our products in a timely manner, could subject us to
manufacturing delays and delivery of products to customers, which could have a
material adverse effect on our results of operations and financial condition. In
addition to the test houses, we also test some of our products internally.
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 cellular and PCS telephone handsets, and
in turn our cellular and PCS products, are approximately 12 to 24 months.
Products with short life cycles require us to manage production and inventory
levels closely. We cannot assure investors 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 affect us beyond the inventory charges taken in
the past.
Our announced restructuring plans may have insufficiently addressed market
conditions.
In 2001, 2002 and 2003, we announced restructuring plans in response to
a sharp downturn in our industry. Under our restructuring plans, we have
incurred charges relating to reductions in our workforce, impairments of certain
manufacturing and research fixed assets, and the consolidation of facilities.
From January 1, 2001 to December 31, 2003, our workforce was reduced by over
25%, primarily through restructuring initiatives. We may have incorrectly
anticipated the extent of the long-term market decline for our products and
services and we may be forced to restructure further or may incur further
operating charges due to poor business conditions.
We face intense competition, which could result in a decrease in our products'
prices and sales.
The semiconductor industry is intensely competitive and is
characterized by rapid technological change. We compete primarily with
manufacturers of discrete gallium arsenide and silicon semiconductors and with
manufacturers of gallium arsenide and silicon integrated circuits. We expect
increased competition from:
o other gallium arsenide integrated circuit manufacturers who
may replace us as a supplier to our market customers or
otherwise dilute our sales to them;
o silicon analog integrated circuit manufacturers; and
o companies which may penetrate the radio frequency/microwave
integrated circuit communications market with other
breakthrough technologies.
Increased competition could result in:
o decreased prices of our integrated circuits;
o reduced demand for our products; and
o a reduction in our ability to recover development-engineering
costs.
Any of these developments could materially and adversely affect our
results of operations and financial condition.
Most of our current and potential competitors, including Hitachi Ltd.,
Maxim Integrated Products Inc., Microtune Inc., Motorola, RF Micro Devices Inc.
and Skyworks Solutions, Inc. have significantly greater financial, technical,
manufacturing and marketing resources than we do. We cannot assure investors
that we will be able to compete successfully with existing or new competitors.
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 including marketable
securities of $121.6 million and our $66.7 million in outstanding convertible
subordinated notes due November 2006, we believe that our existing sources of
liquidity, together with cash expected to be generated from operations, will be
sufficient to fund our research and development, capital expenditure, working
capital and other financing requirements for at least the next twelve months.
However, there is no assurance that the capital required to fund these
expenses will be available in the future. Conditions existing in the U.S.
capital markets when we seek financing, as well as the then current condition of
the 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 would
have a material adverse affect on the Company.
15
In addition, any strategic investments and acquisitions that we may
make to help us grow our business may require additional capital resources. We
cannot assure you that the capital required to fund these investments and
acquisitions will be available in the future.
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 current
shareholders.
As part of our strategy, we will selectively pursue acquisitions and
alliances. Our ability to complete acquisitions or alliances is dependent upon,
and may be limited by, the availability of suitable candidates and capital. In
addition, acquisitions and alliances involve risks that could materially
adversely affect our operating results, 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 investors 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 would be
called upon to satisfy independent of the acquisition price. Future acquisitions
or alliances could result in additional debt, equity, costs and contingent
liabilities, all of which could materially adversely affect our results of
operations and financial condition. Any such additional debt could subject us to
substantial and burdensome covenants and any such equity could be materially
dilutive to existing stockholders. 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 ability to offer our products could be materially
harmed.
We depend heavily on key personnel.
Our success depends in part on keeping key technical, marketing, sales
and management personnel. We must also continue to attract qualified personnel.
The competition for qualified personnel is intense, and the number of people
with experience, particularly in radio frequency engineering, integrated circuit
design, and technical marketing and support, is limited. We cannot be sure that
we will be able to attract and retain other skilled personnel in the future.
Our international sales and operations involve foreign exchange risks.
