| ANADIGICS INC ITEM 1A 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 "e BELIEVE "e , "e ANTICIPATE "e , "e EXPECT "e OR WORDS OF SIMILAR IMPORT SIMILARLY, STATEMENTS THAT DESCRIBE OUR FUTURE PLANS, OBJECTIVES, ESTIMATES OR GOALS ARE FORWARD-LOOKING STATEMENTS THE CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS REPORT IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS AND DEVELOPMENTS TO BE MATERIALLY DIFFERENT FROM THOSE EXPRESSED OR IMPLIED BY THE FORWARD-LOOKING STATEMENTS PRESENTED HEREIN INCLUDE THE RISK FACTORS DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS REPORT, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMPANY AND IN ANALYZING OUR FORWARD-LOOKING STATEMENTS Risks Related to ANADIGICS We have a history of recent losses, and expect to continue to incur losses |
| We have incurred operating and net losses in each of the three years in the period ended December 31, 2005, and may continue to incur losses in 2006 |
| Although we continue to gain increased market acceptance for certain of our products, we cannot assure you as to when or whether we will become profitable again |
| We face intense competition, which could result in a decrease in our products’ prices and sales |
| The markets for our products are intensely competitive and are characterized by rapid technological change |
| We compete with US and international semiconductor and integrated circuit (IC) manufacturers of all sizes, some of whom have significantly greater financial, technical, manufacturing and marketing resources than we do |
| We currently face significant competition in our markets and expect that intense price and product competition will continue |
| This competition has resulted in, and is expected to continue to result in, declining average selling prices for our products and increased challenges in maintaining or increasing market share |
| We believe that the principal competitive factors for suppliers in our markets include, among others: • time-to-market; • timely new product innovation; • product quality, reliability and performance; • product price; • features available in products; • compliance with industry standards; • strategic relationships with leading reference design providers and customers; and • access to and protection of intellectual property |
| Certain of our competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer requirements or may be able to devote greater resources to the development, promotion and sale of their products than we can |
| Current and potential competitors have established or may in the future establish, financial or strategic relationships among themselves or with customers, distributors, reference design providers or other third parties with whom we have or may in the future have relationships |
| If our competitors are able to strengthen existing, or establish new, relationships with these third parties they may rapidly acquire market share at our expense |
| We cannot assure you that we will be able to compete successfully against current and potential competitors |
| Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our financial condition and results of operations |
| 13 _________________________________________________________________ We will need to keep pace with rapid product and process development and technological changes as well as product cost reductions to be competitive |
| The markets for our products are characterized by rapid changes in both product and process technologies based on the continuous demand for product enhancements, higher levels of integration, decreased size and reduced power consumption |
| Because the continuous evolution of these technologies and frequent introduction of new products and enhancements have generally resulted in short product life cycles for our products, we believe that our future success will depend, in part, upon our ability to continue to improve the efficiency of our products and process technologies and rapidly develop new products and process technologies |
| The successful development of our products is highly complex and depends on numerous factors, including our ability to anticipate customer and market requirements and changes in technology and industry standards, our ability to differentiate our products from offerings of our competitors, and our ability to protect and obtain adequate intellectual property for our new products |
| If a competing technology emerges that is, or is perceived to be, superior to our existing technology and we are unable to develop and/or implement the new technology successfully or to develop and implement a competitive and economically acceptable alternative technology, our financial condition and results of operations could be materially and adversely affected |
| We will need to make substantial investments to develop these enhancements and technologies, and we cannot assure investors that we will have funds available for these investments or that these enhancements and technologies will be successful |
| Our gallium arsenide semiconductors may cease to be competitive with silicon alternatives |
| Among our product portfolio, we manufacture and sell gallium arsenide semiconductor devices and components, principally PAs and switches, which tend to be more expensive than their silicon counterparts |
| The cost differential is due to higher costs of raw materials for gallium arsenide and higher unit costs associated with smaller sized wafers and lower production volumes |
| We expect the cost of producing gallium arsenide devices will continue for the foreseeable future to exceed the costs of producing their silicon counterparts |
| In addition, silicon semiconductor technologies are widely-used process technologies for certain integrated circuits and these technologies continue to improve in performance |
| Therefore, to remain competitive, we must offer gallium arsenide products that provide superior performance over their silicon-based counterparts |
| If we do not continue to offer products that provide sufficiently superior performance to justify their higher cost, our financial condition and results of operations could be materially and adversely affected |
| We cannot assure you that there will continue to be products and markets that require the performance attributes of gallium arsenide solutions |
| 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, packaging and passive components are available from a limited number of sources |
| If we are unable to obtain these wafers, packaging or passive components in the required quantities, we could experience delays or reductions in product shipments, which could materially and adversely affect our financial condition and results of operations |