Sales to customers located outside North America (based on shipping
addresses and not on the locations of ultimate end users) accounted for 65%, 46%
and 49% of our net sales for the years ended December 31, 2001, 2002 and 2003,
respectively. We expect that revenues derived from 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 foreign suppliers,
assemblers and test houses, we are subject to risks of conducting business
outside of the United States, including primarily those arising from currency
fluctuations, which could affect the price of our products and/or the cost of
producing them.
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. Wafers and packaging components are available from a limited number of
sources. If we are unable to obtain these wafers or components in the required
quantities and quality, we could experience delays or reductions in product
shipments, which would materially and adversely affect our results of operations
and financial condition.
We depend on a limited number of vendors to supply 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 investors 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.
We may face constraints on our manufacturing capacity which would limit our
ability to increase sales volumes.
We believe that our expanded six-inch wafer fabrication facility should
be able to satisfy our forecasted production needs. However, if production
volumes were to increase significantly from expected levels, we might be
required to hire, train and manage additional production personnel in order to
successfully increase production capacity at our facility. We cannot assure
investors that we would be able to implement these changes successfully. A delay
for any reason in increasing capacity would limit our ability to increase sales
volumes. In addition, if we fail to increase production and do not have
sufficient capacity to satisfy the demand for our products, our relationships
with customers could be harmed.
16
We may face interruptions in our manufacturing processes.
Our manufacturing operations are complex and subject to disruption,
including for causes beyond our control. The fabrication of integrated circuits
is an extremely complex and precise process consisting of multiple 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, human error, or a number of other factors can
cause a substantial percentage of wafers to be rejected or numerous die on each
wafer to malfunction. Because our operating results are highly dependent upon
our ability to produce integrated circuits at acceptable manufacturing yields,
these factors present could have a material adverse affect on our business. In
addition, we may discover from time to time defects in our products after they
have been shipped, which may require us to replace such products.
Additionally, our operations may be affected by lengthy or recurring
disruptions of operations at any of our production facilities or those of our
subcontractors. These disruptions may include electrical power outages, fire,
earthquake, flooding, war, acts of terrorism, or other natural or man-made
disasters. Disruptions of our manufacturing operations could cause significant
delays in shipments until we are able to shift the products from an affected
facility or subcontractor to another facility or subcontractor. In the event of
such delays, we cannot assure investors that the required alternative capacity,
particularly wafer production capacity, would be available on a timely basis or
at all. Even if alternative wafer production 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 or similar arrangements with others.
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 fabrication facility, alternative gallium arsenide
production capacity would not be immediately available from third-party sources.
These disruptions could have a material adverse effect on our business,
financial condition and results of operations.
We are subject to stringent environmental regulation both domestically and
abroad.
We are subject to a variety of federal, state and local requirements
governing the protection of the environment. These environmental 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 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.
We may not be successful in protecting our intellectual property rights or in
avoiding claims that we infringed on the intellectual property rights of others.
Our success depends in part on our ability to obtain patents and
copyrights, maintain trade secret protection and operate without infringing on
the proprietary 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 patent and/or other intellectual property rights of
others. We are currently reviewing a claim alleging that we are or may be
infringing certain patents. We cannot assure investors that we will not be
subject to patent 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 determine that we have infringed 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.
In addition to patent and copyright protection, 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 confidentiality agreements with our collaborators and
employees. We cannot assure investors 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.
17
Provisions in our governing documents and our shareholders' rights agreement
could discourage takeovers and prevent shareholders from realizing an investment
premium.
Certain provisions of our articles of incorporation and by-laws could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of our Company.
These provisions include the ability of the board of directors to designate the
rights and preferences of preferred stock and issue such shares without
shareholder approval, our staggered board of directors, and our advance notice
requirements for stockholder proposals and director nominations. In addition,
the Company has adopted a shareholders' rights agreement that may make it more
difficult and expensive for a third party to acquire the Company. Any of the
foregoing could limit the price that certain investors might be willing to pay
in the future for shares of our common stock.
We have had significant volatility in our stock price and it may fluctuate in
the future. Therefore, the ability to sell shares of common stock at or above
the price paid for them may be difficult.
The trading price of our common stock has and may continue to fluctuate
significantly. Such fluctuations may be influenced by many factors, including:
o our performance and prospects;
o the performance and prospects of our major customers;
o the depth and liquidity of the market for our common stock;
o investor perception of us and the industry in which we
operate;
o changes in earnings estimates or buy/sell recommendations by
analysts;
o general financial and other market conditions; and
o domestic and international economic conditions.
Public stock markets have experienced, and are currently experiencing,
extreme price and trading volume volatility, particularly in the technology
sectors of the market. This volatility has significantly affected 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.
ITEM 2. PROPERTIES.
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, all of which are located in the same
industrial park. 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. Approximately
92,500 square feet of office and laboratory space is leased at 35 Technology
Drive in Warren, New Jersey under a twelve-year lease, which expires on May 1,
2005. We have moved out of this space and over half of the space at 35
Technology Drive has been sublet in order to reduce costs. Additionally, we
lease an approximately 22,000 square foot building in Camarillo, California. The
lease expires on July 31, 2005; however, the term may be extended up to two
times for additional two-year periods.
We also lease approximately 5,400, 8,900, 4,000, 3,500, 6,500, 4,900
and 2,400 square feet of office space located in Richardson, Texas; Atlanta,
Georgia; San Jose, California; Aalborg, Denmark; Rehovot, Israel; Taiwan; and
Seoul, South Korea, respectively, under lease agreements with remaining terms
ranging from ten months to three years that can be extended, at our option. The
space in Rehovot, Israel has been sublet in order to reduce costs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to litigation arising out of the operation of
its business. We believe that the ultimate resolution of such litigation should
not have a material adverse affect on our financial condition, results of
operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our $0.01 par value Common Stock, ("Common Stock") has been quoted on
the NASDAQ National 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.
18
HIGH LOW
--------- ---------
Calendar 2003
Fourth Quarter.......................................... $ 7.38 $ 4.52
Third Quarter........................................... 5.65 2.98
Second Quarter.......................................... 3.72 1.81
First Quarter........................................... 2.95 1.69
Calendar 2002
Fourth Quarter.......................................... $ 4.18 $ 1.59
Third Quarter........................................... 8.20 2.00
Second Quarter.......................................... 13.61 6.60
First Quarter........................................... 16.29 9.40
As of December 31, 2003, there were 31,225,888 shares of Common Stock
outstanding and 328 holders of record of the Common Stock.
We have never paid cash dividends on our capital stock. We currently
anticipate that we will retain all 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.
ITEM 6. SELECTED FINANCIAL DATA.
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, 2003 and 2002 and for the
years ended December 31, 2003, 2002, and 2001 have been derived from our audited
financial statements included herein. The selected consolidated financial data
set forth below as of December 31, 2001, 2000 and 1999 and for the years ended
December 31, 2000 and 1999 have been derived from our audited financial
statements 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.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 2000 2001 2002 2003
--------- ---------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RESULTS OF OPERATIONS
Net sales.......................... $ 131,159 $ 172,268 $ 84,765 $ 82,564 $ 75,212
Gross profit (loss)................ 55,339 82,797 (2,932) 7,262 3,285
Operating income (loss)............ 7,030 16,796 (85,986) (65,565) (50,998)
Income (loss) before income taxes.. 3,398 28,596 (82,782) (52,183) (51,139)
Net income (loss).................. 2,588 18,892 (107,120) (55,886) (50,757)
Earnings (loss) per share:
Basic............................ $ 0.11 $ 0.64 $ (3.54) $ (1.83) $ (1.65)
Diluted ......................... $ 0.10 $ 0.60 $ (3.54) $ (1.83) $ (1.65)
AT DECEMBER 31,
-----------------------------------------------
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total cash and marketable securities........ $171,751 $166,161 $200,095 $155,518 $121,630
Working capital............................. 176,322 179,987 132,062 110,151 81,100
Total assets................................ 317,610 352,473 346,914 255,671 207,898
Total capital lease obligations............. 183 250 94 - 90
Long-term debt, including current portion... 4,000 3,000 100,244 66,700 66,700
Total stockholders' equity.................. 276,649 328,832 226,636 171,088 121,046
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We were organized in 1984 and initially focused on the development and
manufacture of GaAs integrated circuits for low-volume defense and aerospace
applications. In 1988 we began shifting our strategy to focus on radio
frequency/microwave communications systems for high-volume applications, and
began production for these applications in 1989. In 1992 we introduced
integrated circuits for the cable television market. In late 1994 we entered the
wireless communications market with the introduction of cellular telephone
integrated circuits. In 2001 we introduced our InGaP HBT power amplifier modules
to the wireless communications market and in 2003 expanded into the WLAN power
amplifier marketplace.