| We depend on a limited number of vendors to supply the equipment used in our manufacturing processes |
| When demand for semiconductor manufacturing equipment is high, lead times for delivery of such equipment can be substantial |
| We cannot assure you that we would not lose potential sales if required manufacturing equipment is unavailable and, as a result, we are unable to maintain or increase our production levels |
| A delay for any reason in increasing capacity would limit our ability to increase sales volumes |
| 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 |
| We depend on a small number of customers; a loss of or a decrease in purchases and/or change in purchasing patterns by one of these customers could materially and adversely affect our revenues and our ability to forecast revenue |
| We receive a significant portion of our revenues from a few significant customers and their subcontractors |
| Sales to our greater than 10prca customers have exceeded 40prca of total net sales in each of the last three fiscal years |
| Our financial condition and results of operations have been materially and adversely affected in the past by the failure of anticipated orders to be realized and by deferrals or cancellations of orders as a result of changes in customer requirements |
| If we were to lose any of our major customers, or if sales to these customers were to decrease materially, our financial condition and results of operations could be materially and adversely affected |
| 14 _________________________________________________________________ The short life cycles of some of our products may leave us with obsolete or excess inventories |
| The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are designed |
| For example, we estimate that current life cycles for wireless handsets, and in turn our wireless products, are approximately 9 to 12 months |
| Products with short life cycles require us to manage production and inventory levels closely |
| We cannot assure you that obsolete or excess inventories, which may result from unanticipated changes in the estimated total demand for our products and/or the estimated life cycles of the end products into which our products are designed, will not require that we take significant charges that will negatively affect our operating profit and net income |
| 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 interruption in our manufacturing processes |
| 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, earthquakes, flooding, international conflicts, war, acts of terrorism, or other natural or man-made disasters |
| Disruptions of our manufacturing operations could cause significant delays in our shipments unless and until we are able to shift the manufacturing of such products from an affected facility to another facility or the disruption is remedied |
| Furthermore, many of our customers require that they qualify a new manufacturing source before they will accept products from such source |
| This qualification process may be expensive and time consuming |
| In the event of such delays, we cannot assure you that the required alternative capacity, particularly wafer production capacity, would be available on a timely basis or at all |
| Even if alternative manufacturing capacity or assembly and test capacity is available, we may not be able to obtain it on favorable terms, which could result in higher costs and/or a loss of customers |
| We may be unable to obtain sufficient manufacturing capacity to meet demand, either at our own facilities or through external manufacturing |
| Due to the highly specialized nature of the gallium arsenide integrated circuit manufacturing process, in the event of a disruption at the Warren, New Jersey semiconductor wafer fab, alternative gallium arsenide production capacity would not be readily available from third-party sources |
| Any disruptions could have a material adverse effect on our business, financial condition and results of operations |
| 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: • defects in masks, which are used to transfer circuit patterns onto our wafers; • impurities in the materials used; • operator errors; • contamination of the manufacturing environment; and • equipment failure |
| 15 _________________________________________________________________ Many of our manufacturing costs are fixed and average selling prices for our products tend to decline over time |
| Therefore, it is critical for us to increase the number of shippable integrated circuits per wafer and increase the production volume of wafers in order to maintain or improve our results of operations |
| Yield decreases can result in substantially higher unit costs, which could materially and adversely affect our financial condition and results of operations and have done so in the past |
| We cannot assure you that we will not suffer periodic yield problems, particularly during the early production of new products or introduction of new process technologies |
| If any new yield problems were to arise or any existing yield problems were to continue, our financial condition and results of operations could be materially and adversely affected |
| Our dependence on foreign semiconductor assembly and test operations contractors could lead to delays in or reductions of product shipments |
| We do not assemble or test all of our integrated circuits or multi-chip modules |
| Instead, we provide the integrated circuit die and, in some cases, packaging and other components to assembly or test vendors located primarily in Asia |
| We maintain two qualified service locations for each assembly and test process |
| If we are unable to obtain sufficient high quality and timely assembly or test service, or if we lose one of our current assembly or test service locations, or if we experience delays in transferring our production between assembly or test locations, or if means of transportation to these locations are interrupted, we would experience delays or reductions in product shipment, and/or reduced product yields, which could materially and adversely affect our financial condition and results of operations |
| Our results of operations can vary significantly due to the cyclical nature of the semiconductor industry and our end markets |
| The semiconductor industry and our end markets have been cyclical, seasonal and subject to significant downturns |
| In past years, the industry has experienced periods marked by market weaknesses that created lower order demand, production overcapacity, high inventory levels, and accelerated declines in average selling prices for our products |
| These factors negatively affected our financial condition and results of operations during these periods and may negatively affect our financial condition and results of operations in the future |