19
We strive to achieve market advantage through the application of our
radio frequency/microwave design and application knowledge. With our design
expertise we have led the industry with the introduction of innovative products.
Recent examples include quad-band GSM/GPRS power amplifiers with integrated
power control, high efficiency low power (HELP(TM)) 3mm x 3mm CDMA PA modules,
wideband CDMA power amplifier modules, PowerPlexer(TM) integrated GSM front end
modules, active splitter integrated circuits for cable infrastructure and
set-top box applications and high output 802.11 b/g WLAN power amplifier
modules, all of which offer greater levels of product performance and reduce
manufacturers' production costs.
We aim to achieve cost advantage through the scale and efficiency of
our manufacturing operations. During 1999 we began production in our six-inch
analog GaAs wafer fabrication facility, which we believe was among the first
six-inch analog GaAs wafer fabrication facility in our industry. Using a
six-inch wafer allows us to produce, at a small incremental cost, more than
twice the integrated circuit die per wafer than can be produced from the
industry norm four-inch wafer.
During 2003, we made two strategic acquisitions through the purchase of
(1) the Wireless LAN (WLAN) power amplifier business of RF Solutions, providing
an entrance into the emerging and high-growth WLAN market, and (2) the Tavanza
CDMA power amplifier handset business from Celeritek to enhance our customer and
product expansion in the CDMA market. These businesses also provide us with
enriched product portfolio, technology, know-how and high volume capability.
Our business outlook remains cautious after our markets weakened
substantially during 2001 and remained weak throughout much of 2002 and 2003.
With the well-publicized deterioration in the telecommunications industry, we
experienced a substantial decline in demand from 2000 levels for our products.
The downturn in demand reflected a reduction in capital spending by many of our
customers and lower end consumer demand and was compounded by high component
inventories at most of our customers, including components that we previously
supplied. Reduced production volumes contributed to a significant decline in our
gross margin and profitability from the levels achieved in 2000.
Many of our expenses, particularly those relating to capital equipment
and manufacturing overhead, are fixed. Accordingly, reduced revenue causes our
fixed production costs to increase as a percentage of revenue, which adversely
affects our gross margin and profitability. We will continue to strategically
invest in research and development in order to maintain our competitive
position.
The general slowdown in the industry in which we operate as well as the
overall slowing of the economy has had, and could continue to have, a negative
impact on our net sales, gross margins and other results of operations. We
cannot accurately predict whether or when demand will strengthen across all
product lines. If we are unable to reverse the recent trend of low revenues and
net losses because the economy does not improve or because we under perform, our
ability to compete in a very difficult market may be materially and adversely
affected.
We have only one reportable segment. For financial information related
to such segment and certain geographic areas, see Note 5 to the accompanying
financial statements.
CRITICAL ACCOUNTING POLICIES
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
Production revenue is recorded when products are shipped to customers
pursuant to a purchase order. We charge customers for the costs of certain
contractually-committed inventories that remain at the end of a product's life.
Cancellation revenue is recognized 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.
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 during the year. The
accrued liability for warranty costs is included in accrued liabilities in the
consolidated balance sheets.
20
LONG-LIVED ASSETS
Long-lived assets include fixed assets, goodwill and other intangible
assets. We regularly review these assets for circumstances 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.