| Our results of operations also may be subject to significant quarterly and annual fluctuations |
| These fluctuations are due to a number of factors, many of which are beyond our control, including, among others: • changes in end-user demand for the products manufactured and sold by our customers; • the effects of competitive pricing pressures, including decreases in average selling prices of our products; • industry production capacity levels and fluctuations in industry manufacturing yields; • levels of inventory in our end markets; • availability and cost of products from our suppliers; • the gain or loss of significant customers; • our ability to develop, introduce and market new products and technologies on a timely basis; • new product and technology introductions by competitors; • changes in the mix of products produced and sold; • market acceptance of our products and our customers; and • intellectual property disputes |
| As a result, we may experience substantial period-to-period fluctuations in future operating results |
| Investors should not rely on our results of operations for any previous period as an indicator of what results may be for any future period |
| Failure of our operating results to meet the expectations of analysts or investors could materially and adversely affect the price of our common stock |
| 16 _________________________________________________________________ Decline in our revenues and the underutilization of our manufacturing capacity have in the past and may continue to adversely affect our gross margins and profitability |
| Our manufacturing infrastructure and capacity were designed to address significantly higher product demand levels than we have recently experienced and consequently we have in the recent past and may in the future continue to underutilize our 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 percentage of revenues during a period of declining revenues, which adversely affects our gross margin and profitability |
| 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 |
| Improved utilization of our manufacturing capacity will depend on continued growth in demand for our products |
| Our products have experienced significant declines in unit prices |
| In each of the markets where we compete, prices of established products tend to decline significantly over time and in some cases rapidly |
| Accordingly, in order to remain competitive, we believe that we must continue to develop product enhancements and new technologies that will either slow the price declines of our products or reduce the cost of producing and delivering our products |
| If we fail to do so, our financial condition and results of operations could be materially and adversely affected |
| Taking into consideration our cash balance as of December 31, 2005, including marketable securities of dlra86dtta4 million, our dlra46dtta7 million in outstanding senior convertible unsecured notes due November 2006 and our dlra38dtta0 million in outstanding senior convertible unsecured notes due October 2009, 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 US capital markets, as well as the then current condition of our company, will affect our ability to raise capital, as well as the terms of any financing |
| We may not be able to raise enough capital to meet our capital needs on a timely basis or at all |
| In addition, any strategic investments and acquisitions that we may make to help us grow our business may require additional capital |
| We cannot assure you that the capital required to fund these investments and acquisitions will be available in the future |
| Our success depends on our ability to attract and retain qualified personnel |
| A small number of key executive officers manage our business |
| Their departure could have a material adverse effect on our operations |
| We believe that our future success will also depend in large part on our continued ability to attract and retain highly qualified technical sales and marketing personnel, design and application engineers, as well as senior management |
| We believe that there is, and will continue to be, intense competition for qualified personnel in the semiconductor industry as the emerging wireless and broadband markets develop, and we cannot assure you that we will be successful in retaining our key personnel or in attracting and retaining highly qualified technical sales and marketing personnel, design and application engineers, as well as senior management |
| We do not presently maintain key-man life insurance on any of our key executives or officers |
| We are subject to risks due to our international customer base and our subcontracting operations |
| Sales to customers located outside of the United States and Canada (based on shipping addresses and not on the locations of ultimate end users) accounted for 49prca, 61prca and 61prca of our net sales for the years ended December 31, 2003, 2004 and 2005, respectively |
| We expect that international sales will continue to represent a significant portion of our net sales |
| In addition, independent third parties located in Asia supply a substantial portion of the starting wafers and packaging components that we use in the production of gallium arsenide integrated circuits, and assemble and test nearly all of our products |
| 17 _________________________________________________________________ Due to our reliance on international sales and on foreign suppliers, assemblers and test houses, we are subject to risks of conducting business outside of the United States, including primarily those arising from local economic and political conditions, international health epidemics, restrictive governmental actions (eg, exchange controls, duties, etc), limitation of protecting intellectual property rights in foreign jurisdictions and potential acts of terrorism |
| We are subject to stringent environmental laws and regulations both domestically and abroad |
| We are subject to a variety of federal, state, local and foreign laws and regulations governing the protection of the environment |
| These environmental laws and regulations include those related to the use, storage, handling, discharge and disposal of toxic or otherwise hazardous materials used in or resulting from our manufacturing processes |
| Failure to comply with environmental laws and regulations could subject us to substantial liability or force us to significantly change our manufacturing operations |
| In addition, under some of these laws and regulations, we could be held financially responsible for remedial measures if our properties are contaminated, even if we did not cause the contamination |