Goodwill and intangibles impairment
We have intangible assets related to goodwill and other acquired
intangibles. Significant judgements are involved in the determination of the
estimated useful lives for our other intangibles and whether the goodwill or
other intangible assets are impaired. In assessing the recoverability of
goodwill and other intangibles, we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the
respective assets.
Impairment of long-lived assets
We record impairment losses on long-lived assets used in operations or
expected to be disposed of when events and circumstances indicate that the
undiscounted cash flow estimated to be generated by these assets is less than
the carrying amounts of those assets. Management considers sensitivities to
capacity, utilization and technological developments in making its assumptions.
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.
INVENTORY
Inventories are valued at the lower of cost or market ("LCM"), using
the first-in, first-out method. In addition to LCM limitations, we reserve
against inventory items for estimated obsolescence or unmarketable inventory.
Our reserve for excess and obsolete inventory is primarily based upon forecasted
short-term demand for the product and any change to the reserve arising from
forecast revisions is reflected in cost of sales in the period the revision is
made.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain an allowance for doubtful accounts for estimated losses
resulting from customers' failure to make mandatory payments. If the financial
condition of our customers were to erode, making them unable to make payments,
additional allowances may be required.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data as a
percentage of net sales for the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2002 2003
----------- ----------- -----------
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of sales.......................................... 103.5 91.2 95.6
------ ------ ------
Gross (loss)profit..................................... (3.5) 8.8 4.4
Research and development expenses...................... 44.5 36.0 42.7
Selling and administrative expenses.................... 32.2 25.9 25.8
Restructuring and other charges........................ 4.4 6.1 1.2
Asset impairment charges............................... 12.3 10.5 -
Goodwill impairment charge............................. - 9.7 -
Purchased in-process R&D............................... 4.5 - 2.5
------ ------ ------
Operating loss......................................... (101.4) (79.4) (67.8)
Interest income........................................ 8.2 7.7 4.4
Interest expense....................................... (0.8) (6.2) (5.0)
Impairment of investments.............................. (3.7) (0.5) -
Gain on repurchase of Convertible notes................ - 15.2 -
Other income (expense) ................................ - - 0.4
------ ------ ------
Loss before income taxes............................... (97.7) (63.2) (68.0)
Provision (benefit) for income taxes................... 28.7 (5.2) (0.5)
------ ------ ------
Loss before cumulative effect of accounting change..... (126.4) (58.0) (67.5)
Cumulative effect of accounting change................. - (9.7) -
------ ------ ------
Net loss............................................... (126.4%) (67.7%) (67.5%)
====== ====== ======
22
2003 COMPARED TO 2002
NET SALES. Net sales during 2003 decreased 8.9% to $75.2 million,
compared to $82.6 million for 2002. The sales decline was due to a decrease in
demand of TDMA power amplifiers used in cellular handsets resulting from a
market shift in the U.S. from the TDMA air interface standard to the emergence
and deployment of the CDMA-1X telecommunication standard. Additionally, demand
was lower for IC's used in set-top boxes attributed to overall market softness
for set-top boxes.
Specifically, net sales of integrated circuits for cellular and PCS
applications decreased 7.1% during 2003 to $41.5 million from $44.7 million in
2002. Net sales for TDMA power amplifiers declined to zero in 2003 from $3.5
million in 2002.
Sales during 2003 of integrated circuits for broadband applications
decreased 11.1% to $33.7 million from $37.9 million in 2002. The decline was
partially offset by sales of our power amplifiers used in Wireless LAN (WLAN)
applications. On March 31, 2003, we purchased the power amplifier business of RF
Solutions (RFS) providing the Company an entrance into the growing WLAN power
amplifier market.
Generally, selling prices for same product sales were lower during 2003
as compared to 2002.
GROSS MARGIN. Gross margin for 2003 decreased to 4.4% of net sales,
compared with 8.8% of net sales in the prior year. The decline in gross margin
from the prior year is the result of the decrease in revenue, lower production
throughput in our facilities due to outsourcing and consequent lower absorption
of fixed costs. The aforementioned lower pricing was largely offset by savings
related to lower test, assembly and raw material costs.
RESEARCH & DEVELOPMENT. Company sponsored research and development
expense increased 7.8% during 2003 to $32.1 million from $29.7 million during
2002 primarily due to the acquisition of the RFS power amplifier business on
March 31, 2003 and the acquisition of the Tavanza CDMA wireless handset business
from Celeritek on October 14, 2003.
PURCHASED IN-PROCESS R&D. The Company expensed purchased in-process
research and development costs of $1.9 million resulting from the acquisitions
of RFS and Tavanza. The charge represented the fair value of certain acquired
research and development projects that were determined to have not reached
technological feasibility and did not have alternative future uses. No
acquisitions or in-process R&D applied in 2002.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses
decreased 9.3% during 2003 to $19.4 million from $21.4 million in 2002. The
decrease was primarily due to the elimination of intangibles' amortization as a
result of the write-off of intangibles in the fourth quarter of 2002 and savings
realized from the administrative headcount reductions resulting from our
restructuring activities. The expense reductions were partially offset by
increased expenses from the RFS acquisition and the establishment of new
application centers in Taiwan and South Korea.
ASSET AND INVESTMENT IMPAIRMENT CHARGES AND RESTRUCTURING AND OTHER
CHARGES. During 2003, we recorded charges of $0.9 million for restructuring and
other charges related to severance and related employee benefits of workforce
reductions of approximately 19 operations and administrative positions and
lease-related costs. The anticipated annual benefit from the workforce
reductions is expected to approximate $1.9 million. During 2002, we recorded
charges of $8.6 million for asset impairments, $0.4 million for impairment on
investments and $5.0 million for restructuring and other charges.
Activity and liability balances related to the restructuring and other
charges for the years ended December 31, 2002 and 2003 are as follows (in
millions):
22
Lease Workforce
Related Reductions Total
--------- ------------ --------
Year ended December 31, 2002
Restructuring and other expenses $ 3.4 $ 1.6 $ 5.0
Deductions (1.7) (2.2) (3.9)
December 31, 2002 restructuring balance 2.8 0.2 3.0
Year ended December 31, 2003 --------- ------------ ---------
Restructuring and other expenses 0.3 0.6 0.9
Deductions (1.1) (0.8) (1.9)
--------- ------------ ---------
December 31, 2003 restructuring balance $ 2.0 $ - $ 2.0
========= ============ =========
GOODWILL IMPAIRMENT CHARGE. During 2002, we monitored fiber market
conditions in light of additional job cuts and difficult prospects announced by
several of our end-market customers. In view of these weaker market conditions
during the third quarter of 2002, we evaluated our goodwill and intangible
assets for potential impairment. As a result of that evaluation, we recorded a
goodwill impairment charge of $8.0 million. Also see cumulative effect of
accounting change below. There was no impairment of goodwill in 2003.
INTEREST INCOME. Interest income decreased 47.0% to $3.3 million during
2003 from $6.3 million in 2002. The decrease was due to lower average invested
funds and was compounded by lower interest rates.
INTEREST EXPENSE. Interest expense decreased to $3.8 million in 2003
from $5.1 million in 2002. Our interest expense arises from obligations under
our 5% Convertible notes, issued on November 27, 2001. In September, 2002, we
repurchased $33.3 million in face value of the notes and consequently reduced
the outstanding principal balance to $66.7 million.
GAIN ON REPURCHASE OF CONVERTIBLE NOTES. During 2002, we recognized a
gain of $12.6 million, on the repurchase of $33.3 million in principal of our 5%
Convertible notes, after adjusting for accrued interest and the write-off of a
proportionate share of unamortized offering costs.