| Although we are aware of contamination resulting from historical third-party operations at one of our facilities, a prior owner of such facility has been performing, and paying for the costs associated with, remediation of this property pursuant to an agreement with the state environmental regulatory authority |
| However, we cannot assure you that such prior owner will continue to do so or that we will not incur any material costs or liabilities associated with compliance with environmental laws in the future |
| We may not be successful in protecting our intellectual property rights or in avoiding claims that we infringe on the intellectual property rights of others |
| Our success depends in part on our ability to obtain patents and copyrights |
| Despite our efforts to protect our intellectual property, unauthorized third parties may violate our patents or copyrights |
| In addition to intellectual property that we have patented and copyrighted, we also rely on trade secrets, technical know-how and other non-patented proprietary information relating to our product development and manufacturing activities, which we seek to protect, in part, by entering into confidentiality agreements with our collaborators and employees |
| We cannot assure you that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others |
| We seek to operate without infringing on the intellectual property rights of third parties |
| As is typical in the semiconductor industry, we have been notified, and may be notified in the future, that we may be infringing on certain patents and/or other intellectual property rights of other parties |
| We cannot assure you that we will not be subject to litigation to defend our products or processes against claims of patent infringement or other intellectual property claims |
| Any such litigation could result in substantial costs and diversion of our resources |
| If we infringe on the intellectual property rights of others, we cannot assure investors that we would be able to obtain any required licenses on commercially reasonable terms and we may be required to pay substantial damages, including treble damages, and cease production of our work product or use of one or more manufacturing processes |
| Even if we are ultimately successful, patent litigation can be time consuming, disruptive to management and expensive |
| If any of the foregoing were to occur, our financial condition and results of operations could be materially adversely affected |
| 18 _________________________________________________________________ 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 |
| Our ability to complete acquisitions or alliances is dependent upon, and may be limited to, the availability of suitable candidates and capital |
| In addition, acquisitions and alliances involve risks that could materially adversely affect our financial condition and results of operations, including the management time that may be diverted from operations in order to pursue and complete such transactions and difficulties in integrating and managing the additional operations and personnel of acquired companies |
| We cannot assure you that we will be able to obtain the capital necessary to consummate acquisitions or alliances on satisfactory terms, if at all |
| Further, any businesses that we acquire will likely have their own capital needs, which may be significant, which we could be called upon to satisfy independent of the acquisition price |
| Future acquisitions or alliances could result in additional debt, costs and contingent liabilities, all of which could materially adversely affect our financial condition and results of operations |
| Any additional debt could subject us to substantial and burdensome covenants |
| The growth that may result from future acquisitions or alliances may place significant strains on our resources, systems and management |
| If we are unable to effectively manage such growth by implementing systems, expanding our infrastructure and hiring, training and managing employees, our financial condition and results of operations could be materially adversely affected |
| In addition, if we issue additional shares of our common stock in order to acquire another business, our existing shareholders’ interest in us, or the combined company, could be materially diluted |
| We have had significant volatility in our stock price and it may fluctuate in the future |
| Therefore, you may be unable to sell shares of our common stock at or above the price you paid for such shares |
| The trading price of our common stock has and may continue to fluctuate significantly |
| Such fluctuations may be influenced by many factors, including: • our operating results and prospects; • the operating results and prospects of our major customers; • announcements by our competitors; • the depth and liquidity of the market for our common stock; • investor perception of us and the industry in which we operate; • changes in our earnings estimates or buy/sell recommendations by analysts covering our stock; • general financial and other market conditions; and • domestic and international economic conditions |
| Public stock markets have recently experienced extreme price and trading volume volatility, particularly in the technology sectors of the market |
| This volatility significantly affected and may in the future affect the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies |
| These broad market fluctuations may materially and adversely affect the market price of our common stock |
| In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis |
| Certain provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and our shareholders’ rights agreement and of Delaware law could deter, delay or prevent a third party from acquiring us and that could deprive you of an opportunity to obtain a takeover premium for our common stock |
| 19 _________________________________________________________________ Our amended and restated certificate of incorporation, our amended and restated bylaws and Delaware law contain provisions that could have the effect of making it more difficult for a third party to acquire us, or of discouraging a third party from attempting to acquire control of us |
| In addition, we have a shareholders’ rights agreement that under certain circumstances would significantly impair the ability of third parties to acquire control of us without prior approval of our board of directors |
| Together, our amended and restated certificate of incorporation, our amended and restated by-laws, certain provisions of Delaware law and our shareholders’ rights agreement may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices for our common stock and could also limit the price that investors may be willing to pay in the future for our common stock |