PROVISION(BENEFIT) FOR INCOME TAXES. In December 2002, the Company
received a $4.3 million refund pursuant to a carryback claim under the Job
Creation and Workers Assistance Tax Act of 2002. The refund represented taxes
paid in 1996 and 1997.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In 2002, we adopted the
provisions of Statement of Financial Accounting Standards ("FAS") No 142,
"Goodwill and Other Intangible Assets". Under the new rules, goodwill is no
longer subject to amortization but is reviewed for potential impairment, upon
adoption and thereafter annually or upon the occurrence of an impairment
indicator. The annual amortization of goodwill which would have approximated
$2.6 million was no longer required. As a result of completing the required
test, we recorded a charge for the cumulative effect of the accounting change in
the amount of $8.0 million representing the excess of the carrying value of a
reporting unit as compared to its estimated fair value. In 2003, there was no
charge for an accounting change.
2002 COMPARED TO 2001
NET SALES. Net sales during 2002 decreased 2.6% to $82.6 million,
compared to $84.8 million for 2001. Improvement in our wireless business was
more than offset by a downturn in demand in the broadband market.
Specifically, net sales of integrated circuits for cellular and PCS
applications increased 38.6% during 2002 to $44.7 million from $32.3 million in
2001. The increase was due to our penetration into the CDMA power amplifier
module market more than offsetting the decrease in demand for TDMA power
amplifiers.
Sales during 2002 of integrated circuits for broadband applications
decreased 27.9% to $37.9 million from $52.5 million in 2001. Lower investment by
telecom and cable providers led to declines in demand for our fiber and cable
subscriber parts used primarily in set-top boxes and cable modems. The principal
decrease was observed following the first quarter of 2001 when broadband
revenues were $22.2 million.
Generally, selling prices for same product sales were lower during 2002
as compared to 2001.
GROSS MARGIN (LOSS). Gross margin (loss) for 2002 increased to 8.8% of
net sales, compared with (3.5%) of net sales in the prior year. The improvement
in gross margin from the prior year is the result of lower inventory
obsolescence charges (down $8.7 million) and lower warranty related cost. The
aforementioned lower pricing was largely offset by savings related to lower
test, assembly and raw material costs.
RESEARCH & DEVELOPMENT. Company sponsored research and development
expense decreased 21.2% during 2002 to $29.7 million from $37.8 million during
2001 primarily due to headcount reductions from our restructurings and a
narrower focus on our fiber-related projects. As a percentage of sales, research
and development expense decreased to 36.0% in 2002 from 44.5% in 2001.
23
PURCHASED IN-PROCESS R&D. The Company expensed purchased in-process
research and development costs of $3.8 million as a result of the Telcom
acquisition on April 2, 2001. The charge represented the fair value of certain
acquired research and development projects that were determined to have not
reached technological feasibility and did not have alternative future uses. No
acquisitions or in-process R&D applied for 2002.
SELLING AND ADMINISTRATIVE. Selling and administrative expenses
decreased 21.6% during 2002 to $21.4 million from $27.3 million in 2001. The
decrease was primarily due to savings from administrative headcount reductions
from our restructurings, the elimination of goodwill amortization and other
expense reductions. As a percentage of sales, selling and administrative
expenses decreased to 25.9% in 2002 from 32.2% in 2001.
ASSET AND INVESTMENT IMPAIRMENT CHARGES AND RESTRUCTURING AND OTHER
CHARGES. During 2002, we recorded charges of $8.6 million for asset impairments,
$0.4 million for impairment on investments and $5.0 million for restructuring
and other charges. The asset impairment charge related to the write-off of
certain manufacturing and research equipment, leasehold improvements, certain
technology licenses that are no longer used in the ongoing activities of the
business and process technology from the Telcom acquisition following an
evaluation of our carrying value against the related business cash flows. The
charge for impairment on investments was recorded on a private-equity investment
following an evaluation that indicated the carrying value of such investment
exceeded its estimated fair market value. The restructuring and other charges
were for lease-related costs and for severance and related benefit costs of
workforce reductions. The workforce reductions eliminated approximately 83
positions throughout the Company. During 2001, we recorded charges of $10.4
million for asset impairments, $3.1 million for impairment on investments and
$3.8 million for restructuring and other charges, primarily severance and
related benefits costs of workforce reductions, with $1.6 million of benefits
paid through December 31, 2001, and the remainder paid out in 2002.
Activity and liability balances related to the restructuring and other
charges for the year ended December 31, 2002 were as follows (in millions):
Lease Workforce
Related Reductions Total
--------- ------------ --------
Year ended December 31, 2002
Restructuring and other expenses $ 3.4 $ 1.6 $ 5.0
Deductions (1.7) (2.2) (3.9)
December 31, 2002 restructuring balance 2.8 0.2 3.0
GOODWILL IMPAIRMENT CHARGE. During 2002, we monitored fiber market
conditions in light of additional job cuts and difficult prospects announced by
several of our end-market customers. In view of these weaker market conditions
during the third quarter of 2002, we evaluated our goodwill and intangible
assets for potential impairment. As a result of that evaluation, we recorded a
goodwill impairment charge of $8.0 million. Also see cumulative effect of
accounting change below.
INTEREST INCOME. Interest income decreased 9.0% to $6.3 million during
2002 from $6.9 million in 2001. The decrease was due to generally lower interest
rates, despite an increase in average invested funds.
INTEREST EXPENSE. Interest expense increased to $5.1 million in 2002
from $0.6 million in 2001. The interest applies on our 5% Convertible notes,
issued on November 27, 2001. In September, 2002, we repurchased $33.3 million in
face value of the notes, consequently reducing the outstanding balance to $66.7
million.
GAIN ON REPURCHASE OF CONVERTIBLE NOTES. During 2002, we recognized a
gain of $12.6 million, on the repurchase of $33.3 million in principal amount of
our 5% Convertible notes, after adjusting for accrued interest and the write-off
of a proportionate share of unamortized offering costs.
PROVISION(BENEFIT) FOR INCOME TAXES. In December 2002, the Company
received a $4.3 million refund pursuant to a carryback claim under the Job
Creation and Workers Assistance Tax Act of 2002. The refund represented taxes
paid in 1996 and 1997. During 2001, the Company recorded a valuation allowance
of $26.8 million against the carrying value of its deferred tax asset. Since
realization of deferred tax assets is dependent upon the timing and magnitude of
future taxable income prior to the expiration of the deferred tax attributes,
management recorded a full valuation allowance in 2001 and 2002.
24
CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Effective January 1, 2002, we
adopted the provisions of Statement of Financial Accounting Standards ("FAS") No
142, "Goodwill and Other Intangible Assets". Under the new rules, goodwill is no
longer subject to amortization but is reviewed for potential impairment, upon
adoption and thereafter annually or upon the occurrence of an impairment
indicator. The annual amortization of goodwill which would have approximated
$2.6 million was no longer required. Other intangible assets continue to be
amortized over their useful lives. As a result of completing the required test,
in 2002 we recorded a charge for the cumulative effect of the accounting change
in the amount of $8.0 million representing the excess of the carrying value of a
reporting unit as compared to its estimated fair value.
LIQUIDITY AND SOURCES OF CAPITAL
At December 31, 2003 we had $18.5 million of cash and cash equivalents
on hand and $103.1 million in marketable securities. We had $66.7 million of 5%
Convertible notes outstanding as of December 31, 2003.
Operations required the use of $23.6 million in cash during 2003.
Investing activities provided $16.6 million of cash during 2003, consisting
principally of net sales of marketable securities of $25.0 million, partially
offset by purchases of equipment of $4.2 million and the acquisitions of RFS and
Tavanza for $4.2 million. Financing activities consisting of proceeds received
from the employee stock purchase plan ("ESP Plan") provided $1.2 million of cash
in 2003.
At December 31, 2003, we had purchase commitments of approximately $2.1
million for equipment, furniture, and leasehold improvements for the first half
of 2004.
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 the next twelve months and beyond. Our
anticipated capital needs may include acquisitions of complimentary businesses
or technologies, investments in other companies or repurchasing our outstanding
debt or equity. However, we may elect to finance all or part of our future
capital requirements through additional equity or debt financing. There can be
no assura